STATE OF WEST BENGAL & ORS. v. CALCUTTA CLUB LIMITED

[R.F. NARIMAN, J.]

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. D Reliance is placed on behalf of the appellant on a passage in Buckley’s 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 H

p. 910 Copy page pinpoint

A 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 it.” In Cricket Club of India Ltd. v. Bombay Labour Union (1969) B 1 SCR 600, this Court decided a preliminary objection taken in favour of the Cricket Club of India, that the said Club is not an “industry”, and consequently, the Industrial Disputes Act, 1947 would not apply to such members’ club. A contention was raised against this proposition - that the said Club had been incorporated as a limited company under the Companies Act, and would thus have to be treated as a separate legal C entity apart from its members, and would therefore fall within the definition of “industry” under the Industrial Disputes Act, 1947. This was negatived by the Court, stating at page 614 of the said judgment: “Lastly, reference was made to the circumstance that, unlike the Madras Gymkhana Club, the Club has been incorporated as a D Limited Company under the Indian Companies Act. It was urged that the effect of this incorporation in law was that the Club became an entity separate and distinct from its Members, so that, in providing catering facilities, the Club, as a separate legal entity, was entering into transactions with the Members who were distinct from the Club itself. In our opinion, the Tribunal was right in holding that the circumstance of incorporation of the Club as a Limited Company is not of importance. It is true that, for purposes of contract law and for purposes of suing or being sued, the fact of incorporation makes the Club a separate legal entity; but, in deciding whether the Club is an industry or not, we cannot base our decision on such legal technicalities. What we have to see is the nature of the activity in fact and in substance. Though the Club is incorporated as a Company, it is not like an ordinary Company constituted for the purpose of carrying on business. There are no shareholders. No dividends are ever declared and no distribution of profits takes place. Admission to the Club is by payment of admission fee and not by purchase of shares. Even this admission is subject to balloting. The membership is not transferable like the right of shareholders. There is the provision for expulsion of a Member under certain circumstances which feature never exists in the case of a shareholder holding shares in a Limited Company. H

p. 911 Copy page pinpoint

[R.F. NARIMAN, J.]

The membership is fluid. A person retains rights as long as he continues as a Member and gets nothing at all when he ceases to be a Member, even though he may have paid a large amount as admission fee. He even loses his rights on expulsion. In these circumstances, it is clear that the Club cannot be treated as a separate legal entity of the nature of a Limited Company carrying on business. The Club, in fact, continues to be a Members’ Club without any shareholders and, consequently, all services provided in the Club for Members have to be treated as activities of a self- serving institution.”

29Copy pinpoint29. Given the differences pointed out in Cricket Club of India (supra) between clubs registered as Companies under Section 25 of the C 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 members. D

30Copy pinpoint30. The doctrine of mutuality as applied to clubs is elaborately discussed in Bangalore Club v. Commissioner of Income Tax and Anr. (2013) 5 SCC 509. In discussing the fact that in members’ clubs there is a complete identity between contributors and participators, this Court held: E “16. On this aspect of the doctrine, especially with regard to the non-members, Halsbury’s Laws of England, 4th Edn., Reissue, Vol. 23, Paras 222 and 224 (pp. 152 and 154) states: “222.General features of mutual trading.— … Where the trade or activity is mutual, the fact that as regards certain activities, F certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. *** G 224.Clubs, etc.—Members’ clubs are an example of a mutual undertaking; but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting.” 17.Simon’s Taxes, Vol. B, 3rd Edn., Paras B1.218 and B1.222 (pp. 159 and 167) formulate the law on the point, thus: H

p. 912 Copy page pinpoint

18. In short, there has to be a complete identity between the class of participators and class of contributors; the particular label or form by which the mutual association is known is of no consequence. Kanga and Palkhivala explain this concept in The Law and Practice of Income Tax (8th Edn., Vol. I, 1990) at p. 113 as follows: “1.Complete identity between contributors and participators.— ‘… The contributors to the common fund and the participators H

p. 913 Copy page pinpoint

[R.F. NARIMAN, J.]

