12 February 1970
Supreme Court


Case number: Appeal (civil) 1724 of 1967






DATE OF JUDGMENT: 12/02/1970


CITATION:  1970 AIR 1212            1970 SCR  (3) 680  1970 SCC  (1) 462  CITATOR INFO :  RF         1978 SC1765  (12)  R          1985 SC1293  (45)

ACT:     Madras General Sales Tax Act, 1959, s. 2(g) Exp.  I &  S 2(n) Exp.I--Member’s club--Supply of refreshments to Members and their guests--Whether, sales tax leviable.

HEADNOTE:     The   respondents  are  members’  clubs.   They   supply refreshments  in the form of ’food, snacks and beverages  to their  members  or  their  guest S to be  paid  for  by  the members.   The  articles  necessary  for  this  purpose  are purchased by the clubs in the market out of club funds which consisted   of  the  subscription  of  the   members.    The preparations  are  made  within the club  premises  and  are supplied  to  members  at fixed  prices.   On  the  question whether  the clubs are "dealers" liable to sales  tax  under the Madras General Sales Tax Act, 1959,     HELD  : (Per Full Court) As no transaction of  sale  was involved  there  could  be no levy of sales  tax  under  the provisions of the Act.     (Per  Hidayatullah,  C. J. Hegde, Grover, Ray  and  Dua, JJ.) The State Legislature is only competent to legislate on taxes  on sale or purchase of goods under Entry 54, List  11 of  the  7th Schedule to the Constitution.  If there  is  no transfer  of property from one to another there is  no  sale which  would be exigible to tax, in spite of the  definition of ’sale’ in S.2(n) read with Exp.  I of the Act. [686G]      In proprietary clubs where some of the shareholders are not members or some of the members are not shareholders, the members  are not owners of, nor interested in, the  property of  the  clubs.   Unlike proprietary clubs  the  case  of  a members’ club is analogous to that of an agent investing his own  monies for preparing things for the consumption of  the principal  and  later  recouping himself  for  the  expenses incurred.   Therefore, in the present case, even though  the clubs are distinct legal entities they were ,Only acting  as



agents  for members in the matter of supply of various  pre- parations  to  them  and no sale would be  involved  as  the element  of transfer would be completely absent.  [685  A-B, 686 H]      Cosmopolitan  Club, Madras v. District  Commercial  Tax Officer,  Triplicane (1952) 1 M.L.J. 401; Deputy  Commercial Tax  Officer  Triplicane Division,  Madras  v.  Cosmopolitan Club,  I.L.R.  [1955] Mad. 1042.  Graf V.  Evans,  [1882]  8 Q.B.D.  373, Trebanog Working Men’s Club and Institute  Ltd. v.  Macdonald  [19401 1 A.E.L.R. 454, Bengal  Nagpur  Cotton Mills Club, Rajnandangaon v. Sales Tax Officer Raipur & Anr. 8  S.T.C.  781, Century Club & Anr. v. State of  Mysore,  16 S.T.C.  38, Deputy Commercial Tax Officer v.  Enfiend  India Ltd.  [1968] 2 S.C.R. 421, and Inland Revenue  Commissioners v.  Westleigh Estate Co. Ltd.  Same v. .South Behar  Railway Co. Ltd. [19241 1 K.B. 390, referred to. 681     (Per Shah, J. concurring) : The analogy of cases decided under the Licensing Act in the United Kingdom concerning the supply by clubs of alcoholic drinks to their members is  not appropriate.   Whether  refreshments,  beverages  and  other articles supplied by members’ club for consideration, to its members, are in law sold depends upon the, circumstances  in which  the  transaction  takes  place.  in  each  case   the liability  to tax -of the transaction will depend  upon  its strictly  legal  form.   If an  incorporated  members’  club supplies  its property to its members at a fixed  tariff-the transaction would readily be deemed to be one for sale, even if  the  transaction  is  on  a  non-profit  basis;  such  a transaction  would be liable to sales tax.  Where,  however, the  club is merely acting on behalf of the members to  make available  to them refreshments, beverages and  other  arti- cles,  the transaction will not be regarded as a  sale,  for the  club  is  the agency through  which  the  members  have arranged that the refreshments, beverages and other articles should be made available.  The test in each case is  whether the  club transfers property belonging to it for a price  or the  club  acts as an agent for  making  available  property belonging to its members. [687 G, 688 B]       State of Madras v. Gannon Dunkerley & Co. Ltd.  [1959] S.C.R.   379,  Duke  of  West  Minster  v.  Inland   Revenue Commissioner,  19  T.C.  490,  Bank  of  Chettinad  Ltd.  v. Commissioner  of  Income-tax,  Madras,  L.R.  67  I.A.  394, Commissioner  of  Income-tax,  Andhra Pradesh  v.  Motors  & General Stores (P) Ltd., 66 I.T.R. 692 S.C. and Commissioner of Income-tax Gujarat v. B. M. Kharwar, 72 I.T.R. 603  S.C., referred to.       In  the  present case on the  findings  recorded,  the respondents were not transferring property belonging to them but  were merely acting as agents for and on behalf  of  the members and hence, the transactions were not sales and could not therefore be subject to sales tax under the Act. [688 D]

