State Taxation Tribunal - West Bengal
Bengal Rowing Club vs Commissioner Of Commercial Taxes And ... on 25 July, 1991
Equivalent citations: [1993]88STC389(TRIBUNAL)
JUDGMENT
P.C. Banerji, Technical Member
1. This is an application under Article 226 of the Constitution of India filed in the High Court at Calcutta by The Bengal Rowing Club. In terms of Section 15 of the West Bengal Taxation Tribunal Act, 1987, it was transferred to this Tribunal for disposal.
2. In this application a notice dated November 17, 1988, under Section 14(1) of the Bengal Finance (Sales Tax) Act, 1941 (hereinafter called "the 1941 Act") asking the dealer to produce books of accounts for examination to determine its liability to pay tax has been mainly challenged on the ground that the applicant is not a dealer within the meaning of the said Act and hence not liable to pay tax. Without prejudice to its rights and contentions that the applicant is not liable to pay any tax, the applicant has further assailed the provisions of Section 5(1)(d1) of the 1941 Act imposing tax at 15 per cent on the turnover of goods served in or supplied from any air-conditioned hotel, restaurant or club.
3. The case of the applicant may be briefly stated as follows :
The Bengal Rowing Club is a company limited by guarantee and was registered on January 8, 1929 under Section 26 of the Indian Companies Act, 1913/Section 25 of the Companies Act, 1956. It is a social club of members only and its objects as per Clause 3 of its memorandum of association are :
(a) To offer to its members facilities for boat rowing ;
(b) To provide for its members, as far as possible, the usual privileges, advantages and amenities of the dub.
For the promotion of these objects, the club is empowered to raise funds, acquire movable or immovable property, provide and maintain suitable buildings, rooms and other facilities, etc. Sub-clause (i) of Clause 4 of the said memorandum provides for supply of refreshments to the members at a tariff, which shall be settled by the committee of management from time to time. Clause 5 of the said memorandum further states that "the income and property of the club whencesoever derived shall be applied solely towards the promotion of the objects of the club" and "no portion thereof shall be paid or transferred directly or indirectly by way of dividend or bonus or otherwise howsoever by way of profit" to the members.
4. The management of the affairs of the club is vested in a committee, which acts as the governing body of the club, and the office bearers of the club are elected every year from amongst its ordinary or life members. No person other than a member or the guest of such member can use the facilities of the club. The guest is to be always accompanied by the member or his wife and for every such guest the member shall pay the expenses of his entertainment. The members are also required to pay guest charges. Further, no person can be introduced as a guest more than three times in a month. Similar provisions are also there for use by the guest of the member of other facilities of the club, viz., swimming, card rooms, billiards, etc. No outsider is permitted to use the facilities of the club.
5. It is the case of the applicant that it is purely a members' club through the instrumentality of which only the members are provided certain privileges and facilities and that the club merely acts as an agent of its members. The relationship between the applicant and its members is not on principal to principal basis. From the funds of its members the applicant provides the various amenities including the goods and it is later reimbursed by the members. That being the position, the supply of refreshments to its members by the club does not constitute sale and hence the club could not be treated as a dealer under the Act. It has been claimed by the applicant that prior to the amendment of the Constitution by the Constitution (Forty-sixth Amendment) Act, 1982 (in short, "the Amendment Act"), no sales tax was levied on the said club for providing the goods to its members and their guests. It has been further claimed that even after the said Amendment Act the applicant is not liable to pay tax as the amendment did not alter the position so far as the said club is concerned.
6. The respondents have opposed the application on the ground that after the Forty-sixth Amendment of the Constitution and the consequent amendment in the State Act, they are empowered to tax sale of food and other beverages by the applicant-club. They have controverted the claim of the applicant that it is a members' club only and that no sale is made to non-members. Besides, as the incorporated club is a separate juristic person it cannot be treated as acting as an agent of its members in the matter of supply of refreshments. It has been urged that the judgment of this Tribunal in Automobile Association of Eastern India's case [1991] 81 STC 185 decides this case also.