in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid.’ The Madras, Andhra Pradesh and Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves: it is enough if they have 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 similar association or used for some charitable objects.” Rowlatt, J.’s observations in Thomas (Inspector of Taxes) v. C Richard Evans & Co. Ltd. (1927) 1 K.B. 33 were then referred to as follows: “… But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a railway company makes a profit by carrying its shareholders, or if a trading company, by trading with the shareholders even if it is limited to trading with them, makes a profit, that profit belongs to the shareholders in a sense, but it belongs to them qua shareholders. It does not come back to them as purchasers or customers; it comes back to them as shareholders upon their shares. Where all that a company does is to collect money from a certain number of people—it [does not matter] whether they are called members of the company or participating policy-holders—and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand Styles case [New York F Life Insurance Co. v. Styles (Surveyor of Taxes), (1889) LR 14 AC 381 : (1886-90) All ER Rep Ext 1362 : (1889) 2 TC 460 (HL)] , there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference; there is still no profit. G This is not because the entity of the company is to be disregarded; it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. That, as I understand [it], is the effect of the decision in Styles H

p. 914 Copy page pinpoint

A case [New York Life Insurance Co. v. Styles (Surveyor of Taxes), (1889) LR 14 AC 381 : (1886-90) All ER Rep Ext 1362 : (1889) 2 TC 460 (HL)] .” Given 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 itself. 31 What arises for deliberation now is whether the 46 th E Amendment has done away with the principles contained in Young Men’s Indian Association (supra) and the other judgments on the doctrine of mutuality, as applied to members’ clubs.

32Copy pinpoint32. It can be seen that the 61st Law Commission Report had observed that there cannot be said to be any evasion of tax as a member F of members’ clubs “really takes his own goods” and, therefore, did not seek to tax such goods. The framers of the 46th 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 members. G

33Copy pinpoint33. Quite obviously, the Statement of Objects and Reasons has not read the case of Young Men’s Indian Association (supra) in its correct perspective. As has been noticed hereinabove, Young Men’s Indian Association (supra) had three separate appeals before it, in one of which a company was involved. To state, therefore, that under the H

p. 915 Copy page pinpoint

[R.F. NARIMAN, J.]

law as it stood on the date of the 46th Amendment, a sale of goods by a A club having a corporate status to members is taxable, is wholly incorrect. Proceeding on this incorrect basis, what the 46th 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 46th Amendment used the expression “any unincorporated association or body of persons”. B 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).

34Copy pinpoint34. Thus, it is clear that even going by Shri Dwivedi’s 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 form.

35Copy pinpoint35. Even otherwise, on the assumption that “unincorporated association or body of persons” must be read disjunctively, “a body of persons” cannot be equated with “person”. “Person” as defined by the General Clauses Act, (which applies to the interpretation of the E Constitution vide Article 367) reads as follows: “3. Definitions.- xxx xxx xxx (42) “person” shall include any company or association or body F of individuals, whether incorporated or not; Article 366(29-A) does not use this expression, as “person” would then include corporate persons as well. On the other hand, “body of persons” is used to make it clear beyond doubt that corporate persons are not referred to. G

36Copy pinpoint36. The definition of “person” in other Acts such as the Income Tax Act, 1961 is also very wide, and includes an association of persons or body of individuals, whether incorporated or not – see Section 2(31) of the Income Tax Act, 1961. Quite clearly, this language was available and in common usage by the legislature, as the definition of “person” H

p. 916 Copy page pinpoint

A under the Income Tax Act has stood in the statute book since 1961. The contrast in the language of the Income Tax Act, 1961 and Article 366(29- A)(e) again leads to the conclusion that “body of persons” would not refer to the corporate form unless “person” by itself is accompanied by the expression “whether incorporated or not”.

37Copy pinpoint37. Even otherwise, the “supply” of goods by an unincorporated association or body of persons has to be to a member for cash, deferred payment or other valuable consideration. As 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 another. The definition of “consideration” as stated C in the Indian Contract Act, 1872 is as follows: “2. Interpretation-clause.- In this Act the following words and expressions are used in the following senses, unless a contrary intention appears from the context:-

D xxx xxx xxx (d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a E consideration for the promise;” The expression “valuable consideration” has, as has been pointed out in ‘Pollock and Mulla, The Indian Contract & Specific Relief Acts (16th ed.)’, been taken from an old English case Currie v. Misa (1875) LR 10 EX 153, and explained as follows: F “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 other. The above definition brings out the idea of reciprocity as the G distinguishing mark; it is the gratuitous promise that is unenforceable in English law.”

