Deputy Commercial Tax Officer, Saidapet & Anr. v. Enfield India Ltd., Co-Operative Canteen Ltd.

Shah, J. The Enfield India Ltd. Co-operative Canteen Ltd. respondent herein was registered as a Co-operative Society under the Madras Co-operative Societies Act 6 of 1932. The object of the Society was to provide a canteen for the employees of Enfield India Ltd. The Society was assessed by the Deputy Com-mercial Tax Officer to pay sales tax for the years 1959-60 & 1960-61 on its turnover· from refreshments supplied to its mem-bers. The respondent Society then moved in the High Court of Judicature at Madras three petitions under Art. 226 of the Con-stitution for orders quashing the proceedings of the Deputy Com-rnerical Tax Officer, Saidapet assessing the Society to sales-tax in respect of its transactions. Srinivasan J., following a decision of the Madras High Court: Young Mens Indian Association (Regd.) Madras and Another v. Joint Commercial Tax Officer, Harbour Divisi011 Ji, lvladras and Another(') quashed the orders of assess-a1en~. In appeal to the High Court, the orders passed by Srini-vasan J ., were confirmed. With special leave, the Deputy Com-mercial Tax Officer has appealed to this Court.

Section 3 of the Madras General Sales Tax Act 1 of 1959 makes every dealer whose total turn-over for a year is not less than ten thousand rupees, and every casual trader or agent of a non-resident dealer, whatever be· his turnover for the year, liable to pay a tax for each year at the rate of two per cent. of his taxable turnover. 'Dealer' is defined in s. 2(g) as meaning-

"any person who carries on the business of buying, sell-ing, supplying or distributing goods, directly or other-wise, whether for cash, or for deferred payment, or for commission. remuneration or other valuable considera-tion. and includes-

Exp/anation.-A society (including a co-operative society), club .or firm or an association which whether or not in the course of business, buys, sells, supplies or distributes goods from or to its members for cash, or for deferred payment, or for commission, remuneration or other valuable considen11ion, shall be deemed to be a dealer for the purposes of this Act;"

Clause (n) of s. 2 defines 'sale'·:

·· "sale"' ~ 1 ith all its gram1natical var1auons and cog~ natc expressions means every transfer of the property in goods by one person to another in the. course of busi-ness for cash or for deferred payment or other valuable consideration, and includes a transfer of property in goods involved in the execution of a works contract, but docs not include a mortgage, hypothecation, charge· or pledge;

Explmwtion (.1 ) .-The transfer oi property in-volved.in the supply or distribution of goods by a society (including a co-operative society), club, firm, or any association to ils members, for cash, or for deferred pay-ment. or other valuable consideration, whether or not in the course of business shall be deemed to be a sale for the purposes of this Act. .

Explanation ( 2) .- ----- ·

Exp/a11a1ion ( 3) .- Exp/analion ( 4) .- .. Turnover .. is defined in s. 2(r) and insofar as it 1s material it pro\'idcs :

.. "turnover" means the aggregate amount for which goods arc 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. other valuable consideration, pro· videJ "

Tile High Court of Madras in the case of Young Mcm·' Indian A 1.1:>ciafio11( 1 I held that the E~planation to s. 2(g) and Explana· tiM (I) to s. 2(n) of the Act were u//ra vires the State Legisla-ture, because they "created a ficti.on by which the concept 'of the "orJ 'sale' was extended to includ~ a transaction which properly >nca,ing would not amount to sale... The Court held that within t.hc meaning of the Act an incorporated members' club distribut-ing refreshments to i!S members was not a 'dealer' and supply of food by it to its members for a price was not a 'sale'. since the members of a club registered as a Company or as a Society mcrciy utilise the services of the club for their needs ;wd the rncrnhcrs divide ;imongst themselves the total expenses. Essen-ti;illl'. i.1 the view of the Court, the matter is not different from the -case of a number of persons in a family purchasing jointly ;,11 "nidc and later sharing the same among themselves. In such a case. it was said. there is no elemen: of transfer of property fn1m one 10 another, and the fact that the club helps its members i1~ arr;111ging to run a common mess will not make it the owner ot the ~niclcs supplied to the members. for it is at best an agent o•· mandatory whose services are utilised by the members for obtaining their needs, and there is no transfer of propa:y involved in the arrangement. The Court proceeded further to observe that th.: distinction between members' clubs unincorporated and in-c,1rrorated is chat in the former the distribution made by the cl!1h :o one of ics members is a release bv all the members in L1rnw of a joint owner who takes the goods, in the latter the su;ip!y Clf anicles to a member is tantamount to delivery by an ;:~cni 1'r trustee to the principal or beneficiary, and there is in either case mi transfer of ownership by a person absolutely en-ti:let1 to the property to another who acquires title thereto on ~uch tr<insfer.