JUDGMENT:       CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1724 to 1727 of 1967.       Appeals  from the judgments and orders dated  November 23,  1962 and November 4, 1963 of the Madras High  Court  in Writ Petitions Nos. 129, 130 and 181 of 1960 and Writ Appeal No. 275 of 1963.       M.  C. Chagla and A. V. Rangam, for the appellants (in all the appeals).       D.  Narsaraju   and   R.   Gopalakrishnan,   for   the



respondents (in C.As. Nos. 1724, 1725 and 1727 of 1967).       P.  Ram  Reddy, P. Parameswara Rao and A. V. V.  Nair, for the   respondent (in S.A. No. 1726 of 1967).       The Judgment of M. HIDAYATULLAH, C.J., K. S. HEGDE,       A.N. GROVER, A. N. RAY and 1. D. DUA, was delivered by GROVER, J. J. C. SHAH gave a separate opinion. -       Grover,  J. These appeals by certificate are  directed against  a  common  judgment, of the Madras  High  Court  in petitions  filed under Art. 226 of the Constitution  by  the Cosmopolitan   Club,   Madras,  the   Young   Men’s   Indian Association,  Madras  and the  Lawley  Institute  Ootacamund challenging the proceedings relating to their assessment  to sales tax under the Madras General Sales 682 Tax  Act, 1959, hereinafter called the "Act", for  supplying food, snacks, beverages and other articles to their  members or their guests.  It was held by the High Court that each of these  clubs could not be regarded as a "dealer" within  the meaning  of S. 2 (g) read with Explanation I of the Act  nor was  any  "sale" involved in the aforesaid activity  of  the club within the, meaning of s. 2(n) read with Explanation  I of the Act.     The  Cosmopolitan Club, Madras, is a  social  recreation club  which  was started originally in the year 1873  as  an unincorporated association.  In 1934 it was registered under S.  26  of  the Indian Companies Act 1913  as  a  non-profit earning  institution.   Its  objects, as  disclosed  in  the memorandum  of  association,  are  mainly  to  promote   and facilitate   social  intercourse,  discussion  amongst   its members  etc.  The articles of association provide that  the members  for  the time being only constitute the  club.   It maintains  an  establishment  for  preparing  and  supplying refreshment  to its members.  It has been found by the  High Court and has not -been disputed that the articles necessary for  the aforesaid purpose are purchased by the club in  the market and the preparations are made within its premises  at the direction of a committee.  The preparations are supplied to the members at such prices as are fixed by the committee. A  member  is allowed to bring guests with him  but  if  any article  of food is consumed by the guest it is  the  member who has to pay for the same.      The  Young  Men’s  Indian  Association  is  a   society registered  under the Societies’ Registration Act 1860.   It has,  for  its  objects, the improvement of  the  moral  and physical  standards etc. of the students.   The  association provides certain facilities in the shape of a library with a reading   room  apart  from  residential  and   recreational facilities.  There is a mess together with a canteen serving the needs of the members.  Any member can bring a guest  but the  duration of his stay in the hostel or of  enjoying  the benefit  of  the preparations or beverages  is  limited  and restricted  by the rules.  It is the member who has  to  pay the  charges  for any articles consumed by his  guest.   The employees  of the association purchase the various  articles required  for supplying the refreshments etc. and  the  cost and the expenses incurred therefor inclusive of the salaries of  cooks,  servers and others are totalled up  and  divided among  the members participating in the mess.  No profit  is made by the association in providing these amenities to  its members.   These facts as found in the judgment of the  High Court are not disputed.      The  Lawley Institute came into existence by a deed  of trust  dated  September 15, 1911 entered  into  between  the Maharja of Bibbli and the Collector of Nilgiris and  others. The  management  of the Institute vests  absolutely  in  the



