Cosmopolitan Club vs The Joint Commercial Tax Officer, Triplicane Division

S. Ramachandra Ayyar, C.J.—This is a petition filed under Article 226 of the Constitution by the Cosmopolitan Club, Madras, for the issue

of a writ of mandamus against the Joint Commercial Tax Officer, Triplicane Division, to forbear from levying on the Club, sales tax, on the turnover

relating to sales of refreshments supplied by it to its members. The Cosmopolitan Club, Madras is a social recreation club, started originally in the

year 1873, as an un-incorporated association. Long afterwards, in the year 1934, it was registered u/s 26 of the Indian Companies Act, as a

nonprofit earning institution. The Club has at present a strength of about one thousand five hundred members. Its object as disclosed in the

memorandum of association is mainly to promote and facilitate social intercourse, discussions amongst its members, etc., for whose benefit it

maintains a library of literary, historical and political books. The articles of association show that the members for the time being only constitute the

Club. There are provisions for resignation by the members and also for cessation of membership. Incidental to its above purposes, the club

maintains an establishment for preparing and supplying to its members, refreshments. The articles necessary therefore are purchased by the Club in

the market. The preparations are made within its premises at the direction of a committee, and they are supplied to the members at a price fixed by

the committee. In his judgment in The Cosmopolitan Club, Madras Vs. The Deputy Commercial Tax Officer, Triplicane Division, Mt. Road,

Madras and Another, , has described the object of the club in his felicitous way thus:

The Articles and Memorandum of Association of the Cosmopolitan Club Exhibit P-1 said to be based on those of the Eccentric Club, London, are

that of a social members'' Club, not conducted for gain or profit, but with the objective of providing amenities to its members for meeting in the

Club premises, for re creative and social activities varying from strenuous games to pastimes of less vigorous character, for social intercourse, for

interchange of ideas on a variety of topics serious and light, ranging from the Ethics and Philosophy to the prattle of idle gossip. I can take judicial

notice of the necessity to sustain and refresh members of a Club indulging in these generally wholesome, social and re creative activities by a supply

of refreshments, both liquid and solid.

A member is allowed to bring guests with him. But the club only charges the member who introduces the guest for the article of food consumed

by his guest.

The State of Madras had been charging sales tax on the turnover of such sales of refreshments by the club to its members under the provisions

of the Madras General Sales Tax Act, 1939 (hereinafter referred to as the Act). In the year 1949, the Club approached the Government for

exemption from liability to tax; but, on the latter refusing to grant the exemption, the club filed an application to this Court for the issue of a writ of

certiorari and mandamus to quash the order of the Government declining the exemption and to direct them to forbear from collecting the sales tax.

The main controversy in the case centred round the definition of the term dealer on whom Section 3 of the Act casts the liability for the tax, it being

the contention of the club that it was not a dealer. Dealer was defined under the Act as originally enacted as

any person who carries on the business of buying or selling goods.

Under the explanation thereto, a co-operative society, a club, a firm, or any association which sells goods to its members was a dealer within the

meaning of the clause. Mack, J., before whom the petitions came up for disposal accepted the contention of the Club and held that the supply of

refreshments by it to its members would not constitute a sale, that consequently the Club would not be a dealer within the meaning of Section 3 of

the Act, and that the levy of sales tax was, therefore, illegal. The learned Judge accordingly issued a writ of mandamus directing the Government

not to levy sales tax on the disputed turnover. The other application for the issue of a writ of certiorari was dismissed. The judgment of the learned

Judge is reported in The Cosmopolitan Club, Madras Vs. The Deputy Commercial Tax Officer, Triplicane Division, Mt. Road, Madras and

Another, .

The State preferred an appeal against that judgment and it was heard by Balakrishna Ayyar and Rajagopala Ayyangar, JJ., the judgment in the

appeal being reported in Deputy Commercial Tax Officer v. Cosmopolitan Club ILR (1955) Mad. 1042. The learned Judges sustained the

judgment of the trial Judge on the ground that there could be no transaction of sale in that the supply was not done in the course of any business

carried on by the club. Analysing the distinctive elements of a sale, the learned Judges held that there should be present in the transaction, the

following three elements: (1) Transfer of property in the goods; (2) such transfer must be in the course of trade; and (3) such transfer must be for

valuable consideration. As it was found that the Club had no commercial object, that is, a profit motive, in its transaction of preparing and selling

refreshments to its members, albeit against payment, the learned Judges held that the second of the three conditions referred to above was not

present in the case and that, therefore, there was no sale which could attract the tax under the Act. Mack, J., had expressed further the view that

the first of the three elements of sale was also not present in the case as the Club must be deemed to have acted in supplying to its members as the

agent of the members and there could, therefore, be no element of sale involved in the process. The learned Judges, on appeal, while recognising

the possibility of a corporate entity like the Cosmopolitan Club owning and passing the property of the club to its members, did not finally decide

the question whether the supply of refreshments by a non-proprietary incorporated club to its members would amount to a sale or not. A view

similar to the one above, has been taken by a Bench of the Nagpur High Court in Bengal Nagpur Cotton Mitts Club v. Sales Tax Officer (1957) 8

S.T.C. 781. That case concerned the interpretation of the provisions of the term sale in the Central Provinces and Berar Sales Tax Act which did

not contain the words, in the course of trade or business which distinguished the definition of the term shall in the Madras Act. But it was

nevertheless held that the mere absence of those words would not avoid the principle enunciated in the decision referred to above and that the

supply to the members of a members'' club, although such club had been registered u/s 26 of the Companies Act, of refreshments purchased out of

the club''s funds, would not amount to a transfer of property from the club to the member concerned and that the club therefore, would not be

liable to sales tax. Subsequent to the appellate judgment referred to above, the Madras State Legislature enacted Act 1 of 1959, introducing

certain amendments to the Act, the evident object being to bring transactions of the kind referred to above within the ambit of the Act. This was

sought to be achieved by altering the terms of the definition of the terms dealer and sale. It will be convenient to set out here the two definitions:

2(g) dealer means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for

cash, or for deferred payment, or for commission, remuneration or other valuable consideration and includes--

* * *

Explanation.--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

consideration, shall be deemed to be a dealer for the purposes of this Act:

2(n) sale with all its grammatical variations cognate expressions means every transfer of the property in goods by one person to another in the

course of business for cash or for deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or

pledge.

