Case: STATE OF WEST BENGAL  Vs. CALCUTTA CLUB LIMITED

takes place in hotels and restaurants, there is really one indivisible contract of service coupled incidentally with sale of food and drinks. Since it is not possible to divide the service element, which is the dominant element, from the sale element, it is clear that such composite contracts cannot be the subject-matter of sales tax legislation, as was held in those judgments. 12. Bearing these judgments in mind, Parliament amended the Constitution and introduced the Constitution (Forty-sixth Amendment) Act, by which it introduced Article 366(29-A). Sub-clause (f), with which we are directly concerned, reads as follows: 366. (29-A)(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, 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 a purchase of those goods by the person to whom such transfer, delivery or supply is made.A reading of the constitutional amendment would show that supply by way of or as part of any service of food or other article for human consumption is now deemed to be a sale of goods by the person making the transfer, delivery or supply. 45. That the doctrine of mutuality has not been done away with by sub-clause (e) is also clear when sub-clause (e) is contrasted with certain provisions of the Income Tax Act, 1961. Section 2(24) (vii) of the Income Tax Act, 1961, reads as under: 2. Definitions.- xxx xxx xxx (24) income includes- xxx xxx xxx (vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of the provisions contained in the First Schedule This has to be read with Section 44 of the Income Tax Act, 1961 which reads as under: 44. Insurance business.-Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head Interest on securities, Income from house property, Capital gains or Income from other sources, or in section 199 or in sections 28 to 43B, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule. 46. A reading of the aforesaid provisions makes it clear that when profits and gains of a mutual insurance company are sought to be brought to tax, they are so done by express reference to the fact that the business of insurance is carried on by a mutual insurance company. The absence of any such language in sub- clause (e) of Article 366(29-A) is also an important pointer to the fact that the doctrine of mutuality cannot be said to have been done away with by the said 46 th Amendment. 47. In fact, Section 2(24)(vii) has been expressly noticed in Venkatesh Premises Cooperative Society Limited (supra) as follows: 14. The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of the Income Tax Act defines taxable income. The income of a cooperative society from business is taxable under Section 2(24)(vii) and will stand excluded from the principle of mutuality. 48. Also, Section 45(2) of the Income Tax Act, 1961 is an example of a provision by which a deemed transfer by a person to himself gets taxed. Section 45(2) reads as follows: 45. Capital gains.- xxx xxx xxx (2) Notwithstanding anything contained in sub-section (1), the profits and gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as, stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of Section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. It can be seen from this provision that profits or gains arising from a transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business, is by a deeming fiction brought to tax, despite the fact that there is no transfer in law by the owner of a capital asset to another person. Modalities such as these to bring to tax amounts that would do away with any doctrine of mutuality are conspicuous by their absence in the language of Article 366(29-A)(e). 49. In light of the view that we have taken, it is unnecessary to advert to Shri Dwivedis arguments that the explanation (1) to Section 2(10) of the West Bengal Sales Tax Act is a stand-alone provision and not an explanation in the classical sense. We, therefore, answer the three questions posed by the Division Bench in State of West Bengal v. Calcutta Club Limited (supra) as follows: (1) The doctrine of mutuality continues to be applicable to incorporated and unincorporated members clubs after the 46 th Amendment adding Article 366(29-A) to the Constitution of India. (2) Young Mens Indian Association (supra) and other judgments which applied this doctrine continue to hold the field even after the 46 th Amendment. (3) Sub-clause (f) of Article 366(29-A) has no application to members clubs.