State of Tamilnadu Vs Tvl. Aruppukottai Taluk (Madras High Court)
The State filed the appeal challenging the order of the Tribunal, which had allowed the assessee’s appeal and granted relief in respect of the sales turnover relating to the distribution of art silk yarn to the members of a Co-operative Society.
The Commercial Tax Officer, Aruppukottai, in the original assessment orders for the assessment years 1995-96, 1996-97, 1997-98 and 1998-99, revoked the exemption claimed by the assessee in respect of the value of art silk yarn distributed to its members on receipt of monetary consideration and assessed tax along with penalty. The assessee appealed before the Appellate Assistant Commissioner (CT), who deleted the penalty but confirmed the assessment on the disputed turnover. The assessee thereafter preferred a further appeal before the Tribunal.
The Tribunal held that the disputed turnover satisfied all the conditions specified in Explanation 2(iv) to Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959, read with Rule 5-A(c) of the Tamil Nadu General Sales Tax Rules, 1959, and therefore the disputed transaction did not form part of the taxable turnover. Consequently, the Tribunal granted complete relief from payment of tax on the transactions involving distribution of art silk yarn by the assessee to its members.
Aggrieved by the Tribunal’s order, the State filed the present Tax Case raising substantial questions of law concerning the continued applicability of the doctrine of mutuality after the 46th Amendment to Article 366(29A) of the Constitution of India, including whether earlier decisions on the doctrine continued to hold the field and whether the constitutional amendment deemed such transactions to be sales liable to sales tax.
At the stage of admission, it was brought to the notice of the High Court that Civil Appeal No. 4184 of 2009, State of West Bengal and Others vs. Calcutta Club Limited, was pending before the Supreme Court and had been referred to a Larger Bench on questions directly affecting the issues involved in the present appeal. Accepting the Department’s request, the High Court admitted the matter and deferred its adjudication.
When the matter was taken up for final disposal, the Department produced the judgment of the Supreme Court dated 3 October 2019 in State of West Bengal & Ors. Versus Calcutta Club. The High Court noted that the Supreme Court had upheld the views of the Calcutta High Court and the High Court of Jharkhand, holding that services rendered to members of a club or society do not constitute a taxable service and that the doctrine of mutuality continues to apply to both incorporated and unincorporated members’ clubs even after the constitutional amendment.
The High Court observed that the Supreme Court had held that transactions involving distribution of goods to members of a society would not fall within the definition of “sale” where there was no element of profit making. In the present case, the assessee had consistently maintained that the art silk yarn was distributed to its members without any profit margin. Accordingly, the exclusion of the value of such goods from the taxable turnover was held to be legal. The Court further held that, as the doctrine of mutuality applied to the transactions between the assessee and its members, the levy of sales tax on those transactions was ultra vires.
Following the dictum laid down by the Supreme Court in State of West Bengal & Ors. Versus Calcutta Club, the Madras High Court dismissed the State’s Tax Case. No order as to costs was made.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The appeal is by the State, being aggrieved by the order of the Tribunal, which has entertained the appeal filed by the assessee and granted relief in respect of the sales turnover of goods which was distributed to the members of the Co-operative Society.
2.The brief facts of the case are as follows:
The Commercial, Tax Officer of Aruppukottai, in his original assessment orders for the year 1995-96, 1996-97, 1997-98 and 1998-99, revoked the exemption claimed by the assessee in respect of the value of the art silk yarn distributed to its members on receipt of monetary consideration and assessed the tax along with penalty. Being aggrieved, the assessee preferred an appeal before the Appellate Assistant Commissioner (CT), who, on hearing the case, deleted the penalty imposed. However, confirmed the assessment made on the turnover which the exemption was sought. Against the levy of tax, the assessee filed a further appeal before the Tribunal. The Tribunal taking note of the fact that the turnover, the subject matter of the disputed transaction satisfies all the conditions specified in explanation 2(iv) to Section 2(r) of the Tamil Nadu General Sales Tax (TNGST) Act, 1959 read with Rule 5-A(c) of the Tamil Nadu General Sales Tax (TNGST) Rules, 1959, held that the disputed transaction will not come under the purview of the taxable turnover. Thus, the assessee was granted total relief from the payment of tax on the transaction between the assessee and its members in respect of distribution of art silk yarn.
3. Against the order of the Tribunal, the present Tax Case has been filed, raising the following substantial question of law:
“i. Whether the doctrine of mutuality is still applicable to incorporated clubs or any club after the 46th amendment to Article 366(29A) of the Constitution of India?
ii. Whether the judgment of this Court in Young Men’s Indian Association (supra) still holds the field even after the 46th amendment of the Constitution of India; and whether the decisions in Cosmopolitan Club (supra) and Fateh Maiden Club (supra) which remitted the matter applying the doctrine of mutuality after the constitutional amendment can be treated to be stating the correct principle of law?
iii. Whether the 46th amendment to the Constitution, by deeming fiction provides that provision of foods and beverages by the incorporated clubs to its permanent members constitute sale thereby holding the same to be liable to sales tax?”
4.At the time of admission, it was brought to the notice of this Court by the learned Standing Counsel representing the Department, that Civil Appeal No.4184 of 2009, in the case of State of West Bengal and Others vs. Calcutta Club Limited, was pending before the Hon’ble Supreme Court and had been referred to a Larger Bench with specific questions of reference. Since the issue involved in this appeal had a direct bearing on the outcome of the Calcutta Club case, it was prayed that the matter be admitted and its adjudication deferred.
5.Accepting the plea of the learned Standing Counsel for the Department, this Court recorded the order of reference to the Larger Bench of the Hon’ble Supreme Court and admitted the case.
6.Today, when the matter is taken up for final disposal, the learned Government Advocate appearing for the petitioner/Department circulated the judgment of the Hon’ble Supreme Court rendered by a Three-Judge Bench in the case of State of West Bengal & Ors. Versus Calcutta Club, delivered on October 03, 2019. In the said judgment, the Hon’ble Supreme Court endorsed and upheld the view taken by the Calcutta High Court and the High Court of Jharkhand that, services rendered to the members of a Club or Society do not constitute a taxable service and the doctrine of mutuality continues to be applicable to both incorporated and unincorporated members’ Clubs, even after amendment to the Constitution by insertion of Article 366.
7.In sum and substance, the Hon’ble Supreme Court has held that, any transaction or distribution of goods to the members of a society, as in this case, will not fall within the scope and ambit of the definition of ‘Sale’, if there is no element of profit making. In the present case, the consistent stand of the assessee is that the silk yarn was distributed to the members of the Society without any profit margin and therefore, it does not amount to sale. Hence, the exclusion of the value of these goods from the total taxable turnover is legal. Since the doctrine of mutuality applies to the transaction under consideration, the levy of tax on the transactions between the assessee and its members is ultra vires.
Following the dictum laid down by the Hon’ble Suprme Court in the case of State of West Bengal & Ors. and Calcutta Club, this Tax Case is dismissed. No costs.