Explanation (1).--The transfer of property involved in the supply or distribution of goods by a society (including a co-operative society), club, firm,

or any association to its members, for cash, or for deferred payment, or other valuable consideration, whether or not in the course of business shall

be deemed to be a sale for the purpose of this Act.

The definition of the term sale is not, however, very happy. For example, the explanation refers to the transfer of property involved in the

distribution of goods by a club to its member. But, if it were to be held that there could be no transfer at all in such a case, the definition of the term

sale cannot take in the transaction referred to in the explanation.

It is, however, apparent from the terms of the explanation that the second of the three requirements of a sale mentioned in the judgment of this

Court in Deputy Commercial Tax Officer v. Cosmopolitan Club ILR (1955) Mad. 1042, namely, its commercial aspect has been done away with

in respect of clubs, associations, etc. According to the explanation, it will be sufficient to attract the tax, if there were a transfer of property for a

price, there being no other qualification for such a transfer being effected in the course of business. This is in sharp contrast with the main part of

the definition which requires the sale to be one in the course of business. There is also a similar difference in the definition of the term dealer. In

other words, while in the case of an ordinary person, which will include a company, there will be no liability to sales tax unless the sales effected by

him are in the course of trade, no such qualification apart from what we shall refer to later is imposed in regard to sales by clubs and other agencies

coming within the terms of the explanation. There is, however, one apparent difficulty in the definitions, namely, whether an incorporated club

having a legal existence of its own, would come under the main part of the section or would only come within the explanation thereof. Again, it is

obvious that the Legislature could not have intended that every casual sale by a club to its member of its property should come within the

explanation.

Mr. V. Thyagarajan, who appears for the Club, has contended that the purchase of the articles of food, the subsequent preparation and supply

of refreshments by the Club to its members albeit against payment is essentially one of service to its members, and can in no sense, be regarded as

a sale. For one thing, there is such an identity between the club and the member who is supplied with refreshments, that there can be no transfer of

property. Secondly, that even if one were to assume the Cosmopolitan Club as a distinct entity from its members, it must be held to have acted as

either the agent or mandatory of its members in providing them with refreshments and obtaining therefore their value. Following this submission it is

contended that the fiction created by the explanations to Section 2(g) and 2(n) of the Act would be ultra vires of the powers of the State

Legislature, as it brings into the category of sales, transactions which in law are not sales. It was also argued that, even if the explanations to

Sections 2(g) and 2(n) are held to be intra vires, the Cosmopolitan Club, being an incorporated one, would have a persona of its own and will

come under the main part of the definition of the term dealer and of the term sale, and that, therefore, unless the transactions were done in the

course of trade, which they were not, there would be no liability to tax. There was also a contention that the terms of the explanation discriminate

clubs, firms and other associations from other persons and that they are, therefore, void under Article 14 of the Constitution.

We shall first consider whether the explanations to Section 2(g) and 2(n) are ultra vires of the State Legislature for the reason that they enable

the State Legislature to tax transactions which are not really sales and, therefore, fall outside the ambit of its legislative power under the

Constitution. The explanations to which we have made reference deem a club, a dealer, and the transaction, a sale, whether or not the distribution

of the goods to the members takes place in the course of trade. Section 3 of the Act brings to charge the turnover of every dealer, the expression

turnover meaning the aggregate amount for which the goods are bought or sold. The explanations referred to, create, therefore, a fiction by which,

the concept of the word sale is extended so as to include a transaction which properly speaking, would not amount to a sale. The Legislature must

have obviously realised that the institutions referred to in the explanation would not come within the main part of the two definitions and, therefore,

created a legal fiction by the use of the word deem. A person or thing can be deemed to be something else only, if it is not in reality that thing.

Referring to the meaning of the word deem, when used in a statute, Cave, J., observed in The Queen v. Norfolk County Council (1891) 60

L.J.Q.B. 379, 380.

...generally speaking, when you talk of a thing being deemed to be something, you do not mean to say that it is that which it is to be deemed to be.

It is rather an admission that it is not what it is to be deemed to be and that, notwithstanding it is not that particular thing, nevertheless, for the

purposes of the act, it is to be deemed to be that thing.

It would follow that in reality distribution by a club to its members of goods will not be a sale within the meaning of the Act, but it is deemed to be

such by virtue of the operation of the word deemed in the explanations to Section 2(g) and 2(n) of the Act. Ordinarily speaking there can be no

limit to the creation of a fiction in a statute by a Sovereign Parliament. But where the legislative authority is limited or circumscribed, as for example,

by the Constitution, a fiction which has the effect of extending the scope of an enactment so as to transgress the constitutional limits, must obviously

be invalid, for no Legislature can do that by enacting a fiction which it cannot do directly. In other words, if the effect of the deeming provision in

the explanations referred to above were to bring to tax transactions which are not sales, the provision will be invalid as beyond the powers of the

State Legislature. In order to determine whether a legislation which brings to tax transactions which are not sales is intra vires or not, we have to

consider the scope of the authority of the concerned Legislature under the Constitution.

Madras Act 1 of 1959, which introduced the amendment was enacted after the Constitution came into force. The main Act itself was enacted

prior to the Constitution. The power of the State Legislature to levy tax on sales of goods is contained in Article 246 of the Constitution, which

states that the Legislature of any State shall have power to make laws in respect of any of the matters enumerated in list II to the seventh schedule

to the Constitution. Item 54 in that list says:

Taxes on the sale or purchase of goods other than newspapers.