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]24. It can be seen that Young Mens Indian Association (supra) expressly distinguished Enfield India Ltd. (supra), in paragraph 9 therein. The judgment in Enfield India Ltd. (supra), held on the facts of that case that there was nothing to show that the society in that case was acting as an agent of its members in providing facilities for making food available to them. A distinction was then made between a society which is a body corporate and its members, stating that the body corporate is a separate person in law. It then referred to various English judgments including Trebanog (supra), and refused to apply them on the ground that they were cases which dealt with criminal proceedings. The judgment then ended by stating that the Court was not called upon to decide whether an unincorporated club, supplying goods for a price to its members, may be regarded as selling goods to its members25. It can be seen from the above, that the ratio of the Three Judge Bench in Enfield India Ltd. (supra) does not square with the ratio of the Six Judge Bench in Young Mens Indian Association (supra). Young Mens Indian Association (supra) is expressly based upon the English judgments which disregarded the corporate form and stated that there could not be a sale, on the facts of those cases, between two persons because Foster, i.e. a member of the club, could be regarded as vendor as well as purchaser in Graff (supra). Likewise, in Trebanog (supra), the form in which the club was clothed was of no moment, it being stated that there is no magic in the expressions trustee or agent. What is essential is that the holding of the property by the trustee or agent must be a holding for and on behalf of, and not a holding antagonistic to, the members of the club26. It is thus clear that Enfield India Ltd. (supra) does not take the matter any further. Young Mens Indian Association (supra) made no distinction between a club in the corporate form and a club by way of a registered society or incorporated by a deed of trust. What is the essence of the judgment is that the holding of property must be a holding for and on behalf of the members of the club, there being no transfer of property from one person to another. Proprietary clubs were distinguished, as there the owner of the club would not be the members themselves, but somebody else. The present appeal deals with a company that is registered under Section 25 of the Companies Act28. It will thus be seen that in these companies, payment of dividend to shareholders is prohibited, and the profits, if any, have to be applied to promote the objects of the company. Bacha F. Guzdar (supra) did not deal with a Section 25 company - it dealt with two tea companies which were Public Limited Companies, registered under the Companies Act. It is in this context that this Court held:That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. The use of the word assets in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them…The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders. Reliance is placed on behalf of the appellant on a passage in Buckleys Companies Act (12th Edn.), p. 894 where the etymological meaning of dividend is given as dividendum, the total divisible sum but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient. This statement does not justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company. The proper approach to the solution of the Question 1s to concentrate on the plain words of the definition of agricultural income which connects in no uncertain language revenue with the land from which it directly springs and a stray observation in a case which has no bearing upon the present question does not advance the solution of the question. There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole as Lord Anderson puts it29. Given the differences pointed out in Cricket Club of India (supra) between clubs registered as Companies under Section 25 of the Companies Act and other companies, it is clear that the ratio decidendi in the judgment in Bacha F. Guzdar (supra) would not apply to such clubs - there being no shareholders, no dividends declared, and no distribution of profits taking place. Such clubs, therefore, cannot be treated as separate in law from their membersGiven these observations, it is clear that if persons carry on a certain activity in such a way that there is a commonality between contributors of funds and participators in the activity, a complete identity between the two is then established. This identity is not snapped because the surplus that arises from the common fund is not distributed among the members – it is enough that there is a right of disposal over the surplus, and in exercise of that right they may agree that on winding up, the surplus will be transferred to a club or association with similar activities. Most importantly, the surplus that is made does not come back to the members of the club as shareholders of a company in the form of dividends upon their shares. Since the members perform the activities of the club for themselves, the fact that they incorporate a legal entity to do it for them makes no difference. This judgment was also followed by this Court in Income Tax Officer, Mumbai v. Venkatesh Premises Cooperative Society Limited (2018) 15 SCC 37. What is of essence, therefore, in applying this doctrine is that there is no sale transaction between two persons, as one person cannot sell goods to itself32. It can be seen that the 61 st Law Commission Report had observed that there cannot be said to be any evasion of tax as a member of members clubs really takes his own goods and, therefore, did