7. In the writ application, apart from other issues, the validity of the Amendment Act of the Constitution has been challenged on the ground that it alters the basic structure of the Constitution and has not been ratified by the majority of the States. In view of the decision of the Supreme Court in Builders Association of India v. Union of India [1989] 73 STC 370 upholding the validity of the Amendment Act, no further arguments were advanced on the issue before us, though the applicant did not concede the point. So far as we are concerned, the issue has already been concluded by the Supreme Court and no further consideration is called for.
8. The main issues for decision before us, therefore, are (a) whether an incorporated club is liable to pay tax after the constitutional amendment and the amendments made thereto in the 1941 Act and (b) whether the applicant-club is merely acting as an agent of its members to provide for themselves certain amenities and benefits of a social club. If it is found that the applicant is acting as an agent of its members, there could not be any sale so far as its transactions with its members are concerned as the element of sale would then be absent and the club would not be liable to pay tax.
9. To appreciate the contentions of the parties, it is necessary, at this stage, to set out the relevant provisions of the constitutional amendment and the consequential amendments and other relevant provisions in the State Act along with the background of the said constitutional amendments.
10. Explanation 1 to Section 2(c) of the 1941 Act dealing with the definition of "dealer" provides that "a co-operative society or a club or any association which sells goods to its members is a dealer". The Supreme Court had decided that the sale as included in entry 54 of the State List should have the same meaning as it has in the Sale of Goods Act, 1930. Because of this decision various other transactions which resemble, in substance, transactions by way of sales could not be made liable to sales tax. An amendment of the Constitution was, therefore, effected to bring within the ambit of sales certain specified transactions by the creation of a fiction. A new definition of "tax on the sale or purchase of goods" was inserted as Clause (29A) in Article 466 of the Constitution. The sub-clauses of the said Clause (29A) which are relevant for the purposes of this application are Sub-clauses (e) and (f). Sub-clause (e) of Clause (29A) of the said Article 466 includes "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". It was stated in the Statement of Objects and Reasons appended to the said Constitution (Forty-sixth Amendment). Bill that "while sale by a registered club or other association of persons (the club or association of persons having corporate status) to its members is taxable, sale by an unincorporated club or association of persons to its members is not taxable as such club or association in law, has no separate existence from that of the members".
11. Sub-clause (f) of Clause (29A) of Article 466 of the Constitution provides that "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 shall be treated as a tax on sale or purchase of goods". In the Statement of Objects and Reasons appended to the said Constitution Amendment Bill it was stated "in the Associated Hotels of India Ltd. case [1972] 29 STC 474 (SC) ; AIR 1972 SC 1131, the Supreme Court held that there is no sale involved in the supply of food or drink by a hotelier to a person lodged in the hotel". It was further stated in the said Statement of Objects and Reasons that "a new problem has arisen as a result of the decision of the Supreme Court in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi [1978] 42 STC 386 ; AIR 1978 SC 1591. The State had been proceeding on the basis that the Associated Hotels of India Ltd. case [1972] 29 STC 474 (SC) ; AIR 1972 SC 1131, was applicable only to supply of food and drink by a hotelier to a person lodged in the hotel and that tax was leviable on the sale of food-stuff by a restaurant. But overruling the decision of the Delhi High Court, the Supreme Court had held in the above case that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately".
12. Section 6 of the Amendment Act deals with validation of the sales tax levied or imposed by the State, It also provides for granting exemption for certain specified period in case tax was not collected by the assessee. Sub-clause (f) of Clause (29A) was given retrospective effect. Exemption was allowed in respect of supplies made by any restaurant or eating-house (by whatever name called) at any time on or after 7th of September, 1978 and before the commencement of this Act. Exemption was also allowed 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 4th of January, 1972 and before the commencement of this Act. It may be mentioned that the decision of the Supreme Court in the case of Associated Hotels of India Ltd. [1972] 29 STC 474 ; AIR 1972 SC 1131, was delivered on 4th January, 1972 and that in the case of Northern India Caterers (India) Ltd. [1978] 42 STC 386 ; AIR 1978 SC 1591 on 7th September, 1978.