This entry corresponds to item 48 in list II to the seventh schedule of the Government of India Act, 1935, and it is identical with it except that the

latter did not contain the words other than newspapers. The two entries referred to above authorise a State Legislature to impose a tax either on

the sale or on the purchase of goods. That would show that no tax can be imposed unless there has been a transaction of sale, namely, a transfer of

property in the goods from one person to another for a price. Thus there is no constitutional restriction as to the levy of sales tax even on casual

sales but it is essential that the legislation should impose tax only on sales and not on other transactions.

The learned Advocate-General contends, and, in our opinion, rightly, that, in interpreting a constitutional entry, conferring legislative powers,

particularly taxation powers, the widest; possible meaning should be given to the entry. It can also be accepted that, within the topic or topics

covered by the entry, the fullest sovereign powers must be held to have been given to the Legislature. The Legislature can, therefore, enact laws

within the scope of an entry and create for the purpose of bringing certain persons or things within the ambit of such laws the necessary fiction. But

it is obvious that fictions cannot achieve what direct enumeration cannot do under the powers vested by the Constitution. If, therefore, the term sale

in item 54 of list II of the seventh schedule to the Constitution cannot include a release by a trustee in favour of the beneficiary or the transfer by an

agent to his principal of the property of the latter, a fiction making such transactions to come within the meaning of the term sale cannot obviously

be valid as the fiction would have the effect of enlarging the scope of the statute beyond the limits imposed by the Constitution.

But the learned Advocate-General contends that, as a member of an unincorporated club or even a member of an incorporated one who is in

the position of a beneficiary does not have complete title to the property of the club, the transaction by which the club makes over its property to

its member for a price should be regarded as a sale coming within the ambit of entry 54. In support of the contention, reliance is placed upon

certain well known principles recognised in the interpretation of a constitutional provision. It is suggested that in order to ascertain the true meaning

of the words sale of goods, the meaning of the term at the time the Constitution was passed should be looked into in the light of the previous

legislative practice and subject to the provisions of the Constitution itself.

The first of the cases relied on was Wallace Brothers and Co. Limited v. Commissioner of income tax, Bombay City (1948) F.C.R. 1 where

the Privy Council observed:

Where Parliament has conferred a power to legislate on a particular topic it is permissible and important in determining the scope and meaning of

the power to have regard to what is ordinarily treated as embraced within that topic in the legislative practice of the United Kingdom see: Croft v.

Dunphy (1933) A.C. 156. The point of the reference is emphatically not to seek a pattern to which a due exercise of the power must conform. The

object is to ascertain the general conception involved in the words used in the enabling Act.

It would follow from the above that the true meaning of the term sale of goods will have to be found in what is ordinarily known and

comprehended within the meaning of those words.

It cannot be disputed that while interpreting the provisions of entries in our Constitution, reference can be made to the corresponding entry in

the Government of India Act, 1935--vide: The The Sales Tax Officer, Pilibhit Vs. Budh Prakash Jai Prakash, . The learned Advocate-General

drew also our attention in this connection to the decision of the Privy Council in Croft v. Dunphy (1933) A.C. 156 where Lord Macmillan

observed at page 165:

When a power is conferred to legislate on a particular topic it is important, in determining the scope of the power, to have regard to what is

ordinarily treated as embraced within that topic in legislative practice and particularly in the legislative practice of the State which has conferred the

power. Thus in considering what might be appropriately and legitimately enacted by the Dominion Parliament under its power to legislate in relation

to bankruptcy and insolvency, it was considered relevant to discuss the usual contents of bankruptcy statutes.

In Weaver''s Constitutional Law and its Administration, the principles observed in interpreting the American Constitution are stated thus at

page 77:

In interpreting the Constitution, recourse may be had to the common law of England in force in the United States at the time of the Revolution.

Many principles of Government were adopted directly from this source and it has been presumed that the Statesmen who wrote the Constitution

adopted these principles with the fixed technical meaning they had acquired in legal and constitutional history. (''The interpretation of the

Constitution,'' said Justice Brewer '' is necessarily influenced by the fact that its provisions are framed in the language of the English common law,

and are to be read in the light of its history''. To which statement Chief Justice Taft has added. ''The language of the Constitution cannot be

interpreted safely except by reference to the common law and to British institutions as they were when the instrument was framed and adopted''.)

The Statesmen and lawyers of the convention, who submitted it to ratification of the conventions of the thirteen States, were born and brought up in

the atmosphere of the common law, and thought and spoke its vocabulary.

It is needless now to examine how far these principles would justify an interpretation that the term sale would comprehend a release, etc., as

Supreme Court has laid down in unmistakable terms the rule that should guide us in interpreting the words sale of goods occurring in entry 54 in list

II to Schedule VII in Th The State of Madras Vs. Gannon Dunkerley and Co., (Madras) Ltd., . The Supreme Court has pointed out that prior to

the Government of India Act, 1935, there was no legislative practice in this country or in England relating to sales tax; but as the topic enumerated

is tax on sale of goods the real question will be the true import of the expression sale of goods and that that expression should have the meaning

which it had in the Common Law of England relating to sale of goods. Referring to entry 48 in list II of the seventh schedule in the Government of

India Act, 1935, which for the first time empowered the legislation on the topic of tax on sale of goods, the Supreme Court, observed:

We think that the true legislative intent is that the expression sale of goods in entry 48 should bear the precise and definite meaning it has in law,

and that that meaning should not be left to fluctuate with the definition of sale in laws relating to sale of goods which might be in force for the time

being.

Adverting to this matter later, at page 377, their Lordships said:

If the words sale of goods have to be interpreted in their legal sense, that sense can only be what it has in the law relating to sale of goods. The

ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in

law, acquired a definite and precise sense, and that, accordingly, the Legislature must be taken to have intended that they should be understood in

that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in

law.