Jn these appeals the Deputy Commercial Tax Officer contends that the transactions of the respondent Society are taxable and

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I I) 14 S.T.C. I'•)

submils that the High Court was in error in holding that the Explanations 10 s. 2(g) and s. 2(n) are ultra vires the powers of the State Legislature. Entry 54 of List II of the Seventh Schedule of the Conwtution. authorises the State Legislature to legislate on the topic of tax on the sale-or purchase of goods other than news-papers, subject to the provisions of Entry 92A of List I. This Court has consistently held that the expression "sale of goods" used in lhc legislative entries in the Constitution and the Govern-ment. of India Act, 1935, bears the same meaning which it has in the Sale of Goods Act, I 930, ·and therefore the Stale Legis!a· turc may under Entry 54 List II legislate in respect of the series of acts beginning with an agreemcn: of sale between parties com-petent to contract. and resulting in transfer of proper.ty from one of the parties to the agreement to !he other for a price, and matters incidental there!o, but cannot make a transaction which i" not a sale wi!hin the Sale of Goods Act a sale by a statutory !ic!ion and impose tax thei·eon : State of Madras v. Gannon Dun~<rley & Co. Ltd:('), New Indian Sugar Millsv. Ccmmissionerof Sales Tax:('J :rn<l /iho11a/ Sugar Industries v. Sales Tax Officer('). Conse-quently if the clement of transfer of property from one person to another is lacking in any transaction, there is no sale and the l_egislature cannot by treating lt as a sale by a deen1ing clause bring it within the ambit of the taxing statute.

We are however unable to hold that the transactions of the respondent Society of supplying refreshments to its members for a price paid or promised were not taxable under the Madras Genera! Sales Tax Ac:, 1959. By the definilion in s. 2( g) a 'dealer' is a persbn who carries on the business of buying, selling. supplying or distributing goods, whether for cash, or for deferred payment, or for other valuable consideration. The expression 'business· is defined in s. 2 ( d) as meanirg any trade, commerce m manufacture or any adventure or concern in the nature. of tract,,, commerce or manufacture, whether or not any profit accrues fro111 such trade. co1nn1erce, tnanufacture, adventure or concer11. A scheme for supplying goods to its members by a Society, for price may partake of the activity of the nature of adventure or concern in the nature of trade, even if the activity is not 'lCtuated by a profit motive. The respondent Society which has according to its object of incorporation made arrangements for the s(\pplv and 'distribution of refreshments to its members without a profit motive may be regarded as carryin~ on trade and would on that account fall within the definition of a 'dealer' within the meanh1~ of s. 2(g). A Co-operative Society registered under the Madrn~ C<i-operative Societies Act 6 of 1932 is by virtue of s. 20 of th•it Act a body corporate with perpetual succession and a common seal, and with power to hold property, to enter in~o contracts, to institute and defend suits and other legal proceedmgs and to do all things necessary for the purposes for which it was constituted. Such a co-operative society w_!iich carries on the business of supplying goods to its members for cash or deferred payment falls within the definition of 'dealer' in s. 2(g). We_ are unable to hold that by the Explanation to s. 2(g) it was intended to over-step the limits of legislative power. By the Explanation the State Legislature has merely clarified that a taxable entity will be regarded as a dealer within the meaning of the Act even though it buys, sells, supplies or distributes goods from or to its mem-bers, whether in the course of business or not : it is not intended by the Explanation to declare all transactions of the taxable entity with its members to be transactions of sale or purchase. The Explanation is a part of the definition of "dealer" and not of "sale". For the purpose of levying sales tax it was open to the Legislature to devise a definition of the word "dealer" and further to provide that certain bodies shall be deemed to be dealers within the meaning of the Act. We are unable, therefore, to agree with the High Court that the Explanation to s. 2 (g) is ultra vi res the State Legislature.