13. Consequent to the said 46th Amendment, provisions of the 1941 Act in certain respects were amended. Explanation 1 to Section 2(c) remained as it was prior to the Amendment Act. The definition of "sale" in Section 2(g) was amended by inserting Sub-clause (ii) which was subsequently renumbered as Sub-clause (iii). The language of the sub-clause is the same as that of Sub-clause (f) of Clause (29A) of Article 466. This was given retrospective effect by inserting Section 26A in the 1941 Act. In the said section relating to validation and exemption a similar provision was made with regard to exemption till the commencement of the West Bengal Taxation (Second Amendment) Act, 1983, on the lines of Section 6(2) of the Constitution Amendment Act. But no corresponding provision was made with regard to Sub-clause (e) of Clause (29A) of Article 466 relating to supply of goods by unincorporated association or body of persons to a member thereof.
14. It is the case of the applicant that it had no liability to pay any sales tax prior to the Amendment Act and the amendments made thereafter to the 1941 Act ; nor is it liable to pay tax after such amendments. We may now discuss the position of the club vis-a-vis these amendments. For the sake of convenience, the contentions of Mr. R.N. Bajoria, the learned advocate for the applicant, in this regard may be divided into two parts--(a) the position of an incorporated club where the question of agency and principal relationship is not involved ; and (b) where the said club is acting as an agent of its members. Mr. Bajoria contended that Section 6 of the Amendment Act does not apply to the club and that it only seeks to validate the tax on hotels and restaurants. He drew our attention to the Objects and Reasons of the Amendment Act as also the provisions of validation and exemption to indicate that Sub-clause (f) only covers the supplies of goods and services by a hotel, restaurant or eating-house and does not cover the case of the club.
15. We are unable to accept the view that supplies of food/drinks by the clubs are not taxable on the ground that the Statement of Objects and Reasons to the Amendment Bill describes the purpose of amendment as taxation on sales of food by hotels and restaurants. The Statement of Objects and Reasons does not form an integral part of a statute. This is furnished only to indicate in very broad terms the purpose of the Bill. It is the substantive provisions in the statute, which shall always prevail. Though there is reference to hotels and restaurants but it also covers analogous organisations. It is a certain specific activity, viz., supply of food and/or drinks with services, carried on by these, which is relevant. The amended provision, in effect, seeks to bring within the taxing net composite transactions involving supply of goods with services, which were not considered as sale earlier. It is, therefore, the nature of the transactions which is to be looked into. The transactions may be made by hotels, restaurants, eating houses, clubs, etc. It can thus be concluded that the supply of refreshments, etc., to its members by an incorporated club amounts to sale, where the club is not acting as an agent of its members.
16. We now come to the second limb of the contentions of Mr. Bajoria. According to him, it would be evident from the Statement of Objects and Reasons that the case of the club was sought to be dealt with by Sub-clause (e) of Clause (29A) of Article 466 of the Constitution. It was assumed therein that the sale by an incorporated club to its members was capable of being taxed and, therefore, sales by an unincorporated club were sought to be covered by the amendment, since such transactions could not be taxed on the ground that an unincorporated club had no separate existence from that of the members. Mr. Bajoria further argued that it would be evident that the purpose was not to make a transaction a sale, where the club is acting as an agent of its members, and that Sub-clause (e) of Clause (29A) is not applicable to the present case since it only deals with unincorporated association. He contended that even Sub-clause (f) of Clause (29A) and the later amendment of Section 2(g) of the 1941 Act do not have any application where the club is acting as an agent of its members, since the club making over goods to its principal does not supply them for any consideration. There cannot be any consideration where an agent supplies goods to its principal and the same, if any, is referable to its services as an agent and not for supply of goods. One cannot supply to oneself, nor can there be any consideration for such purported supply.
17. It may be pertinent to note that while supplying goods to its members the case of the unincorporated club is analogous to that of an agent providing services to its principal. The provision in the constitutional amendment making a transaction between an unincorporated club and its members a sale may perhaps amount to making a fiction of sale in respect of transactions between the principal and the agent. This observation is, however, based on the assumption that Legislature is competent to create such a fiction. But, so far as the 1941 Act is concerned, Sub-clause (e) of Clause (29A) was not adopted by the State Legislature by suitable amendment of the definition of "sale" in Section 2(g) of the Act. In view of this position, we have already held in the case of Calcutta Swimming Club [1991] 83 STC 197 ; (1990) 23 STA 413 that an unincorporated club is not a dealer as its transactions with its members do not constitute sale. It was observed therein that though the constitutional amendment armed the State Legislature with powers, it did not in its own wisdom choose to exercise such powers to make suitable enactment to tax such unincorporated clubs.