The decision of the Supreme Court referred to above which held that in a building contract which was one, entire and indivisible, there could

be no sale of goods as one essential element of sale, namely, a bargain between the parties with respect to the transfer of property was lacking,

affirmed the judgment of this Court in Gannon Dunkerley v. State of Madras ILR (1955) Mad. 832, 843, where Satyanarayana Rao, J., delivering

the judgment of the Bench observed, while construing entry 48 of list II of Schedule VII of the Government of India Act, 1935:

It must be remembered that the Constitution Act was enacted by the British Parliament and the draftsmen and the Parliament must have been well

aware that the expression sale of goods had acquired a legal import by that time, and it is legitimate therefore, to presume that the expression was

used in the sense in which it was understood by English lawyers and also in India. The draftsmen must have intended to define the power of the

Legislature to tax only the transaction of sale of goods, which was understood in law as meaning and as constituting those composite series of acts

beginning with an agreement of sale and ending with transfer of property for a price, which constitute sale of goods.

We have, therefore, to look to the ordinary legal concept of the term sale of goods. Under the English Common Law, in order to constitute a

valid sale, four elements are necessary. Benjamin in his work on sale of goods (eighth edition) dealing with the matter observes at page 2:

Hence it follows that, to constitute a valid sale, there must be a concurrence of the following elements, viz.:

(1) Parties competent to contract; (2) mutual assent; (3) a thing, the absolute or general property in which is transferred from the seller to the

buyer; and (4) a price in money paid or promised.

In The The State of Madras Vs. Gannon Dunkerley and Co., (Madras) Ltd., the second of the four elements stated above was lacking, as

there was no agreement to sell, between the person who granted the building contract and the one who was to perform it, any of the component

parts employed in the building; it was held that there could be no sale and the Legislature which enacted the provision deeming such a contract to

be a sale acted ultra vires of its powers.

In the present case, it is argued that the third of the constituent elements of the sale set out above is wanting, namely, that the refreshments

which were supplied to the members by the Club were not the absolute property of the Club which could be held to have been transferred by it to

its member and that the principle recognised i The State of Madras Vs. Gannon Dunkerley and Co., (Madras) Ltd., , would equally apply.

That, where one of the several elements which constitute a sale is lacking, the State Legislature would be incompetent to levy tax by a deeming

provision, has been held in a number of cases. We shall refer to a few of them presently. But, before we do so, it is necessary to reiterate what we

have stated earlier, namely, that the expression sale of goods occurring in entry 54 of list II of Schedule VII of the Constitution, is a composite

expression having a definite meaning involving the existence of the four elements stated above and that there can be no sale of goods unless all the

component elements are present.

In Poppatlal Shah Vs. The State of Madras, the Supreme Court dealing with the several elements in the conception of the word sale said:

Thus, there are the elements of a bargain or contract of sale, the payment or promise of payment of price, the delivery of goods and the actual

passing of title, and each one of them is essential to a transaction of sale....

In Bharat Sabaigrass Ltd. v. Collector of Comml. Taxes (1952) 3 S.T.C. 453, 458, the Orissa High Court while construing the meaning of the

word sale occurring in the Sales Tax legislation of that State held that the word could not be made wider than what it meant under the Government

of India Act, 1935, i.e., a completed transaction involving a transference of interest. In that case, there was an attempt to levy tax on a mere

contract for sale entered into in that State on the footing that a contract of sale was deemed to be a sale under the definition section in the

enactment. The learned Judges observed:

There seems to be enough force in the contention that a mere contract for sale cannot constitute a sale. It being executory in character, pure and

simple, no property or ownership passes under it. The sale, on the other hand, is an executed contract where complete ownership passes.

It would be apparent from the above that, unless there is a transfer of property from one to another, there can be no sale, and a statute which

enacts a fiction so as to bring a transaction of that kind within the ambit of its taxation provision, would be ultra vires.

This question, namely, whether by enlarging the definition of the term sale so as to include mere contracts of sale, the State Legislature can

impose a tax, came up for consideration before the Supreme Court in The The Sales Tax Officer, Pilibhit Vs. Budh Prakash Jai Prakash, . That

case concerned with the definition of the term sale in the U.P. Sales Tax Act, 1948. Section 2(h) of that enactment defined sale as including

forward contracts. The Supreme Court held that liability to be assessed to sales tax can arise only if there were a completed sale and not when

there was merely an agreement to sell, which can only result in a claim for damages, and not in the passing of property, and that the power

conferred under entry 48 in list II of Schedule VII of the Government of India Act, 1935, to impose a tax on sale of goods could be exercised only

when there was a sale under which a transfer of property in the goods took place. The provisions of Section 2(h) to the extent they included the

forward contracts were held to be ultra vires the Legislature.

We have earlier referred to the decision in The The State of Madras Vs. Gannon Dunkerley and Co., (Madras) Ltd., , which declared void a

provision in the Madras General Sales Tax Act which enlarged the definition of the word sale so as to include a transfer of property in goods

involved in the execution of works contracts.

It will follow from the principle accepted in the decisions stated above, that it will not be open to the Legislature to make a transaction which is

not a sale, a sale by a statutory fiction and impose a tax thereon. To be more precise, if the element of transfer of property is lacking in any

transaction, there can be no sale and the Legislature cannot, by treating it as a sale by a deeming clause, proceed to bring it within the ambit of the

taxing statute.

It has, therefore, to be seen whether there can be said to be a sale when an incorporated club prepares refreshments by investing its monies in

the first instance and recouping the same from the members to whom the products are supplied. The consideration of this question will depend

upon the precise relationship between the club and its members.

A club is an association of persons united by some common interest, meeting periodically for conviviality, relaxation and social intercourse. In

Halsbury''s Laws of England, third edition, volume 5, page 252, a club has been defined as

a society of persons associated together for social intercourse, for the promotion of polities, sport, art, science, or literature, or for any purpose

except the acquisition of gain.

Though in this country there have always existed literary, cultural and philosophical associations, men generally found relaxation in their families,

and clubs are more or less a foreign concept. For a true understanding of the character of such an institution and its relation to its members, it is,

therefore, necessary to study its features in the country of its origin.

