Mahomed Bagh Club Ltd., Lucknow vs Commissioner of Trade Tax, Lucknow & Ors.

Dr. Satish Chandra, J.:

All these writ petitions have been filed by the petitionerassessee i.e. M/s. Mahomed Bagh Club Ltd. Lucknow (hereinafter referred to as the Club) which was incorporated under the Indian Companies Act as limited Company. It never filed the Trade Tax Returns. First time, the notice was issued on 30.03.1998 and also on other dates under Section 13(1) of the U.P. Trade Tax Act 1948 (hereinafter referred to as the Act) requiring the petitioner to produce the books of accounts for the relevant assessment years. Being aggrieved, the petitioner filed the present writ petitions for the assessment years mentioned above.

Sri Pradeep Agarwal learned counsel for the petitioner submits that the Club was established as an ''Army Club'' in the year 1931. According to him, the Trade Tax Act is not applicable in the petitioner''s case as the petitionerassessee Club is being run exclusively for the benefit of its members. The members enjoy the foods and amenities available in the club. There is no sale to self. The object of the club is based on the principle of mutuality and not involving in any trade activity. For this purpose he read out Section 2(h)(v)(vi) of the Trade Tax Act, which follows as under:

"Section 2(h)(v): the supply of goods by'' any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration ; and

(vi): 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 case or deferred payment or other valu. able consideration."

He submits that there is no transfer of the property in the goods because there cannot be a sale to self. According to him, section 2(h) is not applicable in the petitioner''s case as there is no transfer of the goods. There must be at least two parties for a ''transfer''. In the instant cases, members are trustees of the Club and they consumed food stuff etc. No sale can be made out to sell. He further submits that the Section 2(h) (vi) is related to the sale, supply and service to the customer. In the instant cases, members of the club are not the customers and this provision is strictly applicable to the supply, consumption sale of the food items in a Restaurant/Hotel. The petitioner assessee is not a restaurant. No outsider can come and enjoy the said facility. For this purpose, he heavily relied on the ratio laid down in the case of Harbour Division II, Madras v. Young Men''s Indian Association Madras and others 1970 (26) STC 241 SC where it was observed that there is no ''transfer of property'' from one to another, there is no sale which would be exigible to tax under the Act. If a members'' club even though a distinct legal entity acts only as an agent for its members'' in the matter of the supply of various preparations and articles to them no sale would be involved as the element of transfer would be completely absent.

Learned counsel for the petitioner read out the entire judgment and stated that the objects of the petitioner as disclosed in the memorandum of association are mainly to promote and facilitate social intercourse, discussion among its members etc. It maintains an establishment for preparing and supplying refreshments to its members at such prices fixed as are fixed by the Committee. On specific quarry from the Bench, he admits that a Member is allowed to bring guest with him but if any article of food is consumed by the guest, it is the member who has to pay for the same.

He further relied on the ratio laid down in the case of Commissioner of Income Tax, Kanpur v. Cawnpore Club Ltd. 146 ITR 181 (Alld.) (1983 Tax LR 752) where it was observed that on the principle of mutuality in the case of a club, which is run for the benefit of its members, the income accruing to the club from letting out of accomodation in the club or providing of facilities to them for payment is not liable to tax, for no one could trade with himself. He also submits that in the said case, it was observed that the assessee club offered facilities to its members alone and not outsider. The''income received from these members was applied for the benefit of the members of the club alone. There was no fatling activity in the sense in which ii was understood commonly or in law. The club might be a juristic entity but the nature of the1 payment made by the members for the use of facilities like the rooms let out to them with Various conveniences, was payment by them to themselves as members of the club. Therefore, on the principle of mutuality, the income was exempt form tax. He further submits that this Court in the case of Cawnpore Club Ltd. (supra) observed as under:

"Coming now to the question whether the income of the assessee was exempt from levy of any tax on the principle of mutuality, we may notice first the real principle which, in our opinion, clearly is that a person cannot trade with himself so as to yield an assessable income. The assessee is a club offering facilities to its members alone and to no outsider. The income received from these members is applied for the benefit of the members of the club alone. There is no trading activity in the sense in which it is understood commonly or in law. The club may be a juristic entity (like a company in the present case) but the nature of the payment made by the members for use of the facilities like rooms let out to them with various conveniences, is payment by them to themselves as members of the club. We may refer to the observations of Finlay J., of the King''s Bench Division, in National Association of Local Government Officers v. Watkins [1934] 18 TC 499 in the case of an unincorporated association for protecting the interest of various categories of employees in local Government service which had offered facilities to its members at a holiday camp."

He also relied on the ratio laid down in the Commissioner of Incometax v. Darjeeling Club Ltd. 153 1TR 676 : (1984 Tax LR 1092) (Calcutta) where it was observed that:

"There is a long line of decisions in which it has been held that supplies made by a club to its members or the facilities afforded by a club to its members for a price, will not amount to business activity of the club, even though there may be surplus of revenue over expenditure and the surplus could not be taxed as business profits if the sales were confined to the members of the club only."