18. It is, therefore, clear that there is no provision in the existing State sales tax laws to treat a club, whether incorporated or not, as a dealer, where it is acting as an agent of its members in the matter of supply of refreshments/drinks to them.
19. Now the next question that falls for determination is whether the applicant-club, while supplying goods to its members, acts as an agent of its members. This question admittedly is to be decided with reference to the Constitution of the club and the law laid down on the subject by the Supreme Court.
20. Mr. Bajoria contended that there is a difference between a proprietary club and a members' club inasmuch as in the former there is dichotomy between the members on the one hand and the club on the other, whereas in the latter, there is identity between the members and the club. He further contended that a members' club may be unincorporated or incorporated and that the fact of incorporation or the separate corporate personality of the club does not, in any way, alter its character as a members' club. He also advanced the proposition that the transactions of such an incorporated club with its members, by their very nature, constitute provision of services in which the club is acting as an agent of its members.
21. According to Mr. Bajoria, the following conditions are to be fulfilled for a club to be treated as a members' club :
(i) There must be complete identity between the members and the shareholders of the corporate club. In other words, the member is a shareholder and the shareholder is a member.
(ii) The transaction should be between the club and the members only. There should be no relationship of any nature between the club and the guests of its members. The guests do not have an independent right to use, and pay for, the club facilities. For the guests, the members alone can pay.
(iii) No part of the surplus arising from the dealings between the club and its members should be distributed to any member by way of dividend or otherwise.
He argued that if these tests are fulfilled an incorporated club should be treated as a members' club and the said club should be held as acting as the agent of the members. Conversely he argued that any transaction between the club and an outsider, who is not a member, cannot be considered as one in which the club is acting as the agent of its members.
22. Mr. D. Majumdar, the learned State Representative, contended that the applicant-club is not a purely members' club and its sales are not restricted to members only and goods are sold even to non-members, who do not constitute the club. He drew our attention to Clause 4 of the articles of association of the club, which indicates that there are five classes of members, viz., ordinary, temporary, honorary, non-resident and rowing, though it also provides that the committee may invite distinguished individuals to become patrons of the club. He contended that though a patron is not a member, he is allowed club facilities. Our attention was also drawn to Clause 40, which enables the committee to invite any distinguished person or persons to visit the club and entertain him/them in any suitable manner they think fit. Mr. Bajoria, however, clarified that up till now the committee of the club has not invited anybody to become a patron and that there is no provision in the articles or the bye-laws conferring upon such patrons any rights or privileges of a member. He added that if a distinguished person is invited by the club, he is treated as a guest of all the members and is entertained accordingly and that such distinguished person has no rights or privileges of a member.
23. The submissions of Mr. Bajoria in this regard may be summed up thus. Only members are entitled to the privileges and facilities of the club and their guests do not have any direct relationship with the club, as it is the members, who alone are responsible for payment for the entertainment of their guests. According to the Constitution of the club, the members themselves are the shareholders and there is an embargo with regard to payment of dividend, etc., to the members. All the ingredients of the members' club are, therefore, present in the applicant's case. The applicant-club is thus purely a members' club. So the said club is merely acting as an agent or a mandatory of its members, who are its principal.
24. Here we would like to make a distinction. There are two separate questions involved here. One is whether it is a purely members' club. This question is to be decided in terms of the ingredients indicated above. The question whether an incorporated members' club while supplying refreshments to its members is acting as an agent of its members is, of course, a different issue. This also is a question of fact, which has to be decided regard being had to the precise relationship between the club and its members as also the nature of the transactions between them. It is crucial to determine whether the essence of the transaction is an agency function or a transfer of property in goods for a price. The existence of agency, of course, is possible only in the case of a members' club provided certain other conditions are fulfilled.
25. Mr. Majumdar, the learned State Representative did not accept the theory of agent-principal relationship subsisting in the club and made certain submissions with reference to the various clauses of the memorandum of association, articles of association and the bye-laws of the club to disprove the fact that the club in question was acting as an agent of its members.
