TMI Blog1997 (6) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... Joint Commissioner, Commercial Taxes, rejecting the petitioners' claim that the supply of food, refreshments and beverages to the different categories of the members of the society did not attract the provisions of the Act. t 3. The facts and circumstances leading to the filing of this writ petition can be simply stated thus: On August 23, 1991 the Deputy Commissioner, Commercial Taxes, issued a notice to petitioner No. 1 under section 17(5) of the Act. In the notice, it was pointed out that though engaged in the sale of food articles and alcoholic beverages, petitioner No. 1 had neither got itself registered nor was it making payment of sales tax as provided under the Act. It was accordingly asked to produce its books of account and the records relating to the sales and purchases made by it on a date specified in the notice. In response to the notice, a petition was filed on behalf of petitioner No. 1 making a prayer to drop the proceeding initiated under section 17(5) of the Act on the plea that the supply of food, refreshments and beverages made by the society to its members did not attract the provisions of the Act. By order dated August 15, 1992 (annexure 8), the Assistant Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat they were under no liability to pay sales tax. Relying upon the Supreme Court decision in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi [1978] 42 STC 386, Mr. Poddar first submitted that the supply of food and beverages in a club did not constitute sale but amounted to "ministering to a bodily want or to the satisfaction of the human need" and, therefore, the service of meals and drinks by petitioner No. 1 to its members was not taxable under the Act. Learned counsel secondly submitted, and in fact this was the main plank of the petitioners' case, that even though the supply of food articles and drinks by a hotel or restaurant to its customers may normally constitute sale within the meaning of the Act, it will not do so in the case of petitioner No. 1. According to the learned counsel, petitioner No. 1 is purely a members' club through the agency and instrumentality of which its members alone are provided certain facilities including service of meals and drinks and in making the supplies of meals and drinks petitioner No. 1 merely acted as an agent of its members. In those supplies, therefore, there was no element of sale for the simple reason that there could b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selling, supplying or distributing goods, directly or indirectly, for cash, or for deferred payment, or for commission, remuneration or other valuable consideration and includes- (i) a local authority, a body corporate, a company, any co-operative society or other society, club, firm, Hindu undivided family or other association of persons which carries on such business; (ii).................. (iii).................. Explanation I.................. Explanation II.................. 2(t) 'sale' means any transfer of property in goods for cash or deferred payment or other valuable consideration but does not include a mortgage or hypothecation of or a charge or pledge on goods, and includes- (i) to (iv).................. (v) supply of goods made by a society, trust, club or association, whether incorporated or not, to its members or otherwise; (vi) supply by way of or as part of any service or in any other manner, whatsoever, of goods being food or any drink whether or not intoxicating; And such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply, and all grammatical variation an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion would be whether in that case the supply of food and beverages made by it to its members would not constitute sale notwithstanding the legal fictions created by sub-clauses (e) (the definition of "dealer") and (t) (the definition of "sale") of section 2 of the Act? This would be a question of law to be answered on an interpretation of the provisions of the Act read with sub-clauses (e) and (f) of article 366(29A) of the Constitution. 12.. The argument plainly proceeds on the basis that prior to the 46th Amendment of the Constitution there were two separate reasons for holding that supply of food, refreshments and beverages by a members' club to its members was not taxable. The first reason which applied, in addition to clubs, was based on the principle that there was no sale when food and drinks were supplied to guests residing in a hotel or eating at a restaurant, the supply of meals could not be identified as a transaction of sale as it was essentially in the nature of service provided to the guests by the hotel/restaurant. This principle was upheld by the Supreme Court in State of Himachal Pradesh v. Associated Hotels of India Limited [1972] 29 STC 474 and in Northern Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any supply of food, refreshments and beverages made by a members' club to be continued to remain non-taxable. The argument is sought to be supported by the Statement of Objects and Reasons to the Amendment Bill which made a reference to the Supreme Court decisions in Associated Hotels of India Limited [1972] 29 STC 474 and Northern India Caterers (India) Ltd. [1978] 42 STC 386 but made no reference to the decision in Young Men's Indian Association, Madras [1970] 26 STC 241 (SC). 