board of trustees.  It is 683 intended to serve its members only and no person other  than a  member  is  entitled  to  participate  in  the  amenities provided  by the Institute.  The supplying  of  refreshments and  meals  to  members constitute one  of  such  amenities. These facts are altogether uncontroverted.      It  appears that in the State of Madras levy  of  sales tax  was first made in 1939.  The statute as it  stood  then contained  the definition of "dealer" in s. 2(b).  A  dealer was  defined as "any person who carried on any  business  of buying, or selling goods" with the following Explanation:               a  cooperative society, a club, a firm or  any               association  which sells goods to its  members               is  a  dealer  within  the  meaning  of   this               clause". The  Cosmopolitan  Club, Madras, which had been  paying  tax since   1939  filed  a  petition  under  Art.  226  of   the Constitution   which  was  disposed  of  by  Mack   J.,   in Cosmopolitan   Club,  Madras  v.  District  Commercial   Tax Officer, Triplicane(1).  According to the learned Judge  the supply of refreshments in a members’ club, purchased out  of the club funds and composed of members’ subscription was not a transfer of property from the club as such to a member nor did  the  club do any trade or business in  purchasing  from outside  the requirements of members and supplying the  same to  them at a fixed charge.  The levy of sales tax  on  such supply  of refreshments was held to be illegal.  A  division bench  to  whom  an appeal was  taken  confirmed  the  above judgment   (Deputy   Commercial  Tax   Officer,   Triplicane Division,   Madras   v.  The  Cosmopolitan   Club(’).    The definition  of  "dealer’  in s. 2(g) of the Act  is  in  the following terms :               "dealer"  means any person who carried on  the               business  of  buying,  selling,  supplying  or               distributing  goods,  directly  or   otherwise               whether  for cash or for deferred  payment  or               for commission, remuneration or other valuable               consideration and includes-               (i)...................               (ii)..................               (iii).................               (iv)..................                  Explanation-1.    A  society  including   a               cooperative,  society,  club  or  firm  or  an                             association which, whether or not in t he course               of business, buys, sells or distributes  goods               from  or  to  its  members  for  cash  or  for               deferred (1) [1952] 1 M.L.J. 401. (2) I.L.R. [1955] mad. 1042. 684               payment  or  for commission,  remuneration  or               other valuable consideration, shall be  deemed               to be a dealer for the purpose of this Act;               Explanation II............."               The  definition  of sale as given in  s.  2(n)               reads                  "sale" with all its grammatical  variations               and  cognate expressions means every  transfer               of  the  property in goods by  one  person  to               another in the course of business for cash  or               for   deferred  payment  or   other   valuable               consideration



                Explanation  1. "The transfer  of  property               involved  in  the supply  or  distribution  of               goods  by a society (including  a  cooperative               society) club, firm or any association to  its               members, for cash, or for deferred payment, or               other  valuable consideration, whether or  not               in  the course of business shall be deemed  to               be a sale for the purpose of this Act".               "Turnover" is defined to mean                  "the  aggregate amount for which goods  are               bought or sold or supplied or distributed by a               dealer  either directly or through another  on               his  own  account  or  on  account  of  others               whether  for cash or for deferred  payment  or               for               other               valuable               consideration..................."     It is common ground that for the levy of sales tax there must  be  a  sale  of  refreshments,  beverages  and   other preparations  by  the club to its members.  If there  is  no transfer of property involved in the supply or  distribution of  goods by a club it would not fall within  Explanation  I contained  in the definition of sale in s. 2(n) nor can  the club  be  regarded  as a dealer within  s.  2(g)  read  with Explanation 1.     The  law in England has always been that members’  clubs to  which  category  the clubs in the  present  case  belong cannot  be made subject to the provisions of  the  Licensing Acts concerning sale because the members are joint owners of all  the club property including the excisable liquor.   The supply  of liquor to a member at a fixed -price by the  club cannot  be  regarded to be a sale.  If, however,  liquor  is supplied to, and paid for by a person who is not a bona fide member of the club or his duly authorised agent there  would be a sale.  With regard to incorporated clubs a  distinction has   been   drawn.   Where  such  a  club   has   all   the ,characteristics  of  a members’ club  consistent  with  its incorporation,  that  is  to say, where every  member  is  a shareholder  and every shareholder is a member,  no  licence need be taken out if liquor 685 is   supplied  only  to  the  members.   If  some   of   the shareholders are not members or some of the members are  not shareholders  that would be the case of a  proprietary  club and  would  involve  sale.  Proprietary  clubs  stand  on  a different  footing.   The  members  are  not  owners  of  or interested in the property of the club.  The supply to  them of  food or liquor though at a fixed tariff is  a  sale.(See Halsbury’s  Laws of England, 3rd Ed., Vol. 5, pp.  280-281.) The  principle laid down in Graff v. Evans(’) had throughout been followed.  In that case Field J., put it thus :                   "I  think  the true  construction  of  the               rules  is  that  the members  were  the  joint               owners  of  the general property  in  all  the               goods of the club, and that the trustees  were               their  agents  with  respect  to  the  general               property in the goods". The difficulty felt in the legal property ordinarily vesting in the trustees of the members’ club or in the  incorporated body  was surmounted by invoking the theory of  agency  i.e. the  club or the trustees acting as agents of  the  members. According to Lord Hewart (L.C.J.) in Trebanog Working  Men’s Club  and  Institute  Ltd. v. Macdonald  (2)   once  it  was conceded that a members’ club did not -necessarily require a license to serve its members with intoxicating liquor it was difficult to draw any distinction between the various  legal