In England, there are five different kinds of clubs, namely, (1) unincorporated members'' clubs; (2) unincorporated proprietary clubs; (3) clubs

incorporated under the Companies Act; (4) working men''s clubs registered under the Friendly Societies Act; and (5) shop clubs. It will be

necessary for the purpose of understanding the cases to which we have to refer hereafter to know something about the first three types of clubs.

An unincorporated members'' club is a society of persons each of whom contributes to the funds out of which the expenses of conducting the

society are paid. But such club, not being a partnership or a legal entity, can neither sue nor be sued in the club name, unless the property of the

club is vested in trustees. The club property will be the property of all the members for the time being. But the property being devoted for the

purpose of the club, the individual interest of the members therein will become capable of realisation only upon dissolution. Till then the members

will have only a right to use the club premises and enjoy the privileges of the society, in accordance with the rules, so long as they pay the

subscriptions. The rights and duties of the members of such a club, as between themselves, will depend on the rules (vide: Halsbury''s Laws of

England (third edition), volume V, page 253-4.)

An unincorporated proprietary club is one where the property and the funds of the club are owned not by the members but by some other

person. It will be open to the person owning the club to conduct it with a view to earning profits. The members will be entitled to use the club

property as licensees under the terms of the contract between themselves and the owner of the club. The right of the member is purely personal

and contractual. It may also happen that the proprietor of such a club is an incorporated company. It is not necessary in such a case that the

members of the company should be members of the club.

An incorporated member''s club retains the characteristics of an unincorporated members'' club and at the same time, being incorporated under

the Companies Act, would obtain the advantage of suing and being sued as a legal entity independent of its individual members. As a members''

club is not one run with a view to earning profits, the convenient method adopted is to register the club as a company limited by guarantee, the

members for the time being constituting the shareholders of the company. Section 26 of the Indian Companies Act, 1913 (which corresponds to

the present Section 25), enables the associations run not for profit like a club to be registered as a company. On such registration, the club

acquires the status of a legal entity.

The true relationship between a club and its members came up for consideration in England with respect to licensing provisions under the

Liquor Licensing Laws. The Licensing Act in that country prohibited the sale of liquor in unregistered clubs. Questions arise whether the supply of

intoxicating liquor by an unregistered club to its members amounted to a sale. Briefly stated, the consensus of opinion in England appears to be,

that supply for a price by a bona fide members'' club to its members of intoxicating liquor will not contravene the provisions of the Licensing Act,

as the transaction does not constitute a sale by retail within the meaning of the Act, but is one in the nature of a release by the members of their

shares in the property supplied. This was held to be the case even in the case of an incorporated members'' club. But that principle was, however,

not applied in the case of a proprietory club, inasmuch as the members would have no interest in the property which belonged to the proprietor (be

it a company or an individual), the supply by the latter constituting a sale and unless the premises were duly licensed, there would be a

contravention of the Act.

The leading case on the subject is Graff v. Evans (1882) 8 Q.B.D. 373. In that case, the manager of a bona fide unincorporated members''

club was prosecuted for selling by retail intoxicating liquor without a proper license under the Licensing Act, 1872. The club property was, by the

rules, vested in certain trustees. There was a committee of management, which was in control of the general business of the club. The liquor was

purchased by the club and was supplied at a fixed percentage above the cost price to its members. The learned Judges held that there was no sale

at all in the case. Field, J., observed:

The question here is, Did Graff, the manager, who supplied the liquors to Foster, effect a sale by retail? I think not. I think Foster was an owner of

the property together with all the other members of the club. Any member was entitled to obtain the goods on payment of the price. A sale

involves the element of a bargain. There was no bargain here, nor any contract with Graff with respect to the goods. Foster 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 became entitled to have ale and whisky supplied to him as a member at a certain price. I cannot conceive it possible that

Graff could have sued him for the price as the price of goods sold and delivered. There was no contract between two persons, because Foster

was vendor as well as buyer. Taking the transaction to be a purchase by Foster of all the other members'' shares in the goods, Foster was as much

a co-owner as the vendor. I think it was a transfer of a special property in the goods to Foster, which was not a sale within the meaning of the

section.

This decision was followed in Metford v. Edwards (1915) 1 K.B. 172, where the question arose whether there was a sale by reason of supply

of liquor to the members of a working men''s club which had been registered under the Friendly Societies Act, 1896. It was held that there was no

sale.

The position then will be that the supply of liquor by a members'' club to its members is a mere mode of distributing the common property, and

not a sale of liquor by the club to its members so as to attract the licensing laws. It will be analogous to a case of several people, combining

together, ordering for goods on joint account and arranging between themselves the proportion in which they should pay for it or the proportion in

which they should consume the same. The purchase in such a case would be a joint purchase of all those who contributed money and a distribution

between them can only be termed a partition and not a sale. This principle applicable to members'' clubs has been held to be equally applicable to

a case where the property is vested for purposes of convenience in trustees. That was the case in Graff v. Evans (1882) 8 Q.B.D. 373.

Channell, J., in National Sporting Club Limited v. Cope 82 L.T. 352. observed:

Then it has further been held that, that being the principle applicable to members'' clubs, it is not altered by the fact that the property is vested for

purposes of convenience in trustees. In the case where it is so vested the property is of course in those trustees, and in one sense the members''

clubs have no legal property in the excisable articles; but they have an interest in them; whether one may properly call it an equitable interest I really

do not know, but it does not matter. The interest they have is treated just the same as if it were the legal property. It is so to all intents and

purposes, and the sale of it among the members is treated as being a mere distribution of the property in which they have a common interest,

although the legal ownership is vested in trustees.

The learned Judge was also inclined to the view that, where the members of the club have been incorporated into a simple corporation consisting

solely and entirely of the members of the club, the principles underlying distribution of property in an unincorporated members'' club would apply to

that case as well.

That aspect of the matter came up finally for consideration in Trebanog Working Men''s Club and Institute Ld. v. Macdonald (1940) 1 K.B.