38Copy pinpoint38. 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 H

p. 917 Copy page pinpoint

[R.F. NARIMAN, J.]

of those goods by the person to whom such supply is made. As the A Young Men’s 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 Men’s Indian Association (supra) has not been done away with by the limited B fiction introduced by Article 366(29-A)(e).

39Copy pinpoint39. 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 C of India Limited AIR 1972 SC 1131 and Northern India Caterers (India) Ltd. (supra).

40Copy pinpoint40. 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 46th 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 doubt. Section 6(2) of the Amendment Act reads as follows: “…(2) Notwithstanding anything contained in sub-section (1), any supply of the nature referred to therein shall be exempt from the aforesaid tax- (a) where such supply has been made, by any restaurant or eating house (by whatever name called), at any time on or after the 7th day of September, 1978 and before the commencement of this Act and the aforesaid tax has not been collected on such supply on the ground that no such tax could have been levied or collected at that time; or G (b) where such supply, not being any such supply by any restaurant or eating house (by whatever name called), has been made at any time on or after the 4th day of January, 1972 and before the commencement of this Act and the aforesaid tax H

p. 918 Copy page pinpoint

A has not been collected on such supply on the ground that no such tax could have been levied or collected at that time: Provided that the burden of proving that the aforesaid tax was not collected on any supply of the nature referred to in clause (a) or, as the case may be, clause (b), shall be on the person B claiming the exemption under this sub-section.” 41.Sub-clause (a) refers to 7th September, 1978, which is the date on which Northern India Caterers (supra) was pronounced and sub- clause (b) refers to 4th January, 1972, which is the date on which Associated Hotels of India Ltd. (supra) was pronounced. The 46th C 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). D

42Copy pinpoint42. 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’ clubs.

43Copy pinpoint43. 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 Court. In K. Damodarasamy Naidu & Bros. and Ors. v. State of T.N. and Anr. (2000) 1 SCC 527, this Court referred to Article 366(29-A)(f) as follows: “9. The provisions of sub-clause (f) of clause (29-A) of Article 366 need to be analysed. Sub-clause (f) permits the States to H

p. 919 Copy page pinpoint

[R.F. NARIMAN, J.]

impose a tax on the supply of food and drink. The supply can be A by way of a service or as part of a service or it can be in any other manner whatsoever. The supply or service can be for cash or deferred payment or other valuable consideration. The words of sub-clause (f) have found place in the Sales Tax Acts of most States and, as we have seen, they have been used in the said B Tamil Nadu Act. The tax, therefore, is on the supply of food or drink and it is not of relevance that the supply is by way of a service or as part of a service. In our view, therefore, the price that the customer pays for the supply of food in a restaurant can- not be split up as suggested by learned counsel. The supply of food by the restaurant-owner to the customer though it may be a C part of the service that he renders by providing good furniture, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor and a floor show, is what is the subject of the levy. The patron of a fancy restaurant who orders a plate of cheese sand- wiches whose price is shown to be Rs 50 on the bill of fare knows D very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays Rs 50 for its supply and it is on Rs 50 that the restaurant- owner must be taxed.”

44Copy pinpoint44. In a recent judgment of this Court, Federation of Hotel and Restaurant Associations of India v. Union of India and Ors. (2018) E 2 SCC 97, this Court referred to the reason for the enactment of sub- clause (f) as follows: “11. As has been stated in the trilogy of judgments in Associated Hotels of India Ltd. [State of Punjab v. Associated Hotels of India Ltd., (1972) 1 SCC 472] and the two Northern India Ca- F terers (India) Ltd. [Northern India Caterers (India) Ltd. v. State (UT of Delhi), (1978) 4 SCC 36 : 1978 SCC (Tax) 198 : (1979) 1 SCR 557] , [Northern India Caterers (India) Ltd. v. State (UT of Delhi), (1980) 2 SCC 167 : 1980 SCC (Tax) 222] , it is clear that when “sale” of food and drinks takes place in hotels G 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. H

p. 920 Copy page pinpoint

A 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: B “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 C 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 D for human consumption is now deemed to be a sale of goods by the person making the transfer, delivery or supply.”