26. He referred to Clause 4 of the memorandum where property is mentioned as being that of the club in the various sub-clauses. It was further stated that the club was empowered to purchase, take on lease or hire, construct or repair immovable properties, etc. It was contended that this clause clearly showed that the club was not the agent of the members. Mr. Bajoria, however, contended that the club being an incorporated body was bound to own such property, but it was for the convenience of the members that this arrangement has been made. He added that it is for the purpose of providing club facilities to its members as indicated in Clause 3 of the memorandum that this has been done. He further contended that the holding of the property by the club is not antagonistic to its members and if it holds only for the purpose of providing club facilities it holds such property as an agent of the members. He argued that the respondents proceeded on the assumption as if a formal contract of agency is required before it could be held that the club was in substance acting as an agent of its members. According to him, the question actually is whether in substance the transaction is one where the members through the corporate medium provide themselves with club facilities.
27. His further submissions in this regard are on the following lines. Clause 4 of the memorandum empowers the club to do various acts for the purpose of carrying out the objects stated in Clause 3 of the said memorandum. The objects stated in Clause 3 of the memorandum are only to provide facilities, privileges, amenities and advantages of a club to the members and to no one else. Accordingly, all the powers under Clause 4, which the club can exercise, must subserve the object of providing various facilities and amenities of a club to its members. In other words, the powers in Clause 4 are restricted to the objects mentioned in Clause 3, viz., providing club facilities to the members. Further, the powers of the club are to be exercised only by the committee, which shall be the governing body of the club, and such governing body is composed of members only. Accordingly, the powers under Clause 4 with reference to the club can only be exercised by the members of the club and no one else. Mr. Bajoria, therefore, observed that Clause 4 of the memorandum, far from supporting the contentions of the respondents, fully establishes the applicant's case that the club is acting as an agent only of its members.
28. Mr. Majumdar further referred to a number of clauses in the articles of association of the club to indicate that the club emerges as a distinct and separate entity, vis-a-vis the members comprising it. He referred to Clause 12 enumerating the various privileges of the members, Clause 18, in which the committee may ask any member to resign or it may strike off the name of a member from the rolls where the conduct of the member concerned is such that it would detrimentally reflect on the club and Clause 36 of the bye-laws, which provides that the club does not accept any responsibility or liability for the death, drowning, injury, hurt, etc., of the member or his guest using the swimming pool or the lake, etc. To all these, the response of Mr. Bajoria was that it is the committee, which is nothing but the members themselves, which is laying down all these regulations for the conduct and use of the club facilities by the members themselves and all these clauses are not antagonistic to the members.
29. It is not necessary to multiply further such provisions of the memorandum and articles of association, because the arguments of Mr. Majumdar in this regard are anchored in the concept that an incorporated club is a distinct juristic entity and that the corporate club is different in form and substance from the persons comprising it. Mr. Bajoria, however, brought in the underlying theory of agency, even though the club may structurally be a corporate body. According to him, the fact of incorporation does not destroy in any way the principle of agency, when the very purpose of such incorporation is to facilitate or effectuate the avowed objective of the members. He had relied heavily on the English law on the subject followed in the case of Young Men's Indian Association v. Joint Commercial Tax Officer [1963] 14 STC 1030, decided by a Division Bench of the Madras High Court as also the decision of the Supreme Court in the case of Joint Commercial Tax Officer v. Young Men's Indian Association [1970] 26 STC 241. The cases, Commissioner of Income-tax v. Merchant Navy Club [1974] 96 ITR 261 (AP), Commissioner of Income-tax v. Darjeeling Club Ltd. [1985] 153 ITR 676 (Cal) and the State of Tamil Nadu v. Madras Advocates' Co-operative Society Limited [1976] 38 STC 297 (Mad.) were also cited in support.
30. Actually, the fact of incorporation of a club by itself is not a determining factor. What is important is whether it is acting as an agent of its members and the terms of such incorporation are not inconsistent with the principle of agency.