15.. An argument is accordingly sought to be advanced that the introduction of clause (29A) in article 366 of the Constitution followed by corresponding amendments in the Act had only the effect of bringing the supply of food and refreshments to guests in hotels and restaurants within the tax net but those amendments did not override the law of agency, if otherwise applicable to a case. In support of the submission Mr. Poddar relied upon the following passage from a decision of the West Bengal Taxation Tribunal in Hindustan Club Limited v. Additional Commissioner of Commercial Taxes [1995] 98 STC 347: "Mr. Bajoria dwelt upon the 46th Amendment of the Constitution of India by which, inter alia, clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the law as settled by the Supreme Court of India on this question will govern the field. As regards the second point urged by Mr. Bajoria, we think, sub-clause (f) of clause (29A) enables the State to impose sales tax on supply of food, drink, etc., for cash, deferred payment, or other valuable consideration, but where the identity of the supplier is different from that of the receiver of supply on the strength of the law laid down by the Supreme Court of India in Joint Commercial Tax Officer v. Young Men's Indian Association [1970] 26 STC 241; AIR 1970 SC 1212. Mr. D. Majumdar, learned State Representative, submitted that the law of agency is irrelevant in view of sub-clause (f) of clause (29A) and he did not agree with Mr. Bajoria that subclause (f) applied to hotels, restaurants, eating places, etc., but not to a members' club. Mr. Majumdar also submitted that reference to Statement of Objects and Reasons is not necessary for interpretation of the sub-clauses of clause (29A) of article 366. It is true that the Statement of Objects and Reasons is not a part of the statute. Nevertheless, it provides an indication as to the purpose of legislation and the remedy sought to be achie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e within the meaning of the Sale of Goods Act. But clause (29A) has now given a much enlarged and inclusive definition of "tax on the sale and purchase of goods" and after the 46th Constitutional Amendment the expression "sale of goods" in entry 54, List II of the Seventh Schedule to the Constitution may not be deemed to bear the same meaning as in the Sale of Goods Act. I am, therefore, unable to find the decision of the West Bengal Taxation Tribunal in Hindustan Club Limited v. Additional Commissioner of Commercial Taxes [1995] 98 STC 347 on this point free from doubt. 18.. However, the occasion to examine this aspect of the matter will arise only in case it is found that petitioner No. 1 was a members' club operating on the principle of agency and having its relationship with the individual members based on the doctrine of mutuality. To examine the constitution of petitioner No. 1 and its relationship with its members of the different categories, I will now advert to the provisions of its memorandum of association, Rules and Regulations, bye-laws, etc. 19.. On March 11, 1988, nine persons formed themselves into a society in the name and style of Ranchi Gymkhana Club and adop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement are also relevant for our present purpose and the two clauses are accordingly reproduced below: "11. So long as this agreement is in force, the club shall accept and admit as members such number of persons who are nominated by UMI. Such persons shall have the right and privileges as applicable to corporate/visiting members of the club, as the case may be. However, such persons shall be liable to pay the monthly subscription fees and bills and other charges for use and enjoyment of facilities provided on charge basis by the club as per the bye-laws of the club in existence from time to time. No security deposit and entrance fees shall be leviable on such members. It is intended that such nominees shall be employees of UMI and/or its associated companies." 20.. So long as this agreement shall remain in force, UMI shall be entitled to nominate six members on the managing committee of the club and to remove from such committee any such person or persons and nominate other persons in their place. The members of the managing committee so nominated by UMI shall not be liable to retire nor shall they be suspended or removed by the club. Subject to the aforesaid the said nominee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that there would not have been any substantial increase in its memberships as admittedly till then the society did not have any resources or means of its own to run or maintain the club. The other question which comes to mind at this stage is whether some of the original nine subscribers to the society s memorandum of association, shared any interests or positions in the company with which the society was made to enter into the aforesaid agreements? The pleadings of the parties are silent on this aspect of the matter but I cannot help the suspicion that interesting facts may come to light if this aspect of the matter was further investigated. 