not seek to tax such goods. The framers of the 46 th Amendment thought otherwise, and made it plain that they sought to bring to tax sales made by unincorporated clubs or an association of persons to their members, as it was thought that such transactions were not taxable, as such club or associations in law has no separate existence from that of the members33. Quite obviously, the Statement of Objects and Reasons has not read the case of Young Mens Indian Association (supra) in its correct perspective. As has been noticed hereinabove, Young Mens Indian Association (supra) had three separate appeals before it, in one of which a company was involved. To state, therefore, that under the law as it stood on the date of the 46 th Amendment, a sale of goods by a club having a corporate status to members is taxable, is wholly incorrect. Proceeding on this incorrect basis, what the 46 th Amendment sought to do was to then bring to tax sales by clubs which have no separate existence from that of their members. In so doing, the 46 th Amendment used the expression any unincorporated association or body of persons. This expression, when read with the Statement of Objects and Reasons, makes it clear that it was only clubs which are not in corporate form that were sought to be brought within the tax net, as it was wrongly assumed that sale of goods by members clubs in the corporate form were taxable. Any is the equivalent of all. This word, therefore, also lends itself to the aforesaid interpretation, as the emphasis of the legislature is on all unincorporated associations or bodies being brought within sub- clause (e)34. Thus, it is clear that even going by Shri Dwivedis eloquent argument as to the intention of the legislature, as seen through the object that the legislature sought to achieve, would lead to the aforesaid expression applying only to clubs which were not in the corporate formAs has been correctly argued by Shri Jaideep Gupta, the definition of consideration in Section 2(d) of the Indian Contract Act, 1872 necessarily posits consideration passing from one person to anotherThe expression valuable consideration has, as has been pointed out in Pollock and Mulla, The Indian Contract & Specific Relief Acts (16 th ed.), been taken from an old English case Currie v. Misa (1875) LR 10 EX 153, and explained as follows:A valuable consideration in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the otherThe above definition brings out the idea of reciprocity as the distinguishing mark; it is the gratuitous promise that is unenforceable in English law38. This is further reinforced by the last part of Article 366(29-A), as under this part, the supply of such goods shall be deemed to be sale of those goods by the person making the supply, and the purchase of those goods by the person to whom such supply is made. As the Young Mens Indian Association (supra) case and the doctrine of mutuality state, there is no sale transaction between a club and its members. As has been pointed out above, there cannot be a sale of goods to oneself. Here again, it is clear that the ratio of Young Mens Indian Association (supra) has not been done away with by the limited fiction introduced by Article 366(29-A)(e)39. But, says Shri Dwivedi, even if sub-clause (e) does not apply, sub-clause (f) would apply, given the width of its language. Here again, it is clear that the reason for sub-clause (f), as has been stated in the Statement of Objects and Reasons, is the doing away with of two judgments of this Court, namely, State of Punjab v. Associated Hotels of India Limited AIR 1972 SC 1131 and Northern India Caterers (India) Ltd. (supra)40. This is clear not only from the Statement of Objects and Reasons, but from the subject matter of sub-clause (f) (which does not include goods in their entirety, but only food or any other article for human consumption, or any drink), which is the serving of such food or drink in hotels or restaurants. This is further made clear by Section 6 of the 46 th Amendment Act, which is a validation and exemption provision. Section 6(1)(a) specifically refers to transactions referable to the aforesaid two Supreme Court judgments. The exemption provision puts the matter beyond doubt41. Sub-clause (a) refers to 7 th September, 1978, which is the date on which Northern India Caterers (supra) was pronounced and sub-clause (b) refers to 4 th January, 1972, which is the date on which Associated Hotels of India Ltd. (supra) was pronounced. The 46 th Amendment Act, therefore, when read as a whole, would make it clear that Article 366(29-A)(f) refers only to an undoing of the aforesaid two judgments, the subject matter being the taxability of food or drink served in hotels and restaurants. This being the case, it is obvious that the taxability of food or drink served in members clubs is not the subject matter of sub-clause (f)42. Looked at from another point of view, a members club may supply goods which are not food or drink – for example, soap, cosmetics and other household items. These items would be goods, but would not