31. Mr. Majumdar submitted that the judgment of this Tribunal in Automobile Association of Eastern India's case [1991] 81 STC 185 would be applicable to the present case, as the facts of both the cases are almost similar. It was held in the case of Automobile Association of Eastern India [1991] 81 STC 185 (WBTT) that it was not acting as an agent of its members and its transactions were taxable. Mr. Bajoria, however, argued that the decision in that case was not applicable to the instant case as, unlike the present club, Automobile Association of Eastern India was formed for various objects, which were not confined to its members only and the club facilities were also used by others, who were not members. He further argued that the Automobile Association of Eastern India's case [1991] 81 STC 185 (WBTT) proceeded on the basis of certain observations made by Shah, J., in a separate judgment in Joint Commercial Tax Officer v. Young Men's Indian Association [1970] 26 STC 241 (SC), which are contrary to the majority view in that case.
32. Mr. Bajoria contended that there was a fundamental difference of approach between the observations of Shah, J., and those of the majority in that case. His submissions in this regard may be briefly stated thus : According to Shah, J., the analogy of cases of criminal or quasi-criminal nature relating to English Licensing Laws, where the substance of the transaction rather than the form was the determining factor, was not appropriate in taxing matters where the strict legal form of the transaction is relevant. This view has been expressed in Enfield India's case [1968] 21 STC 317 (SC) as well as in the separate judgment of Shah, J., in Young Men's Indian Association's case [1970] 26 STC 241 (SC). The majority view in Young Men's Indian Association's case [1970] 26 STC 241 (SC) was that "in England, even in taxation laws the position of a members' club, though incorporated, has been recognised to be quite different" and that the said club was only structurally a company, which did not carry on trade or business to attract tax. The observation of Shah, J., that an incorporated members' club supplying its property to its members at a fixed tariff is carrying on sale, is, therefore, contrary to the majority view.
33. Mr. Majumdar, on the other hand, argued that the observations of Shah, J., were only a logical extension of the majority view and do not constitute a minority view contradicting the majority view. According to him, both Shah, J., delivering a separate judgment, and Grover, J., delivering the judgment of the majority, accepted the finding of the High Court that the clubs in question were acting as agents of their members. He pointed out that Grover, J., noted the view taken by various High Courts on the subject and also indicated the position of English law relating to clubs but apparently did not express any opinion on that. He further contended that the decision in Enfield India's case [1968] 21 STC 317 (SC) is still good law and there is no conflict between the decision in the said case and that in Young Men's Indian Association's case [1970] 26 STC 241 (SC).
34. It is not necessary for us to enter into the controversy regarding form and substance and whether there is a conflict between the majority view and the views of Shah, J. It is, however, pertinent to note that Shah, J., did not hold that incorporation by itself is a determining factor ; otherwise he could not have accepted the view that the Cosmopolitan Club in Young Men's Indian Association's case [1970] 26 STC 241 (SC) was acting as an agent of its members. He merely indicated an alternative scenario, where an incorporated members' club supplying goods to its members at a fixed tariff, did not act as an agent of its members. In respect of each and every case of a members' club the theory of agency cannot be brought in ; it is the nature of the transaction, in the context of the activities of the club, which shall decide whether the club is acting as an agent or not.
35. It is true that in Automobile Association of Eastern India's case [1991] 81 STC 185 (WBTT) certain observations of Shah, J., in Young Men's Indian Association's case [1970] 26 STC 241 (SC) were reproduced but the decision in that case was not based on those observations. As there were non-members getting club facilities and the nature of the tariff did not indicate that it was a case of recoupment, the principle of agency was not accepted. Young Men's Indian Association's case [1970] 26 STC 241 (SC) was distinguished and it was held that the decision in Enfield India's case [1968] 21 STC 317 (SC) was applicable.
36. It appears from the constitution of the applicant-club that there is a class of members known as rowing members, who cannot take part or vote in any general meeting and do not have any right in the management of the club. They cannot be elected as members in the governing body. They are entitled to such of the other privileges of the ordinary members as may be prescribed by the rules and the bye-laws. They are governed by the special rules applicable to them. According to these rules, a rowing member is not permitted to introduce guests but, however, can bring his wife only inside the club premises. He can enjoy certain club facilities like playing badminton, table tennis free of charge and use the swimming pool on payment of a fee. As regards cards and billiard rooms, these can be used by him only as a guest of an ordinary member. Refreshments can be served to them and all payments are required to be made by the rowing members by coupons available on cash.