45Copy pinpoint45. 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 E Income Tax Act, 1961, reads as under: “2. Definitions.- xxx xxx xxx (24) “income” includes- F 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 G the First Schedule” This has to be read with Section 44 of the Income Tax Act, 1961 which reads as under:

p. 921 Copy page pinpoint

[R.F. NARIMAN, J.]

“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.”

46Copy pinpoint46. 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 46th Amendment.

47Copy pinpoint47. In fact, Section 2(24)(vii) has been expressly noticed in D 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.”

48Copy pinpoint48. 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 G (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-

p. 922 Copy page pinpoint

A 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).

49Copy pinpoint49. In light of the view that we have taken, it is unnecessary to advert to Shri Dwivedi’s 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: E (1) The doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs after the 46th Amendment adding Article 366(29-A) to the Constitution of India. (2) Young Men’s Indian Association (supra) and other judgments which applied this doctrine continue to hold the field even F after the 46th Amendment. (3) Sub-clause (f) of Article 366(29-A) has no application to members’ clubs.

50Copy pinpoint50. Having gone through the judgment and order of the West Bengal Taxation Tribunal dated 3rd July, 2006 and the impugned Calcutta G High Court judgment dated 1st February, 2008, and in view of the answers to the three questions referred to the present Three Judge Bench (as listed hereinabove), we are of the view that no interference is called for in the findings of fact or declaration of law in this case. Accordingly, C.A. No. 4184 of 2009 stands dismissed. H

p. 923 Copy page pinpoint

[R.F. NARIMAN, J.]

C.A. No.7497 of 2012 and other connected matters A

51Copy pinpoint51. Delay condoned. Leave is granted.

52Copy pinpoint52. By an order dated 13th December, 2017 by a Division Bench of this Court in Civil Appeal No.7497 of 2012 and its connected matters, this Court listed these appeals involving the levy of service tax upon members’ clubs as follows: B

“The issue involved in these cases has been referred to the larger Bench and the reference order is reported as ‘State of West Bengal & Ors. v. Calcutta Club Ltd.’ [2017(5) SCC 356][Civil Appeal No. 4184 of 2009]. C Let these appeals be also listed before the larger Bench along with the aforesaid matter after taking orders from Hon’ble the Chief Justice of India.”

53Copy pinpoint53. Primarily two judgments have been impugned before us by the Revenue; one by the High Court of Jharkhand at Ranchi in W.P (T) D No.2388 of 2007 dated 15th March, 2012; and the other by the High Court of Gujarat in S.C.A. Nos.13654-13656 of 2005 dated 25th March,

2013. The impugned judgment dated 15th March, 2012 by the High Court of Jharkhand set out the relevant provisions of the Finance Act, 1994 (hereinafter referred to as the “Finance Act”), by which service tax was levied on members’ clubs, and arrived at the conclusion that such clubs stand on a different footing from proprietary clubs, as has been held in Young Men’s Indian Association (supra). The High Court following Young Men’s Indian Association (supra) then held, stating: “18. However, learned counsel for the petitioner submits that sale and service are different. It is true that sale and service are two different and distinct transaction. The sale entails transfer of property whereas in service, there is no transfer of property. However, the basic feature common in both transactions requires existence of the two parties; in the matter of sale, the seller and buyer, and in the matter of service, service provider and service receiver. Since the issue whether there are two persons or two legal entity in the activities of the members’ club has been already considered and decided by the Hon’ble Supreme Court as well as by the Full Bench of this Court in the cases referred above,

p. 924 Copy page pinpoint

A therefore, this issue is no more res integra and issue is to be answered in favour of the writ petitioner and it can be held that in view of the mutuality and in view of the activities of the club, if club provides any service to its members may be in any form including as mandap keeper, then it is not a service by one to another in the light of the decisions referred above as foundational facts of existence of two legal entities in such transaction is missing. However, so far as services by the club to other than members, learned counsel for the petitioner submitted that they are paying the tax.

19. Therefore, this writ petition deserves to be allowed and it is held that rendering of service by the petitioner- club to its members is not taxable service under the Finance Act, 1994 and the writ petition of the petitioner is allowed accordingly.”