be within sub-clause (f) - not being food or drink, and cannot, therefore, be taxed under sub-clause (f), leading to the absurd situation of the supply of food and drink being taxable in members clubs, and the supply of other goods in such clubs being outside the tax net. For this reason also, it is clear that the subject matter of sub-clause (f) is entirely different and distinct from that of sub-clause (e), and cannot possibly apply to members clubs. In this view of the matter, the expression in any manner whatsoever, being part and parcel of sub-clause (f) cannot be held to extend to a supply of all goods so as to bring such goods to tax when applied to members clubs43. Judgments of this Court have also held that the subject matter of sub-clause (f) related to food and drink supplied in hotels and restaurants, the deeming fiction of sub-clause (f) being introduced only to get over certain judgments of this Court46. A reading of the aforesaid provisions makes it clear that when profits and gains of a mutual insurance company are sought to be brought to tax, they are so done by express reference to the fact that the business of insurance is carried on by a mutual insurance company. The absence of any such language in sub- clause (e) of Article 366(29-A) is also an important pointer to the fact that the doctrine of mutuality cannot be said to have been done away with by the said 46 th AmendmentIt can be seen from this provision that profits or gains arising from a transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business, is by a deeming fiction brought to tax, despite the fact that there is no transfer in law by the owner of a capital asset to another person. Modalities such as these to bring to tax amounts that would do away with any doctrine of mutuality are conspicuous by their absence in the language of Article 366(29-A)(e)49. In light of the view that we have taken, it is unnecessary to advert to Shri Dwivedis arguments that the explanation (1) to Section 2(10) of the West Bengal Sales Tax Act is a stand-alone provision and not an explanation in the classical sense. We, therefore, answer the three questions posed by the Division Bench in State of West Bengal v. Calcutta Club Limited (supra) as(1) The doctrine of mutuality continues to be applicable to incorporated and unincorporated members clubs after the 46 th Amendment adding Article 366(29-A) to the Constitution of India(2) Young Mens Indian Association (supra) and other judgments which applied this doctrine continue to hold the field even after the 46 th Amendment(3) Sub-clause (f) of Article 366(29-A) has no application to members clubs72. The definition of club or association contained in Section 65(25a) makes it plain that any person or body of persons providing services for a subscription or any other amount to its members would be within the tax net. However, what is of importance is that anybody established or constituted by or under any law for the time being in force, is not included. Shri Dhruv Agarwal laid great emphasis on the judgments in DALCO Engineering Private Limited v. Satish Prabhakar Padhye and Ors. Etc. (2010) 4 SCC 378 ( in particular paragraphs 10, 14 and 32 thereof) and CIT, Kanpur and Anr. v. Canara Bank (2018) 9 SCC 322 ( in particular paragraphs 12 and 17 therein), to the effect that a company incorporated under the Companies Act cannot be said to be established by that Act. What is missed, however, is the fact that a Company incorporated under the Companies Act or a cooperative society registered as a cooperative society under a State Act can certainly be said to be constituted under any law for the time being in force. In R.C. Mitter & Sons, Calcutta v. CIT, West Bengal, Calcutta (1959) Supp. 2 SCR 641, this Court had occasion to construe what is meant by constituted under an instrument of partnership, which words occurred in Section 26A of the Income Tax Act, 1922. The Court held:The word constituted does not necessarily mean created or set up, though it may mean that also. It also includes the idea of clothing the agreement in a legal form. In the Oxford English Dictionary, Vol. II, at pp. 875 & 876, the word constitute is said to mean, inter alia, to set up, establish, found (an institution, etc.) and also to give legal or official form or shape to (an assembly, etc.). Thus the word in its wider significance, would include both, the idea of creating or establishing, and the idea of giving a legal form to, a partnership. The Bench of the Calcutta High Court in the case of R.C. Mitter and Sons v. CIT [(1955) 28 ITR 698, 704, 705] under examination now, was not, therefore, right in restricting the word constitute to mean only to create, when clearly it could also mean putting a thing in a legal shape. The Bombay High Court, therefore, in the case of Dwarkadas Khetan and Co. v. CIT [(1956) 29 ITR 903, 907] , was right in holding that the section could not be restricted in its application only to a firm which had been created by an instrument of partnership, and that it could reasonably and in conformity with commercial