37. It is evident from the foregoing paragraph that rowing members, though not shareholders of the club, enjoy certain club facilities and the club has direct relationship with them in certain matters. They can have refreshments and pay for these directly to the club and not as guests of members. It cannot, therefore, be said that there is identity between the members and the club. In the matter of supply of refreshment it cannot be held that the club has transactions only with its constituent members, that is, the principal. It has transactions with others also, who are not the principal. The obvious conclusion is that the applicant-club is not a members' club and hence the question of agency does not arise at all.
38. It is an accepted position in law that where a members' club prepares refreshments by investing its monies in the first instance and distributes such products by recouping the same from the members to whom supplied, there cannot be any sale. In such a members' club, which has been incorporated in keeping with the objective of providing amenities to its members, the supply of articles by it to a member is akin to delivery by an agent to the principal. The case is analogous to a mess where several people combine together, purchasing the various articles required for supplying refreshments and the expenses incurred therefor being divided among, and shared by, the members participating in the mess. Apart from the fact that the ingredients of a members' club should be present, it is also necessary that the principle of recoupment, which is sine qua non for the existence of the principle of agency, has also to be there. The Supreme Court also in Young Men's Indian Association's case [1970] 26 STC 241 considered this as an essential element.
39. A transaction of sale involves transfer of goods for a consideration. If it is just recoupment, no question of consideration or price arises. The tariff which goes beyond recoupment and leads to a surplus partakes of the nature of price or consideration.
40. It was brought to our notice by Mr. Majumdar that there was a surplus of about rupees three lakhs during the year 1989-90 in the catering business of the applicant-club ; the net surplus during the previous year was about rupees eight lakhs. It appears from the annual report of the club, 1989-90 that this surplus was used either to meet the deficit in rowing and regatta, amusements, etc., or for providing other amenities to the members.
41. At the time of argument Mr. Bajoria submitted that the surplus, if any, arising out of catering activities is kept as reserve for providing amenities to the members in pursuance of the objects of the club. He further added that there is no provision of giving dividends or bonus as in a normal company and the said surplus is given back to the members in the shape of further amenities. It may perhaps be too fine a point to argue that the use of the surplus in this manner cannot be deemed to be recoupment, as it is not confined to the supply of food and drinks, out of which such surplus was actually generated.
42. Obviously, all the members do not participate equally in the matter of refreshments ; some may participate more frequently than others and the occasions for availing catering facilities by some may be less frequent or few and far between. The surpluses however, are not given back in the same proportion in which these were contributed. If the surpluses are used for providing amenities to the club members, these actually are shared by all the members equally and not necessarily in the same proportion of their contribution. It may, however, be argued that even then the doctrine of identity between the contributors and the participants is not destroyed so long as the ownership or distribution of such surplus is restricted to those, who provided it as a class, even though it is not distributed in precisely the same proportion in which the members contributed to the surplus.
43. The position is, however, different in the case of rowing members. As pointed out earlier, they do not have the privileges and facilities of ordinary members, who virtually constitute the club. The rowing members certainly are not shareholders and undoubtedly not the principals, in case the club is treated as an agent. If the surplus of the catering establishment is used, though partially, for meeting the deficit of the rowing and regatta activities, it cannot be held that the surplus is given back to the constituent members. In fact, part of the surplus is used for giving benefits to the rowing members. There is, therefore, absence of mutuality between the contributors and the participants. This strikes at the very root of the principle of agency.
44. In view of the reasons given above, we come to the conclusion that the applicant-club is not acting as an agent of its members. The facts of the cases cited by the learned advocate for the applicant are distinguishable, as those cases related to members' clubs where they were acting as agents of their members. These cases do not really help the applicant. We, therefore, hold that the applicant-club is a dealer in view of explanation 1 to Section 2(c) of the 1941 Act and it is liable to sales tax, as its transactions with its members constitute sale in terms of the definition of "sale" in Section 2(g) of the said Act.
45. The next issue relates to the levy of a higher rate of tax on supplies made in or from an air-conditioned club. This has been challenged as arbitrary, discriminatory and violative of Article 14 of the Constitution. The specific question is whether the provisions of Section 5(1)(d1) of the 1941 Act, whereby a tax on sale of cooked food served in or supplied from, inter alia, an air-conditioned club is charged at 15 per cent as against 8 per cent chargeable under Section 5(1)(e) of the Act, is valid.