54Copy pinpoint54. Likewise, the Gujarat High Court by the judgment dated 25th March, 2013, followed the judgment of the High Court of Jharkhand D and declared the following: “8. In the result, these petitions are allowed and it is hereby declared that Section 65(25a), Section 65(105) (zzze) and Section 66 of the Finance (No.2) Act, 1994 as incorporated/ amended by the Finance Act, 2005 to the extent that the said provisions purport to levy service tax in respect of services purportedly provided by the petitioner club to its members, to be ultra vires. Rule is made absolute with no order as to costs.”

55Copy pinpoint55. The appeals that are listed before us concern impugned judgments that have in essence followed these two judgments, insofar as service tax that is levied on members’ clubs is concerned. The vast majority of cases before us concerns members’ clubs that have been registered as Companies under Section 25 of the Companies Act, or registered co-operative societies under various State Acts, such societies being bodies corporate under the aforesaid Acts.

56Copy pinpoint56. Shri Dhruv Agarwal, learned Senior Advocate appearing on behalf of the Revenue, after taking us through the relevant provisions, submitted that service tax was levied on members’ clubs with effect from 2005. With effect from 2012, after statutory changes had been made, service tax continued to be levied on such clubs and was attracted H

p. 925 Copy page pinpoint

[R.F. NARIMAN, J.]

even to members’ clubs in incorporated form, i.e., as companies or as registered cooperative societies. According to Shri Agarwal, the principle of mutuality that is laid down in Young Men’s Indian Association (supra) has been expressly done away with in the service tax context, as there is in these cases no transaction of sale, unlike the sales tax cases that have just been heard. He cited a number of judgments to buttress his proposition that the High Courts of Jharkhand and Gujarat wrongly applied the judgment of Young Men’s Indian Association (supra), which was in the context of Sales Tax acts, to Service Tax, and hence did not lay down the law correctly.

57Copy pinpoint57. On the other hand, learned counsel appearing on behalf of the Respondents in these cases argued that when service tax was introduced in 1994, the legislature indicated activities which amounted to service, which were then selected for the purpose of imposition of tax. In 2005, despite the fact that members’ clubs were so selected, members’ clubs in incorporated form were expressly excluded from service tax. Post- 2012, there was a sea change, as a result of which service tax was imposed on all taxable services, short of those which were in a negative list contained in Section 66D of the Finance Act. According to the learned counsel appearing on behalf of the Respondents, the same position that obtained re: incorporated members’ clubs continued after 2012, despite the introduction of Explanation 3 to Section 65B(44). All the learned counsel argued that the doctrine of mutuality, insofar as incorporated institutions are concerned, was not done away with in the service tax regime, and the Jharkhand and Gujarat High Court were correct in applying the judgment in Young Men’s Indian Association (supra) to these cases.

58Copy pinpoint58. As was stated hereinabove, service tax was introduced for the first time by the Finance Act, 1994. Under Section 64(3), Chapter V of the Finance Act applied to taxable services as defined, with effect from 16th June, 2005. Under Section 65(25a), “club or association” was defined as follows: “club or association” means any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members, but does not include- (i) anybody established or constituted by or under any law for the time being in force, or H

p. 926 Copy page pinpoint

A (ii) any person or body of person engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry, or (iii) any person or body of person engaged in any activity having objectives which are in the nature of public service and are B of a charitable, religious or political nature, or (iv) any person or body of persons associated with press or media.

59Copy pinpoint59. Under Section 65(105)(zze), “taxable service” was defined as follows: C “”Taxable service” means any service provided- (zze) to its members by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount.”

60Copy pinpoint60. With effect from 1st May, 2011, “club or association” was defined by Section 65(25aa) as follows: “club or association” means any person or body of persons providing services, facilities or advantages, primarily to its members for a subscription or any other amount but does not include- (i) anybody established or constituted by or under any law for the time being in force, or (ii) any person or body of person engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry, or (iii) any person or body of person engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature, or

G (iv) any person or body of persons associated with press or media. 61 Likewise, in Section 65(105)(zzze), the expression “or any other person” was added after the expression “to its members”, thus making it clear that the tax net had now been widened so as to include non- members of clubs or associations as well. H

p. 927 Copy page pinpoint

[R.F. NARIMAN, J.]