He also placed reliance on the ratio laid down in the case of Chelmsford Club v. Commissioner of Incometax 2000 (243) ITR 89 : (AIR 2000 SC 1092) (SC) where it was observed that :

"In our opinion, the High Court in Delhi Gymkhana Club Ltd.''s case [1985] 155 ITR 373. has not laid down any principle of law. It has merely proceeded on a hypothesis. At any rate the conclusion based on that hypothesis, in our opinion, being opposed to the principle accepted by us in this judgment will not be of any assistance to the Revenue.

For the reasons stated above, we are of the view that the business of the appellant is governed by the principle of mutuality even the deemed income from its property is governed by the said principle of mutuality. Therefore, these appeals have to succeed. Accordingly the appeals are allowed and the judgment impugned herein is set aside. The questions referred by the Tribunal are answered in the affirmative and in favour of the appellant. On the facts and circumstances of these cases, the parties will bear their own costs."

Further, learned counsel for the petitioner submits that the services offered in the Club were neither with any profit motive nor tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any). He also relied on the ratio laid down in the case of Commissioner of Incometax v. BankipurClub Ltd. (1997) 226 ITR 97 : (AIR 1997 SC2312) where it was observed that there was no sale by the Club to any outsider and one cannot sale to himself on the basis of doctrine of mutuality.

Learned counsel for the petitioner further submits that soon after receipt of the notice for the assessment years 9091 to 9697, the petitioner preferred an application under Section 35 of the Act on 08.06.1999. The Commissioner has refused to exercise his jurisdiction under section 35 of the Act as per his order dated 14.08.2001. Lastly, he submits that the Trade Tax is not applicable in the assessee''s case. So, the impugned notices for the assessment years mentioned above, may kindly be quashed.

On the other hand, Sri Sanjieva Shankdhar, learned counsel for the department has relied on the impugned notices. He submits that the Constitution (46th Amendment) Act, 1982 came into existence on 02.02.1983 and the same is applicable retrospectively. In the object and reasons, it was stated that the proposed amendment would help in the argumentative of State Revenue to a considerable extent. Clause 6 of the bill seeks to validate laws levying tax on the supply of food or drink for consideration and also the collection or recoveries made by way of tax under any such law. He relied on the clause 29A (f) to Article 366 of the Constitution, which was introduced by the 46th Amendment. The said clause reads as under:

Article 366 [29A] (f): a lax on the supply, by way of or as part of 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.

He further submits that after the amendment in the Constitution, the definition of dealer under Section 2 (c) has been amended accordingly. After amendment, Section 2(c) reads as under:

"Dealer means any person who carries on in Uttar Pradesh (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods directly or indirectly, for cash or deferred payment or for commission, remuneration or other valuable consideration and includes"

He also submits that the definition of business is also amended and Section 2(aa)(iii) reads as under:

"2(aa)(iii): any transaction of buying, selling or supplying plant machinery, raw materials, processing materials, packing materials, empties, consumable stores, waste or byproducts, or any other goods of a similar nature or any unserviceable or obsolete or discarded machinery or any parts or accessories thereof or any waste or scrap or any of them or any other transaction whatsoever, which is ancillary to or is connected with or is incidental to, or results from such trade, commerce, manufacture, adventure, or concern or works contract or lease.

The definiiion of ''Sale'' under Section 2(h)(v) and (vi) after amendment reads as under:

"2(h)(v): the supply of goods by any unin2010(111) ALJ/11

corporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; and

(vi): 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 case or deferred payment or other valuable consideration. "

Lastly, he submitted that doctrine of mutuality is applicable for the purpose of income Tax but for the purpose of sales, the said principle is not applicable and the assessee is liable to pay the Trade Tax.

We have heard both the parties at length and gone through the material available on record including written arguments submitted by the learned counsel for the petitioner.

The assessee, originally was established as an Army Club in the year 1931. For the assessment years mentioned above, the department has already made out the provisional assessments and levy the Trade Tax on the supply of snacks, food etc. to its members as well as the sale of magazine, papers, play cards etc. The said provisional assessment were stayed in these writ petitions by this Hon''ble Court as an interim measure. By the impugned notices, the department has asked to produce the books of accounts and assessee never produced the same. The assessee preferred to obtain the stay order by this Hon''ble Court in these writ petitions.

It is the main argument of the learned counsel for the petitioner that the members of the Club are jointly owner of the property and all the goods of the Club belong to them as trustee. Doctrine of mutuality is applicable in the instant cases. There is no transfer or sale to self. But facts remain that assessee is a juristic person being a company who is registered under the Companies Act. It has its own identity. Member will come and will go but this company remains. The outgoing member is not taking any property with himself as he was not a joint owner of the property. As trustee, he can not draw any remuneration or dispose of the property. An individual of the Club has no control over the funds, which was collected and there is no obligation on the part of the Club to return the funds to the members, so the principle of mutuality is not applicable strictly. The tests of Mutuality in a nutshell are :

i. The identity as between Members and Contributors;

ii. The objective of mutual benefit ; and iii. The actual activities resulting in either mutual benefit or return of the contribution to the contributors.