For turnover from a transaction to be taxable under the Act, the transaction must have four constituent elements, viz. ( 1) par-ties competent to contract; (2) mutual assent; (3) thing, the absolute or general property in which is transferred from the seller 10 the buyer; and ( 4) price in money paid or promised. When a Co-operative Society supplies to its members for a price refreshments in the canteen maintained by it the four constituent clements of sale are normally present : the parties are competent to contract; there is mntual assent; refreshments which belonged absolutely to the Society stand transferred to the buyer and pi'ice is either paid or promised.

There is nothing on the record of the case which shows that the Society".is acting merely as an agent of its members in provid-ing facilities for making food available to the members. From the mere fact ·that the Society supplies refreshments to its mem-bers only and claims to make no profit, it cannot be inferred that in preparing refreshments, and making them available to its mem-bers it is acting as an agent of the members. Nor can it be said that the Society is holding its property including refreshments prepared by it for supply to its members as a trustee for its mem-bers. A registered Society •is a body corporate with power to hold property and is capable of entering into contracts. It can-not be assumed that property which it holds is property of which its members are owners. The property in law is the property of the Society. The me1itbers are undoubtedly entitled to compel the Society to act according to its constitution and to apply the propertv for the purposes for which it is held, but on that account the property of the Society cannot be treated as the property of the members. 'J.:he Soci~ty is a person : the property in the refreshments which it supplies to its members is vested in the Society and when refreshments are supplied for a price paid or promised transfer of property in the refreshment results. In the case of an unincorporated Society, club or. a firm or an associa-tion ordinarily the supply and distribution by such a Society, club, firm or an association of goods belonging to it to its members may not result in sale of the goods which are jointly held for the bene-fit of the members by the Society, club, firm or the association, when by virtue of the relinquish~1ent of the common rights of the members the property stands transfen-ed to a member in pay-ment of a price, and the transaction may not prima facie be regarded as a 'sale' within the meaning of the Act. By providing that a transfer of property in goods from a corporate body to its members for a price, the Legislature does not over-step the limits of its authority,_ and it cannot on that account be held that the first Explanation to s. 2(n) is in its entirety ultra vires the State Legislature. It is, however, unnecessary in this case to say more, for. the case of the respondent Society falls within the definition of 'sale' and no assistance need be sought from the first Explana-tion to s. 2(n).

Reference may briefly be made to the judgment in Trebanog Working Men's Club and Institute Ltd. v. Macdonald and Monk-1i:earmouth Conservative Club Ltd. v. Smith('), on which the High Court strongly relied. In a members' club incorporated under the Industrial and Provident Societies Acts, the sharehoklers and the members were identical. Tbe club purchased intoxicat-ing liquor and supplied it from time to time to individual members for payment as in an ordinary club. The society was convicted of selling by retail, contrary to s. 65 of the Licensing (Consolida-tion) Act, 1910, certain intoxicating liquor without a justices' licence. The Conrt of Appeal quashed the conviction holdini that the incorporated society was a legal entity distinct from the members, and could act as their agents or trustees, the real interest in the liquor being in the members, and the Society was not obliged to take out a licence, for sale of liquor by retail. The principle of that case has, in our judgment, no application to the case before us. There was a Jong course of authorities in the Courts in England dealing with the liability of the clubs supply-ing intoxicating liquors to their members to obtain the justices' licence. In Graff v. Evans('), Graff, the manager of an unincor-

(1) [1940] 1 K.B. 576. (2) [1882) 8 Q.B.D. 373.

poratcd club, the property of which was vested in trustees, and the committee of management whereof arranged to supply liquor .to its members at a fixed percentage above its cost, supplied liquor to a member, and he was prosecuted for selling by retail intoxi- .cating liquor without a licence. It was held that there was no sale by retail, for the member was as much a co-owner of the liquor supplied as any other member of the club. Any member or the club was entitled to obtain liquor on payment of the price .and since the1e was no bargain, nor any contract with the mana-ger in r~spect of the liquor supplied, and the member to whom the liquor was supplied was acting upon his rights as a member ·of the club, not by reason of any new contract, but under his old contract of association by which he subscribed a sum to the funds of the club, and on that account he became entitled to have liquor ,upplicd to him as a member at a certain price.

in Metford v. Edwards( 1) a working men's club was regis-tered under the Friendly Societies Act, 1896. It was held that liquor kept on the premises of the club by the members who are owners of the liquor and intended for c·onsumption by the mem-bers, is distributed to the members by one of them in return for payment, is not sold by retail within the meaning of the Licensing (Consolidation) Act, 1910.