62Copy pinpoint62. Under Section 66, it was stated that there shall be levied the A tax (referred to as “the service tax”) at the rate of 12% of the value of taxable services referred to in sub-clauses…(zzze) of clause (105) of section 65, and collected in such manner as may be prescribed.

63Copy pinpoint63. Under Section 67, where service tax is chargeable on any taxable service with reference to its value, it was stated: B “67. Valuation of taxable services for charging service tax (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, - C (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in D money as, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for consideration which is not ascertainable. be the amount as may be determined in the prescribed manner.” E

64Copy pinpoint64. Likewise, under Section 68, it was stated: “68. Payment of service tax (1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.” F

65Copy pinpoint65. With effect from 1st July, 2012, Sections 65 and 65A were made inapplicable, and a new Section 65B introduced, in which under Section 65B(37), the term “person” was defined as follows: “(37) “person” includes,- G (i) an individual, (ii) a Hindu undivided family, (iii) a company, H

p. 928 Copy page pinpoint

A (iv) a society, (v) a limited liability partnership (vi) a firm, (vii) an association of persons or body of individuals, whether B incorporated or not, (viii) Government, (ix) a local authority, or (x) every artificial juridical person, not falling within any of the preceding sub-clauses; C

66Copy pinpoint66. Under Section 65B(44), “service” was defined as follows: “(44) “service” means any activity carried out by a person for another for consideration and includes a declared service but shall not include- D (a) an activity which constitutes merely,- (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods, which is deemed E to be sale within the meaning of clause (29A) of article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment; F (c) fees taken in any Court or tribunal established under any law for the time being in force. xxx xxx xxx Explanation 3. For the purposes of this Chapter;- G (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;

p. 929 Copy page pinpoint

[R.F. NARIMAN, J.]

(b) an establishment of a person in the taxable territory and any A of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.”

67Copy pinpoint67. A new Section 66B was then introduced, which states as follows: “66B.Charge of service tax on and after Finance Act, 2012 B

There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.” C

68Copy pinpoint68. As was stated hereinabove, service tax was thus leviable on all services as defined, short of a negative list of services which was then set out in Section 66D of the Act.

69Copy pinpoint69. In an interesting judgment of this Court, Union of India and D Ors. v. Margadarshi Chit Funds Private Limited and Ors. (2017) 13 SCC 806, this Court outlined the history of service tax as follows: “19. The amendment was carried w.e.f. 1-6-2007 whereby the words “but does not include cash management” were deleted. This provision remained on statute book up to 30-6-2012. By the E Finance Act, 2012, entire scheme of service tax was completely changed and overhauled with the introduction of altogether new system of service tax. There was a paradigm shift in the service tax regime. Initially, service tax was levied only on three services by the Finance Act, 1994. The Finance Act, 1996 extended the levy to three more services. Twelve more services were brought under the service tax net by the Finance Act, 1997 and its scope was further enlarged by the Finance Act, 1998 when twelve more services were brought under the service tax net. Three services were exempted from the service tax by the Finance Act, 1998 and one more service by the Finance Act, 2000. Its scope was further widened by the Finance Act, 2001 when service tax was extended to include fifteen more services. The Finance Act, 2002 further levied service tax on ten more services. The Finance Act, 2003 brought 8 new services within the ambit of service tax.

p. 930 Copy page pinpoint

A Further, the Finance (No. 2) Act, 2004 brought 13 new services under service tax which included reintroduction of service tax on 3 services and also made applicable service tax on risk cover in life insurance under the life insurance service, whereas this service was introduced in the year 2002. The Finance Act, 2005 brought 9 new services under the service tax net. The Finance B Act, 2006 brought 15 new services under the service tax net. The Finance Act, 2007 brought 7 new services under the service tax net and six telecom related services were omitted and merged into one new category of taxable service. Further, the Finance Act, 2008 w.e.f. 16-5-2008, introduced 6 new services. Further, C the Finance (No. 2) Act, 2009 w.e.f. 1-9-2009 introduced 3 new services. Likewise, the Finance Act, 2010 w.e.f. 1-7-2010 vide Notification No. 24/2010-ST, dated 22-6-2010 introduced 8 new services. By the Finance Act, 2011 w.e.f. 1-5-2011 vide Notification No. 29/2011-ST dated 25-4-2011, 2 new services were brought within its net and at the same time, health service was D exempted w.e.f. 1-5-2011 by Notification No. 30/2011-ST dated 25-4-2011. Thus, the service tax was on a total of 115 services.