26.. Coming now to the rules and regulations of Ranchi Gymkhana Club, as they stand after the amendments following the three agreements, one cannot fail to notice at least three features which seem to contradict the claim that it is a members' club. These are as follows: (i) The number of categories of members (nine) is uncommonly large; (ii) The entrance fee and interest-free security deposit payable by the different categories of members are not uniform but vastly disparate; (iii) The third and the most significant feature which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior approval of the managing committee. (g) Sports member: Any person showing promise or who has shown outstanding ability in any game or sports may be admitted by the managing committee as a sports member for such period and on such terms and conditions as may be decided by it from time to time. Note.-Persons who have represented the State or the country at any game or sports events of National level or State level may also be admitted under this category. (h) Visiting member: A person residing outside the periphery of Ranchi may be admitted as a visiting member, provided that such membership shall stand automatically terminated on such member shifting his place of resident within the periphery of Ranchi. This rule shall be governed by the following provisions: (i) For the purpose of these Rules "Ranchi and its periphery" shall mean and include an area within a radius of 50 kms. from registered office of the club. (ii) Persons under the age of 21 years shall not be eligible for admission to membership in any class. (iii) A permanent resident is one who has been a resident of Ranchi and its periphery and has a place of resident and/or occupation within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulations relates to the management of the club and in this regard great care seems to have been taken to shut out completely, practically, all the members from any participation in the club's management. This would be evident from rules 12 (voting rights), 13 (Management) and 14 (Meetings) which are reproduced below: "12. Voting rights: Save and except founder/permanent member of the club, no member shall be entitled to any voting rights or shall be permitted to contest for or participate in the managing committee or vote at any general meeting held for any purpose whatsoever. No member shall be entitled to vote with any dues or payments outstanding in his account. 13. Management: (a) The affairs of the club shall be managed by the managing committee comprising of 9 (nine) members out of which six would be nominated as mentioned in sub-clause 13(aa) of the Rules and Regulations of the club. The other three members of the managing committee shall be co-opted from amongst founder/permanent/resident members by the nominated members of the managing committee and the first members of managing committee shall be: (i) Mr. Brij K. Jhawar, 'Jhawar House', Kanke Road, Ranchi. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitution of the new managing committee. Any alteration/change in the nominated members shall not be deemed as constitution of new managing committee. (f)(i) The managing committee shall ordinarily meet at least once in every two months but may meet at such times and places as they think fit and at all meetings three shall form a quorum. If within half an hour after the time appointed for the meeting a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place and if at such adjourned meeting, if a quorum is not present, members present will form the quorum subject to a minimum of two. (ii) Meetings can be convened at the request of the president or by any four members of the managing committee after giving not less than 72 hours notice to the other members of the managing committee. (iii) At every meeting of the managing committee, the president or in his absence the managing committee shall elect one of their members to preside. Each member of the managing committee shall have one vote on all matters placed before the managing committee; but in the event of an equality of votes the president shall have a second or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficient quorum subject to a minimum of five members present personally. The quorum at every meeting shall be determined within half an hour of the appointed time. (d) Voting at general meetings: Every founder/permanent member present and entitled to vote shall have one vote. Voting by proxy shall not be allowed. Save as provided otherwise in this rule, voting shall be by show of hands and all decisions shall be taken by bare majority. In the case of equality of votes the president shall have a second or casting vote in addition to his own vote. In the case of any dispute as to the determination of any decision by vote, the decision of the president shall be final and conclusive. (e) Chairman at general meeting: The president or in his absence, any member of the managing committee or in their absence any member present and elected by the majority shall be the chairman at the general meeting." 