In National Sporting Club Ltd. v. Cope(') it was held that a member's club formed into a joint stock company, of which shares were held by persons who were not members, was guilty of breaches of s. 17 of the Beerhouse Act, 1834, and s. 19 of the Refreshment Houses Act, 1860, when in carrying on the club retail intoxicating liquors and tobacco were supplied to the mem-bers of the club. The Court held in that case that the Company was a separate legal entity from the members, and the sale of intoxicating liquors to members was not a distribution of the common property of the members among themselves. Channell J.. observed at p. 354 :

"Nqw. the law with reference to purely members'

clubs may be taken to be settled, namely, that in the cases of purely members' clubs a licence is not required, that the form that is gone through in the coffee room or in other parts of the club house where refreshments are sold is in one sense not a selling of liquors so as to make the licensing laws applicable, but that it is merely a mode of distributing common property."

The question was again raised before the Court of Appeal in Trebaiwg Working Men's Club and lnvtitlife Ltd. v. Mac-

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(!) [191511 KB. 171. (2) 82 L.T. 353.

4onald('). tlewart, C.J., delivering the judgment of the Court observed that the principle of the decision in ·Graff v. Evans( 2 ) applied even though the clubs before the Court were incorporated either under the Industrial and Provident Societies Acts or the Companies Act. The learned Chief Justi~e observed at p. 582 :

"Once it is conceded that a members' club does not necessarily require a licence to serve its members with intoxic~ting liquor, because the legal property in the liquor is not in the members themselves, it is difficult to draw any legal distinction between the various legal entities that may be entrusted with the duty of holding the .property ort behalf of the members, be it an indivi-dual or a body of trustees, or a company formed for the purpose, so long as the real interest in the liquor remains, as in this case it clearly does, in the members of the club. There ·is no magic in this connection in the expressions "trustee" or "agent". What is essential is that the hold-ing of the property by the agent or trustee must be a holding for and on behalf of, and not holding antagonis-tic to, the members of the club."

The Courts in these cases were dealing with case of quasi-crintinal nature, and the substance of the transaction rather than the legal form m which it may be clothed had to be determined. It was held that if in substance the property in the liquor held by the It club-whether incorporated or unincorporated-was vested in

the members, when a member received a.nd paid for it, there was no sale within the meaning of the Licensing Act, but was a transfer of a special property.in the goods from all the other mem-bers of the club to the consum~r in consideration of the price paid. •

We are not dealing in this case with liability criminal or quasi-crintinal. The question is one of liability under a taxing statute and the Court in deterntinmg the liability of the Society to pay tax cannot ignore the form and look at what is called the "subs-tance of the .transaction'~· Ex facie, the transaction is one in which the legal owner of property transfers it to another pursuant to a contract for a price, and that transaction must be regarded as a sale. Whether by appropriate provisions in the Articles pi Association or Rules, a scheme may be devised under which the goods supplied may be treated as belonging to the members of the Society, and the Society merely acts as an agent in supplying the food to its members, need not be considered in the present case. It will suffice to state that it cannot be urged as a proposi-tion of law that when a Co-operative Society supplies to its mem-bers refreshments for a price under a scheme for distribution or

(1) [194-0) 1 K.B. 576. (2) [1882) 8 Q.B.D. 373.

LIS.P,CI/68-13

supply of refreshments, the transaction can in no event be regarded as a sale of the refreshments supplied for a price.

We arc not called upon in thi> case to decide whether an un-incorporated club supplying good.; for a price to its members may be regarded as selling goods to iL~ members.

We are of the view that the Explanation to s. 2!g) of the Madras General Sales Tax Act 1 of 1959 is not ultra vires the Legislature. Whether any part of the Explanation (l) to s. 2(n) is 11/tra vires the Legislature does not fall to be determined in this case, for, we are of the view that the transactions of the respon-dent Society fell within the substantive part of the definition of the expression "sale", and on that account those transactions are taxable under the Madras General Sales Tax Act 1 of 1959.

The appeals must therefore be allowed, and the petitions filed by the Society dismissed. In view of the order passed by this Court on August 12, J 965, when leave was granted to appeal to this Court, the aj>pcllan: will pay costs of these appeals to the respondent. There will be one hearing fee in the three appeals.

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 737 to 739 of 1966.

Appeals by special leave from the judgment and order dated October 21, 1964 of the Madras High Court in Writ Appeals Nos. 289 to 291 of 1964.

A. K. Sen and A. V. Rangam, for the appellants (in all the .appeals).

K. R. Chaudhuri, for the respondents (in all the appeals).