46. The challenge is mainly on the following counts. Classification sought to be made with reference to the air-conditioning of the club, etc., for charging a higher rate of tax is without any rationale or nexus. It is a case of pure sale of food-stuff and the incidence of tax on the self-same cooked food cannot be different whether sold in an air-conditioned place or in a non-air-conditioned place. The classification has, therefore, no rational basis and is arbitrary and discriminatory. It virtually amounts to a tax on air-conditioning or luxury, which cannot have any relevance in fixing the rate of sales tax. Further, there is no yardstick laid down for determining whether a club is air-conditioned or not. It is not clear whether a single air-conditioner in the office-room of the club will make it an air-conditioned club. The place where cooked food is served in or supplied from may not itself be air-conditioned. Cooked food may be consumed at the lawn, in the lobby, by the side of the swimming pool, which are not air-conditioned. On the basis of mere air-conditioning, which itself is very vague and uncertain, charging of a higher rate of tax is arbitrary and unreasonable.
47. Mr. Majumdar controverted the above arguments on these lines. The object is to raise revenue by imposition of a higher rate of tax on cooked food served in or supplied from air-conditioned clubs, etc., which have a higher status and where comparatively well-to-do people are members. The classification has been made in this case on the basis of air-conditioning, which only the affluent class of clubs with richer people can afford. This is certainly a rational basis of classification, which envisages imposition of a differential rate of tax on a certain class of food consumed by a comparatively affluent section of the people, who have the ability to pay a higher rate. The Legislature's right to classify like this in taxation matters, where a certain latitude is permitted, cannot be disputed, as it is rational and in keeping with the social and economic policies of the State. As regards the yardstick for air-conditioning, according to common parlance, it is fairly well-known which club is air-conditioned and which is not. There is no vagueness about it.
48. It is not a tax on air-conditioning or luxury, as has been alleged by the applicant. Air-conditioning is just a criterion for classification on the premise that air-conditioned clubs serve costly food, which is consumed or paid for by comparatively affluent sections of the people. Cooked food of the costly variety supplied in air-conditioned clubs constitutes a distinct class with a discernible difference from the cooked food of non-air-conditioned clubs. To impose a higher rate of tax on such costly food is to raise revenue by putting an additional burden on those, who have the ability to bear it with least unease. The idea is to lay a bigger burden on stronger shoulders and a lighter burden on weak shoulders. Thus the classification here has been founded on an intelligible differentia, which distinguishes the persons or goods that are grouped together from others left out of the group. The differentia also has a rational relation to the object sought to be achieved by the legislative measures. In other words, there is a nexus between the basis of classification, which is reasonable, and the object being achieved, which, of course, is to raise revenue regard being had to the capacity of the consumers to pay with minimum discomfort. We also draw support from a decision of the Supreme Court in Kerala Hotel & Restaurant Association v. State of Kerala [1990] 77 STC 253. The point regarding yardstick for air-conditioning does not appear to be serious enough. Club-going people or those, who deal with, or are associated with, clubs, understand what is an air-conditioned club. Regard being had to this, it is for the taxing authorities to decide whether a particular club is air-conditioned or not if such a dispute arises. No matter where the food is served,--at the lawn or by the side of the swimming pool,--so long as it is served in or supplied from the said air-conditioned club, a higher rate of tax will be attracted. The charge of vagueness or uncertainty does not, therefore, stand. The taxation measure in question is accordingly held to be valid. The challenge in this regard must, therefore, fail.
49. In the circumstances, the sales tax authorities are competent to issue notice to the applicant-club for production of books of accounts, etc., for the purpose of determining its liability to pay tax. The notice dated November 17, 1988 under Section 14(1) of the Bengal Finance (Sales Tax) Act, 1941, was therefore, validly issued. The amendment of Schedule IV of the 1941 Act with effect from April 1, 1988 to include "cooked food served in or supplied from any air-conditioned hotel, restaurant, refreshment room, club or eating-house" is also held to be valid.
50. In the result, the application fails and is dismissed. There will be no order for costs.
S.P. Das Ghosh, Chairman
51. I agree.
L.N. Ray, Judicial Member
52. I agree.