576, 582, where a question arose whether the supply of liquor by an incorporated members'' club to its members on payment contravened the

provisions of the Licensing Act. It was recognised that an incorporated club was a legal entity distinct from its members but, notwithstanding it,

when the club supplied liquor to its members, it could not be regarded as effecting a sale but it rather acted as the agent or trustees of the

members. Lord Hewart, C.J., who was of opinion that the purchase of excisable articles for use of the club was made by its committee on behalf

of its members, stated the legal position thus:

In our opinion, the decision in Graff v. Evans (1940) 1 K.B. 576, 582 applies to and governs the present case. Once it is conceded that a

members'' club does not necessarily require a licence to serve its members with intoxicating 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 entitles that may be entrusted with the duty of holding

the property on behalf of the members, be it an individual, or a body of trustees, or a company formed for the purpose, so long as the real interest

in the liquors remains, as in this case it clearly does, in the members of the club. There is no magic in this connection in the expression trustee or

agent. What is essential is that the holding of the property by the agent or trustee must be a holding for and on behalf of, and not a holding

antagonistic to, the members of the club.

From the decisions referred to above, it is clear that so long as no outsider has an interest in an incorporated club which runs only for its

members, there is an identity of interest between the club and the members. The club may be a juristic entity capable of holding property. But when

it purchases articles for the consumption of its members and supplies the same to them against payment, no element of sale is involved in the

transaction, as the club should be regarded only as holding the property for the benefit of its members and releasing the same when required to do

so. Therefore, the distinction between an unincorporated members'' club and an incorporated one is this. In the former case, the distribution made

by the club to one of its members is a release by all the members in favour of a joint owner who takes the goods. In the case of an incorporated

club which exists only for the purpose of providing amenities to its members, the supply of articles by it to a member will tantamount to delivery by

an agent or trustee to the principal or beneficiary. In such a case also, there will be no transfer of ownership by a person absolutely entitled to the

property to the one who acquires title to the property on such transfer.

If these principles are to be accepted, there can be no sale involved in the supply of refreshments by the Cosmopolitan Club, Madras, to its

members, as it is conceded that it is purely a members'' club.

The learned Advocate-General, however, contends that the rule laid down by the English cases should not be followed in this country for three

reasons: (i) that the decisions referred to above were rendered in prosecutions under the Licensing Acts and were mainly the result of the principle

of stare decisis; (ii) that sufficient importance had not been given in the decisions to the distinct legal personality of an incorporated club; and (iii)

that the decisions are opposed to the principles recognised in English and Scottish Joint Co-operative Wholesale Society Ld. v. Commissioner of

Agricultural income tax, Assam (1948) A.C. 405.

We see no force in the first of the three reasons set out above. The English decisions to which we have made reference earlier proceed, not on

any rule of construction of a penal statute or even on the application of the rule of benefit of doubt, but on the vital aspect of the relationship of the

club to its members and the character of the transaction involved in the supply in a members'' club of goods to the members. We agree with regard

to the following observation of Mack, J., in The Cosmopolitan Club, Madras Vs. The Deputy Commercial Tax Officer, Triplicane Division, Mt.

Road, Madras and Another, . in this connection:

Underlying them all, there is the basic legal principle that a purely members'' club which makes purchases through a secretary or manager and

supplies requirements to members at a fixed rate does not, in law, sell these goods to members but merely distributes them, all the essential

elements of a sale in the transaction being wanting.

As pointed out in the appellate judgment, the decisions of the English Courts have remained in force for several years, and in our opinion, they

should apply to cases in our country particularly for the reasons that clubs themselves are modelled on the English pattern.

The second line of argument adopted by the learned Advocate-General is that a club (whether incorporated or otherwise), in its true concept

should not be treated as identical with its members and that, as a substratum at least of the property in the goods remained with the club, any

transfer of that property to the member would involve a sale. In this connection the learned Advocate-General invited our attention to the decisions

in Rukminamma v. Ramadas 1940 M.W.N. 1015 and Satyavart Sidhantalankar Vs. The Arya Samaj, which held that a society registered under a

Societies Registration Act was a legal entity having a persona of its own and he argued, by way of analogy, that a club as such will have a limited

legal existence of its own which would make it competent to sell its goods to its members.

Reference is then made to National Union of General and Municipal Workers v. Gillian (1946) 1 K.B. 81, where it has been held that a trade

union could in general maintain an action in tort, although a registered trade union unlike its counterpart in this country is neither a natural person nor

a corporation. In Bonsor v. Musicians'' Union (1956) A.C. 104, such a union has been styled a near-corporation. It is, therefore, argued that a

club, particularly an incorporated one, is a legal entity capable of holding and transmitting property, and that, therefore, in a club, the supply of

refreshments to individual members by it can only be a sale of the property, as a club cannot be deemed to be the agent of each and every single

member, although it might be the agent of all of them put together. Pursuing this line, it was further argued that the English decisions referred to

above should be held to be inconsistent with the decision of the Privy Council in English and Scottish Joint Co-operative Wholesale Society Ld. v.

Commissioner of Agricultural income tax, Assam (1948) A.C. 405. In that case, the Appellant was an incorporated company carrying on business

as planters, growers and merchants of tea. The Appellant company had only two members, both of them co-operative societies. The Appellant

owned a tea estate in Assam. Each year the two co-operative societies (members of the Appellant society) advanced certain sums of money to the

society towards the cost of tea to be supplied to them. The tea was supplied later to them and the cost at the market price was debited against

them. There was thus a supply by the Appellant of the tea grown by it only to its members and to no outsider. The Assam Government levied tax

under the provisions of the Agricultural income tax Act, 1939. The Appellant contested its liability on the ground that it was a mutual society by

which all the surplus profits went only to the members and there was thus no profit made by the company for the levy of income tax. The Privy

Council held that no matter who the purchasers might be, the society had sold the tea grown and manufactured by it at a profit and it having earned

profits, the provisions of the taxing enactment would apply. The decision undoubtedly proceeds on the basis of the well-understood rule of law that

a company is distinct from its shareholders. In order to better appreciate that case, it is necessary to digress a little and refer to the law regulating

the levy of income tax with respect of mutual societies, which the Appellant claimed to be and which claim was rejected. In a mutual society, e.g., a

mutual insurance association, the surplus goes back to the members (viz., insured persons); in effect it amounts to a return of his own money which

the member had overpaid. In other words in such associations, persons who make contributions receive back a proportionate part of their

contribution, if there is a surplus after meeting the liabilities of the association. There is thus a complete identity between the contributors and the

recipients of the surplus, the mutual association serving as an agency for a purpose, not itself making any profit. In New York Life Insurance Co. v.