20. Thus, right from 1994 till 2011, the mode adopted was to specify those services on which it was intended to levy service tax. However, Parliament by the Finance Act, 2012 w.e.f. E 1-7-2012 has introduced altogether new system of taxation of services by making a paradigm shift. Now, the scheme of taxation of services is based on negative list of services. There- fore, earlier list of taxable services is no longer applicable. Instead two things have happened. First, the term “service” is defined whereas there was no definition of “service” in the Finance Act, 1994 which position remained till 2012. Earlier, each individual service on which tax was levied (known as taxable service) was defined. Secondly, the definition of “service” given now contains a negative list which is contained in Section 66-D of the Act. In other words, it specifically excludes certain transactions from the ambit of service. Thus, those transactions which are specifically excluded are not liable for service tax. Any other kind of service which qualifies the definition of “service” contained in the Act would be exigible to service tax.”

p. 931 Copy page pinpoint

[R.F. NARIMAN, J.]

70Copy pinpoint70. In All-India Federation of Tax Practitioners and Ors. v. A Union of India and Ors. (2007) 7 SCC 527, this Court upheld the constitutional validity of the levy of service tax, also stating: “8. As stated above, service tax is VAT. Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of services. Therefore, for our understanding, broadly B “services” fall into two categories, namely, property based services and performance based services. Property based services cover service providers such as architects, interior designers, real estate agents, construction services, mandapwalas, etc. Performance based services are services provided by service providers like stockbrokers, practising chartered accoun- C tants, practising cost accountants, security agencies, tour opera- tors, event managers, travel agents, etc.” After exhaustively reviewing a number of judgments, the Court stated that Parliament has legislative competence to levy service tax under Entry 97 List I of the Constitution of India. D

71 With this background, it is important now to examine the Finance Act as it obtained, firstly from 16th June, 2005 uptil 1st July, 2012.

72Copy pinpoint72. The definition of “club or association” contained in Section E 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 F 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 G 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,

p. 932 Copy page pinpoint

73Copy pinpoint73. 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 1st July, 2012 were not included in the service tax net. H

p. 933 Copy page pinpoint

[R.F. NARIMAN, J.]

74Copy pinpoint74. The next question that arises is - was any difference made to this position post 1st July, 2012?

75Copy pinpoint75. It can be seen that the definition of “service” contained in Section 65B(44) is very wide, as meaning any activity carried out by a person for another for consideration. “Person” is defined in Section 65B(37) as including, inter alia, a company, a society and every artificial juridical person not falling in any of the preceding sub-clauses, as also any association of persons or body of individuals whether incorporated or not.

76Copy pinpoint76. 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 D “service” under Section 65B(44) as well.

77Copy pinpoint77. 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 persons. E

78Copy pinpoint78. The explanation to Section 65, which was inserted by the Finance Act of 2006, reads as follows: “Explanation: For the purposes of this section, taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration:”

79Copy pinpoint79. 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 society.

80Copy pinpoint80. 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 H

p. 934 Copy page pinpoint

A 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 force. B

81Copy pinpoint81. 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 C 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 association”.

82Copy pinpoint82. 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 E 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 F which are incorporated.

83Copy pinpoint83. 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 G “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 corporate. H

p. 935 Copy page pinpoint

[R.F. NARIMAN, J.]

84Copy pinpoint84. We are therefore of the view that the Jharkhand High Court A and the Gujarat High Court are correct in their view of the law in following Young Men’s 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. 85.The appeals of the Revenue are, therefore dismissed. Writ B Petition (Civil) No.321 of 2017 is allowed in terms of prayer (i) therein. Consequently, show-cause notices, demand notices and other action taken to levy and collect service tax from incorporated members’ clubs are declared to be void and of no effect in law. C Divya Pandey Matters disposed of.