practice, be held to apply to a firm which may have come into existence earlier by an oral agreement, but the terms and conditions of the partnership have subsequently been reduced to the form of a document. If we construe the word constitute in the larger sense, as indicated above, the difficulty in which the learned Chief Justice of the Calcutta High Court found himself, would be obviated inasmuch as the section would take in cases both of firms coming into existence by virtue of written documents as also those which may have initially come into existence by oral agreements, but which had subsequently been constituted under written deeds73. It is, thus, clear that companies and cooperative societies which are registered under the respective Acts, can certainly be said to be constituted under those Acts. This being the case, we accept the argument on behalf of the Respondents that incorporated clubs or associations or prior to 1 st July, 2012 were not included in the service tax net76. What has been stated in the present judgment so far as sales tax is concerned applies on all fours to service tax; as, if the doctrine of agency, trust and mutuality is to be applied qua members clubs, there has to be an activity carried out by one person for another for consideration. We have seen how in the judgment relating to sales tax, the fact is that in members clubs there is no sale by one person to another for consideration, as one cannot sell something to oneself. This would apply on all fours when we are to construe the definition of service under Section 65B(44) as well77. However, Explanation 3 has now been incorporated, under sub-clause (a) of which unincorporated associations or body of persons and their members are statutorily to be treated as distinct persons79. It will be noticed that the aforesaid explanation is in substantially the same terms as Article 366(29-A)(e) of the Constitution of India. Earlier in this judgment qua sales tax, we have already held that the expression body of persons will not include an incorporated company, nor will it include any other form of incorporation including an incorporated co-operative society80. It will be noticed that club or association was earlier defined under Section 65(25a) and 65(25aa) to mean any person or body of persons providing service. In these definitions, the expression body of persons cannot possibly include persons who are incorporated entities, as such entities have been expressly excluded under Section 65(25a)(i) and 65(25aa)(i) as anybody established or constituted by or under any law for the time being in force . Body of persons, therefore, would not, within these definitions, include a body constituted under any law for the time being in force81. When the scheme of service tax changed so as to introduce a negative list for the first-time post 2012, services were now taxable if they were carried out by one person for another person for consideration. Person is very widely defined by Section 65B(37) as including individuals as well as all associations of persons or bodies of individuals, whether incorporated or not. Explanation 3 to Section 65B(44), instead of using the expression person or the expression an association of persons or bodies of individuals, whether incorporated or not , uses the expression a body of persons when juxtaposed with an unincorporated association82. We have already seen how the expression body of persons occurring in the explanation to Section 65 and occurring in Section 65(25a) and (25aa) does not refer to an incorporated company or an incorporated cooperative society. As the same expression has been used in Explanation 3 post-2012 (as opposed to the wide definition of person contained in Section 65B(37)), it may be assumed that the legislature has continued with the pre-2012 scheme of not taxing members clubs when they are in the incorporated form. The expression body of persons may subsume within it persons who come together for a common purpose, but cannot possibly include a company or a registered cooperative society. Thus, Explanation 3(a) to Section 65B(44) does not apply to members clubs which are incorporated83. The expression unincorporated associations would include persons who join together in some common purpose or common action – see ICT, Bombay North, Kutch and Saurashtra, Ahmedabad v. Indira Balkrishna (1960) 3 SCR 513  at page 519-520. The expression as the case may be would refer to different groups of individuals either bunched together in the form of an association also, or otherwise as a group of persons who come together with some common object in mind. Whichever way it is looked at, what is important is that the expression body of persons cannot possibly include within it bodies corporate84. We are therefore of the view that the Jharkhand High Court and the Gujarat High Court are correct in their view of the law in following Young Mens Indian Association (supra). We are also of the view that from 2005 onwards, the Finance Act of 1994 does not purport to levy service tax on members clubs in the incorporated form.