As per the ratio laid down in the case of Wankaner Jain Society v. C.I.T., (2003) 260 ITR 241 (Mad.), where discretion is not barred, principle of mutuality will have no application. Moreover, to understand the doctrine of mutuality, it will have to be seen in a broad proposition that if the object of the assessee company claiming to be a ''mutual concern'' or ''club'', is to carry on a particular business and money is realized both from the members and from nonmembers, for the same consideration by giving the same or similar facilities to all alike in rsspect of the one and the same business carried on by it, the dealings as a whole disclose the same profitearning motive and are alike tainted with commerciallity. In other words, "the activity carried on by the assessee in such cases, claiming to be a "mutual concern" or "members" "club" is a trade or an adventure in the nature of trade and the transactions entered into with the members or nonmembers alike is a trade/business/transaction and the resultant surplus is certainly profit income liable to tax. We should also state that "at what point, does the relationship of mutuality end and that of trading being" is a difficult and vexed question. A number of factors may have to be considered to arrive at a conclusion. "Whether or not the persons dealing with each other, is a mutual club" or carrying on a trading activity or an adventure in the nature of trade is largely a question of fact.

Further, in the instant case, the consumable items are brought or prepared for a price. There is a difference between the Club and a restaurant. Restaurant is run for profit to the owner and in the case of Club the profit earned is to be the income of the Club. So, the doctrine of mutuality is applicable regarding income/profit only. It will not apply to trade tax specially after Constitutional (46th) Amendment.

Heavy reliance was placed by the counsel of the petitioner on the ratio laid down in the case of Young Men''s Association Case (Supra). In the said case, the question was considered whether the supply of various preparations by each club to its members involved a transaction of sale or not. Hon''ble Supreme Court did not lay down in that judgment that the supply of goods by incorporated bodies were not sale. The Hon''ble Court only held that in the case of members'' club, though incorporated where service or supply is only to members and there are no shareholders who are not members, the supply of refreshments to such members would not amount to sale.

The supply of food, drink or refreshments having been expressly dealt with in Article 366 subclause (f) of clause (29A) of the Constitution of India, whether or not incorporated, clubs can no longer take shelter under that decision of the Hon''ble Apex Court to avoid the payment of sales tax on the refreshments delivered or supplied by them to their members, for valuable consideration.

21 A. The doctrine of mutuality in the field of sales tax has been done away after the insertion of subclause (29A) in Article 366. That doctrine was applied initially to unincorporated bodies, members of which collectively obtained goods and thereafter released their rights in favour of each other in the goods supplied to each member. That doctrine was later expanded to cases where, in reality the transaction was mutual, but through a corporate entity which was owned and controlled only by the members clubs. Article 366 (29A) in sub clause (e) treats the supply of goods for valuable consideration to members by incorporated association as sale. This provisions read, as under:

Article 366 (29A)(e) : a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration."

Subclause (e) of article 366 (29A) having thus struck at the root of the doctrine of mutuality, that doctrine can no longer be invoked by any one or any entity whether or not incorporated in so far as levy of sales tax is concerned, in cases where appropriate legislation has been enacted.

It may be recalled that transactions involving the supply of refreshments to members in members'' club were made exigible to sales tax under the very first general sales tax legislated in India, in the year 1939. The statutory provision was rendered ineffective by judicial pronouncements of the High Court commencing from 1951, culminating in the decision of the Apex Court in 1970 in the case of Young Men''s Indian Association [1970] 26 STC 241 (SC). The original legislative intent was restored by the 46th Amendment to the Constitution in 1982 and State legislation subsequently enacted in conformity with Article 366 (29A).

As observed in one of the judgments of this Court in the case of Commissioner of Sales Tax v. Ram Singh and Sons, (1983) UPTC 563 that the clubs are an imported concept and from 1939 and during the period prior to independence, supply of refreshments to members for valuable consideration in all clubs in this State was regarded as sale and tax was levied thereon. Shortly after independence, courts followed the English law of the period, prior to independence for holding that such supplies do not constitute a sale. Parliament had therefore to step in, and it did so by amending the Constitution and expanding the width of the definition of sale or purchase of goods.

After the enactment of corresponding amendment to the State Sales Tax Act, it is no longer open to any club, whether incorporated or unincorporated, whether proprietary or nonproprietary, to contend that the delivery or supply of food articles etc. to its members is not a sale and that tax is not leviable on such sales.

In the light of the above discussion and by considering the totality of the facts and circumstances of the case, we are of the view that the petitioner during the assessment years under consideration was subject to Trade Tax Act and impugned notices were rightly issued to the petitioner by the Department.

It is painful to mention that earlier this Hon''ble Court has dismissed the writ petition of the petitioner vide order dated 30.08.2008 [writ petition Nos. 5319 (M/B) of 2004, 1387 (M/B) of 2004 and 5134 (M/B) of 20041 on the similar cause of action, but this fact was not brought to the notice of this Bench at the time of hearing of the present petitions on a number of days.

In the result, we find no merit in the present petitions and the same are dismissed with cost of @ Rs.2,000/ (Rupees two Thousand only) for each petition mentioned above.

Petitions dismissed.