Styles (1889) 14 App. Cas. 381, Lord Watson dealing with such a case said:

When a number of individuals agree to contribute funds for a common purpose, such as the payment of annuities, or of capital sums, to some or all

of them, on the occurrence of events certain or uncertain, and stipulate that their contributions, so far as not required for that purpose, shall be

repaid to them, I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits.

44.1 Thus where all the contributors to the common fund of an association participate in the surplus and all such participators are contributors,

there is a complete identity between the contributors and participators and the association becomes a mere agency for the operation of the purpose

which they had in view. In such a case, there can be no profit at all as the payment of the surplus back to the contributor will merely be a return of

his own money which he had overpaid. It was this principle that was invoked in English and Scottish Joint Co-operative Wholesale Society Ld. v.

Commissioner of Agricultural income tax, Assam (1948) A.C. 405, 417, where the association sold its own goods to its members. There was,

however, no common fund to which the members contributed and the surplus in which they participated. The Privy Council clearly pointed out

that, what the members paid were mere advances by way of loan to the company which was liquidated later by setting off the price due from them

to the company on the supply of tea. Thus, the company, an entity, was having a contractual sale transaction with its members. Lord Normand

delivering the judgment of the Board said:

What kinds of business other than mutual insurance may claim exemption from liability to income tax under the principle of Styles'' case (1889) 14

App. Cas. 381, 394 need not be here considered; but their Lordships are of opinion that the principle cannot apply to an association, society or

company which grows produce on its own land or manufactures goods in its own factories, using either its own capital or capital borrowed

whether from its members or from others, and sells its produce or goods to its members exclusively. In the present case the Appellant society is

not bound by its rules to sell its tea only to its members, but it could make no difference if it were. No matter who the purchasers may be, if the

society sells the tea grown and manufactured by it at a price which exceeds the cost of producing it and rendering it fit for sale, it has earned profits

which are, subject to the provisions of the taxing Act, taxable profits.

It will be seen from the foregoing that the Assessee could manufacture goods and sell the same to its members or any other whom it may

choose. From the decision of their Lordships of the Privy Council, it appears that three features should exist in a case before an Assessee can

invoke to his aid the principle of the decision in Styles'' case (1889) 14 App. Cases 381 namely, (i) that there should be an identity of contributors

with the recipients of the surplus; (ii) that the company, though incorporated, was a mere entity for the convenience of the members (policy

holders); and (iii) the impossibility of the contributors receiving profits in that there is only a return of contributions and not an earning of profits

which is later distributed.

The second of the three features set out above shows that there can be a company established merely for the convenience of the members,

conceived as an instrument to obey the mandate of the members. It can be readily conceded that an incorporated members'' club, the legal

personality of the club is utilised for securing an advantage and for discharging the mandates of the members. There is no doubt that by the process

of incorporation, a club is constituted a juristic person. Such a juristic person can undoubtedly own property; it can deal with it. But it is not

necessary that it should always own property or sell the same. As incorporated club can take certain responsibilities which a person can take.

There may be cases where the very constitution of such a juristic person is not for purposes of owning or selling property but as a convenient agent

for the performance of certain duties to the members thereof. In such a case, an incorporated club can only be regarded as the agent or mandatory

of the members. The learned Judges in Deputy Commercial Tax Officer v. Cosmopolitan Club ILR (1955) Mad. 1042, however felt that there

was a measure of inconsistency involved in saying, at the same time, that a club acquires a juristic personality by reason of its incorporation and, at

the same time, the transfer of property, vested in such a personality, to individual members for price did not constitute a sale. That, however, is

based on the assumption that, whenever property is vested in an incorporated club, it is vested in it as an owner, and whenever it passes it on to its

members it only sells. In our opinion, property may vest in the club for designated purposes and the club will then be only in the position of a

trustee. The decision in English and Scottish Joint Co-operative Wholesale Society Ld. v. Commissioner of Agricultural income tax , Assam

(1948) A.C. 405 can have no application where a company is created for the avowed purpose of acting as an agent to its members as it were, and

where it does not, and, indeed, cannot sell its property to outsiders. Whether in a particular ease, a company can be held to have sold the property

to its members or whether it merely discharged a duty as an agent or mandatory of its members while it delivered it to all or any of them will, in the

absence of specific provision in its constitution, be a question of fact that will have to be decided in the light of the evidence in each case. But a

members'' club holds a recognised position under the law. Whether such a club is incorporated or not incorporated, it exists and performs duties

only for the benefit of members. Its activity in regard to that matter may be an organised one but all that will be for the benefit of the members. It

cannot, for example, begin to sell its preparations to others. If it does so, whether such an act is ultra vires or intra vires, there will undoubtedly be

a sale. But in the instant case, it is not denied that the Petitioner club is not selling its refreshments prepared by it to outsiders. It will be useful in this

connection to refer to one of the objects of the club as stated in paragraph 3(e) of the memorandum of association:

And for the purpose of the club to purchase, hire or otherwise acquire any movable and immovable property, and in particular any land, building,

furniture, club and household effects, utensils, books, newspapers, periodicals, fittings, apparatus for entertainment, sport appliances, conveniences

and accommodation and to sell, hire, mortgage or dispose of the same whenever they are superfluous, obsolete or otherwise not required for the

use of the members of the Club.