entities  which might be entrusted with the duty of  holding the property on behalf of members, be it an individual or  a body of trustees or a company formed for the purpose so long as  the real interest in the liquor remained in the  members of  the club.  What was essential was that the.  holding  of the  property by the agent or trustee must be a holding  for and  on behalf of and not a holding antagonistic to  members of the club.      In  the various cases which came to be decided  by  the High Courts in India the view which had prevailed in England was  accepted and applied.  We may notice the  decisions  of the Madhya Pradesh High Court in Bengal Nagpur Cotton  Mills Club, Rajnandangaon v. Sales Tax Officer Raipur & Another  ( 3  ) and of the Mysore High Court in Century Club &  Another v.  The  State of Mysore & Anr. (4).  In the former  it  was held  -that  the  supply to the member of  a  members’  club registered  under s. 26 of the Indian Companies Act 1913  of refreshments purchased out of club funds which consisted  of members’  subscription was not a transfer of  property  from the club as such to a member and the club was not liable  to sales  tax  under  the C.P. & Barar Sales Tax  Act  1947  in respect  of  such supplies of  refreshment.   The  principle adverted to in Trebanog Working Men’s Club (2) was adopted (1)   [1882] 8 Q. B. D. 373. (3)  8 S. T. C. 781. (2)  [1940] 1 A.E.L.R. 454. (4)  16 S. T. C. 38. 686 and  it  was said that if the agent or  a  trustee  supplied goods  to  the members such supplies would not amount  to  a transaction  of sale.  The Mysore court expressed  the  same view  that  a  purely member’s club  which  makes  purchases through a Secretary or manager and supplies the requirements to  members at a fixed rate did not in law sell these  goods to the members.     On behalf of the appellant reliance has been placed on a decision  of this court in Deputy Commercial Tax  Officer  & Anr.   v.  Enfiend  India  Ltd.  (1).   In  that  case   the Explanation  to  s.  2 (g) was found to  be  intravires  and within  the  competence  of  the  State  legislature.    The judgment  proceeded on the footing that when  a  cooperative society supplied refreshments to its members for a price the following  four constituent elements of sale were present  : (1)  parties competent to contract; (2) mutual consent;  (3) thing,  the  absolute  or  general  property  in  which   is transferred  from the seller to the buyer and (4)  price  in money  paid  or promised.  The mere fact  that  the  society supplied  the refreshments,to its members alone and did  not make  any profit was not considered sufficient to  establish that the society was acting only as an agent of its members. As a registered society was a body corporate it could not be assumed that the property which it held was the property  of which  its members were owners.  The English decisions  were distinguished  on the ground that the courts in those  cases were dealing with matters of quasi criminal nature.      It  appears that in England even in taxation  laws  the position  of  a members’ club though incorporated  has  been recognised  to  be  quite  different.   In  Inland   Revenue Commissioners v. Westleigh Estate Co. Ltd.(’); Same v. South Behar  Railway Co. Ltd. and Same v. Eccentric  Club  Pollock M.R. dealing with the case of the Eccentric Club pointed out that  the members’ club was only structurally a company  and it  did not carry on trade or business so as to attract  the Corporation Profits Tax.      The essential question, in the present case, is whether