33.. At this stage it may also be noted that according to paragraph 6 of the writ petition the total strength of the club is 761 out of which 193 are founder/ permanent members, 368 resident members, 22 non-resident members, 15 temporary members, 48 corporate members, 1 sports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted before us that it was necessary to have stringent control over the club s management in order to maintain its efficiency and high standard of service. I am readily willing to accept that the club has a high degree of efficiency and maintains a very superior standard of service but having regard to the facts and circumstances stated above I find myself unable to accept that it is a members' club. 37.. Mr. Poddar further submitted that all categories of members paid equal charges for the food, refreshments and beverages supplied to them by the club and to that extent made equal contribution in the common fund and had an equal Here italicised. right of participation in the common fund. The submission is wholly unacceptable. The right of participation in the management of the collective body is basic to the right of participation in the common fund. In the present case no member of the club except nine constituting the governing body has any right to participate in the management of the club. It is, therefore, futile to suggest that members have equal right to participation in the common fund of the club. I even fail to see that in this case there is a common fund of the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub [1974] 96 ITR 261 (AP), it is first to be noted that the case arose under the Income-tax law and the decision was prior to the 46th Amendment of the Constitution. It is further to be noted that in that case the court was considering a category of temporary members who paid no subscription and had no voting right. Presumably they constituted a very small portion of the total membership of the club. The position here is that an overwhelmingly large number of members who pay ten times more as entrance fee and 3.5 times more as security deposit have been debarred from participation in the affairs of the club. As noted above, the Rules and Regulations governing petitioner No. 1 are singularly different and, therefore, the decision in Merchant Navy Club [1974] 96 ITR 261 (AP), is of no help to the petitioners in this case. 40.. Moreover, it may be noted that a Bench of West Bengal Taxation Tribunal in Bengal Rowing Club v. Commissioner of Commercial Taxes, West Bengal [1993] 88 STC 389, on a consideration of a number of decisions, including the decision in Merchant Navy Club [1974] 96 ITR 261 (AP), held that having a category of rowing members who had no right in the management of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently there was no common identity as between the temporary members and the club. Therefore, the supply of food, drinks and refreshments made by the club to the temporary members would amount to sale within the meaning of section 2(g) of the Bengal Finance (Sales Tax) Act, 1941. It accordingly segregated the transactions of the club in respect of its permanent members and temporary members. 42.. Mr. Poddar also relied upon a decision of this Court in Commissioner of Income-tax v. Bankipur Club Ltd. [1981] 129 ITR 787. This case also was decided under the Income-tax Act and on facts was totally different from the present case. 43.. Learned counsel also relied upon a decision of the Gujarat High Court in Sports Club of Gujarat Ltd. v. Commissioner of Income-tax [1988] 171 ITR 504. This decision too was under the Income-tax Act and it was held that the principle of mutuality was not destroyed by the presence of transactions which were nonmutual in character. In such cases the principle of mutuality could be confined to transactions with "members" and the two activities in appropriate cases, could be separated and the profits derived from non-members could be brought to tax. 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... common fund and goes to the root of the principle of mutuality. It, therefore, follows that: (i) persons who are admitted to the membership of a club for a short and specified period or persons who are admitted as members with no voting right or any other means for participation in the club's management cannot be said to be the real members of the club inasmuch as in such cases there would be no reciprocity or mutuality between the club and those classes of members; (ii) in case the number of such members is a very small fraction of the total membership of the club and the payments made by them forms an insignificant part of the club's total turnover, their existence may be disregarded from a practical point of view and it may be said that the club's mutuality remains unaffected; (iii) in case, however, their number is significantly large and the club has substantial transactions with them, those transactions may be segregated in order to save the club's mutuality in relation to its real members; (iv) in case, however, the number of such persons is very large and the transactions with them form the major portion of the club's turnover that would certainly destroy the club ..... 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