The above object which controls the activity of the club shows that every article purchased by the club is for the benefit of the club. In other

words, the members get a beneficial interest therein immediately after the purchase of articles intended for the preparation of refreshments. On

conversion into refreshments, the club''s ownership will partake the same character. When, therefore, the refreshments are distributed to individual

members against payment, the club will be only discharging its duty to the members as their mandatory or agent. In such a case there can be no

element of transfer of ownership by one absolute owner to another person. The principle recognised in Trebanog Working Men''s Club and

Institute Ld. v. Macdonald (1940) 1 K.B. 576 will, in our opinion, apply to all clubs, incorporated or otherwise. Thus the juristic personality that is

in the club should be held as conceived and set up as an agency to enable the members to obtain the amenities for which they contribute. There can

be no sale of the goods in such a case so as to attract the provisions of the Sale of Goods Act.

This conclusion of ours renders it unnecessary to deal with two other contentions raised by Mr. Thyagarajan, on behalf of the Petitioner. We

shall, however, deal with them briefly with a view to securing completeness.

It was argued that the Cosmopolitan Club, in the instant case, being an incorporated association of persons, it would be a legal persona which

will come within the main part of the definition of the term dealer and that the explanation to that provision which deals with clubs can only

comprehend clubs other than incorporated ones. On that line of argument is built a further argument that, as under the main part of Section 2(g) a

person can be considered to be a dealer only if he carries on business, and as it has been held in Deputy Commercial Tax Officer v. Cosmopolitan

Club ILR (1955) Mad. 1042, that the Petitioner is not carrying on business in regard to its activity of supplying to its members refreshments at a

price, it will not be liable to any sales tax on the turnover. The argument proceeds on a misapprehension. It was held in Deputy Commercial Tax

Officer v. Cosmopolitan Club ILR (1955) Mad. 1042, that an incorporated club will not be a dealer within the meaning of Section 2(g), as it stood

then for the reason that the profit motive was absent in the case. The explanation was enacted to supply the deficiency in the main part of the

definition which could not reach institutions like the Cosmopolitan Club, Madras. Therefore, the Legislature must be taken to have proceeded on

the basis that co-operative societies, clubs, associations, firms, etc., who distribute goods to their members for a price form a distinct category but

will not, by reason of their constitution, be a dealer in the accepted sense of the word in regard to their dealings with their members. It, therefore,

created a statutory fiction to make such institutions dealers within the meaning of the Act. Therefore, an incorporated club as well as an

unincorporated club will come within the terms of the explanation to Section 2(g) for the reason that they will not come under the terms of the main

part of the provision. The matter can also be put in another way. The explanation makes a special provision with regard to co-operative societies,

clubs, firms and other associations, and the general words of the main part of Section 2(g) will not, therefore, apply to them. It follows, therefore,

that, on the terms of Section 2(g) as it stands, a club, whether incorporated or not, will be a dealer only by virtue of the explanations to that

provision and not otherwise. It is, therefore, not necessary that its transactions with its members should be commercial in their nature so as to

attract the tax liability.

The next contention relates to the validity of the explanation with reference to Article 14 of the Constitution. It is contended that, on the terms

of Section 2(g) and Section 2(n), there has been a discrimination between incorporated companies and incorporated clubs in two respects and

that, therefore, the provision has to be struck down as contravening Article 14. The first ground of differentiation pointed out is, that, while in

regard to incorporated companies other than clubs which come under the main part of Section 2(g), it is not necessary that the transaction should

be carried by a person doing business; in respect of incorporated companies coming within the terms of the explanation, there is no such

requirement. Reference was made in this connection to the two decisions of this Court reported in Gannon Dunkerley v. State of Madras ILR

(1955) Mad. 832 and Sree Meenakshi Mills Ltd. v. State of Madras (1955) 1 M.L.J. 104, where it was held that an incorporated company

running a canteen for the benefit of its workers would not be liable to sales-tax on the turnover in the canteen, for the reason that it was not done in

the course of business. The second ground of differentiation alleged is, that, on the terms of the explanation even a casual sale by the club might

make it a dealer within the meaning of the Act, while in the case of a person who carries on business, there should be a systematic course of

business.

There can be no doubt that co-operative societies, clubs, firms and associations form a distinct and intelligible class from those specified in the

main part of Section 2(g). The decision in Deputy Commercial Tax Officer v. Cosmopolitan Club ILR (1955) Mad. 1042, has emphasised the

essential difference between the two. In the case of the former, in spite of the fact that there has been systematic sales by the club to its members,

they will not be dealers within the meaning of the Act, as the transactions are not of a commercial nature. They are, therefore, different from

persons referred to (including companies) who will come u/s 2(g). The classification is undoubtedly intelligible and even reasonable. The first

ground of attack under Article 14 , therefore, fails.

On the second aspect of the submissions made to us, we are of opinion that the terms of the explanation, on their true interpretation, do not

make either casual or non-repetitive or isolated act of sale by the persons mentioned in the explanation as sales within the meaning of Section 2(n).

The explanation to Section 2(g) and 2(n) contemplate an organised activity on the part of the club in the purveying of articles to its members, and

the activity of persons or institutions referred to therein is more comparable to that of traders than otherwise. We are, therefore, of the opinion that

there is no difference in treatment between the category of persons coming under the main part of Section 2(g) and the explanation thereto. It

follows that neither Section 2(g) nor Section 2(n) can be challenged as contravening Article 14 of the Constitution.

But from what we have stated earlier, it will be clear that in regard to the supply and distribution of refreshments by the Cosmopolitan Club to

its members against payment, it cannot be said that there has been transfer of property by the club as an absolute owner to its members as

purchasers. The case is more analogous to that of an agent or mandatory investing his own monies for preparing things for consumption of the

principal, the later recouping himself for the expenses incurred. The circumstance that a small margin of profit results occasionally in such a

transaction can only be regarded as incidental to the transaction, as it is not always possible to fix the price of refreshments with exactitude. That

cannot obviously convert the transaction into one of sale. It follows that the club cannot be regarded as a dealer; nor can the supply of

refreshments to its members be regarded as a sale within the meaning of the Act. A writ of mandamus will, therefore, issue in the terms prayed for.

No order as to costs.