the  supply of the various preparations by each club to  its members involved a transaction of sale within the meaning of the  Sale  of Goods Act 1930.  The State  Legislature  being competent  to legislate only under Entry 54, List II of  the 7th  Schedule  to the Constitution the expression  "sale  of goods" bears the same meaning -which it has in the aforesaid Act.   Thus in spite of the definition contained in S.  2(n) read with Explanation I of the Act if there is -no  transfer of property from one to another there is no sale which would be  exigible  to tax.  If the club even  though  a  distinct legal  entity is only acting as an agent for its members  in the  matter  of ,supply of various preparations to  them  no sale would be involved (1) [1968] 2 S.C.R. 421. (2) [1924] 1 K. B. 390. 687 as the element of transfer would be completely absent.  This position  has  been rightly accepted even  in  the  previous decision of this Court.     The  final conclusion of the High Court in the  judgment under appeal was that the case of each club was analogous to that  of an agent or mandatory investing his own monies  for preparing things for consumption of the principal, and later recouping  himself  for the expenses  incurred.   Once  this conclusion on the facts relating to each club was reached it was  unnecessary  for the High Court to have  expressed  any view with regard to the vires of the Explanations to S. 2(g) and 2(n) of the Act.  As no transaction of sale was involved there  could be no levy of tax under the provisions  of  the Act  on the supply of refreshments and preparations by  each one of the clubs to its members.     The  appeals must fail and are dismissed but there  will be no order as to costs.     Shah, J. Where general property in goods belonging to  a person  is  under a contract transferred to  another  for  a price  paid  or promised, the transaction is  a  sale.   The State  Legislature  has  under  the  Constitution  power  to legislate under Entry 54 List 11 in respect of taxes on sale or purchase of goods and the expression "sale" has the  same meaning  it bears in the Sale of Goods Act, 1930: see  State of  Madras  v. Gannon Dunkerley & Co.  (Madras)  Ltd.(’).  A transaction  which is not of the nature of sale  within  the meaning  of  the Sale of Goods Act,  cannot,  therefore,  be subjected  to tax under a law enacted in exercise  of  power under Entry 54 List 11.     Whether  refreshments,  beverages  and  other   articles supplied by a Member’s Club for consideration to its members are in law sold depends upon the circumstances in which  the transaction takes place.  In each case the liability to  tax of the transaction will depend upon its strictly legal form. If  an incorporated members’ club supplies its  property  to its members at a fixed tariff, the transaction would readily be deemed to be one for sale, even if the transaction is  on a  non-profit basis; such a transaction would be  liable  to sales  tax.   Where, however, the club is merely  acting  on behalf   of   the  members  to  make   available   to   them refreshments, beverages and other articles, the  transaction will  not be regarded as a sale, for the club is the  agency through   which   the  members  have   arranged   that   the refreshments,  beverages and other articles should  be  made available.  The test in each case is whether the (1) [1959] S.C.R. 379. 688 club  transfers property belonging to it for a price or  the club  acts  as  an  agent  for  making  available   property



belonging to its members.     In  my judgment, the analogy of the cases decided  under the  Licensing  Act  in the United  Kingdom  concerning  the supply by clubs of alcoholic drinks to their members is  not appropriate.   In  a  criminal  trial  or  a  quasi-criminal proceeding, the Court is entitled to consider the  substance of  the  transaction  and determine  the  liability  of  the offender.  But in a taxing statute the strict legal position as  disclosed  by  the form and not  the  substance  of  the transaction is determinative of its taxability : see Duke of West  Minister  v.Inland Revenue Commissioners(’);  Bank  of Chittinad  Minister v.Inland Revenue Commissioners(’);  Bank of Chittinad Income-tax, Andhra Pradesh v. Motors &  General Stores(P)  Ltd.(’); and Commissioner of Income-tax,  Gujarat v. B. M. Kharwar (4).      It  appears on the findings recorded by the High  Court that the clubs or associations sought to be rendered  liable in these appeals were not transferring property belonging to them but were merely acting as agents for and on be-half  of the members.  They were not selling goods but were rendering a service to their members. I agree therefore that the appeals must fail. Y.P.                        Appeals dismissed. (1)   19 T.C. 490. 519. (2)   L. R. 67 I. A. 394. (3)  66 I.T.R. 692 S.C. (4)  72 I.T.R. 603 S.C. 689