RAJPATH CLUB LTD V. UNION OF INDIA

SCA/13655/2005

AI Insights

The case involves three clubs in Ahmedabad - Sports Club of Gujarat Limited, Rajpath Club Limited, and Karnavati Club Limited - challenging the constitutional validity of certain provisions of the Finance (No.2) Act, 1994 as amended by the Finance Act, 2005, which imposed service tax on services provided by the clubs to their members. The clubs argued that these provisions were unconstitutional and beyond the legislative competence of the Parliament, citing the principle of mutuality, which posits that transactions within a mutual association (like a club and its members) do not constitute separate taxable entities. The High Court of Gujarat, referencing judgments from the Supreme Court and other High Courts, upheld the clubs' contention, declaring the contested provisions as ultra vires.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 723080 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 25-03-2013
• Assessment Year: misc
• Other Referred Cases: Ranchi Club Ltd. v. Chief Commr. of C.Ex & S.T., Ranchi Zone, Joint Commercial Tax Officer Vs. The Young Mens' Indian Association, Commissioner of Income Tax Vs. Ranchi Club Limited
• Laws Referred To: Finance (No.2) Act, 1994, Finance Act, 2005, Companies Act, 1956, Sales of Goods Act, 1930
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: JITENDRA MALKAN; R J OZA; Y N RAVANI
• Assessee Lawyers: S N SOPARKAR; V N NAIR
• Keywords: Legislative Competence; Mutuality; Service tax; Ultra Vires; Unconstitutional
• Section: 66; 65(25a); 65(105)(zzze)

Judgement Text

"C/SCA/13654/2005 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 13654 of 2005 With SPECIAL CIVIL APPLICATION NO. 13655 of 2005 TO SPECIAL CIVIL APPLICATION NO. 13656 of 2005 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE RAVI R.TRIPATHI and HONOURABLE MR.JUSTICE R.D.KOTHARI ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ SPORTS CLUB OF GUJARAT LTD....Petitioner(s) Versus UNION OF INDIA & 3....Respondent(s) ================================================================ Appearance: SCA 13654/2005 MR SN SOPARKAR, Sr. Advocate with MR VN NAIR FOR NANAVATI & NANAVATI, ADVOCATE for the Petitioner(s) No. 1 Page 1 of 12 C/SCA/13654/2005 JUDGMENT MR JITENDRA MALKAN, ADVOCATE for the Respondent(s) No. 2 MR RJ OZA, ADVOCATE for the Respondent(s) No. 2 MR YN RAVANI, ADVOCATE for the Respondent(s) No. 1 – 4 SCA 13655/2005 MR MIHIR JOSHI, Sr. Advocate with MR VN NAIR FOR NANAVATI & NANAVATI, ADVOCATE for the Petitioner(s) No. 1 MR JITENDRA MALKAN, ADVOCATE for the Respondent(s) No. 2 MR RJ OZA, ADVOCATE for the Respondent(s) No. 2 MR YN RAVANI, ADVOCATE for the Respondent(s) No. 1 – 4 SCA 13656/2005 MR SI NANAVATI, Sr. Advocate with MR VN NAIR FOR NANAVATI & NANAVATI, ADVOCATE for the Petitioner(s) No. 1 MR JITENDRA MALKAN, ADVOCATE for the Respondent(s) No. 2 MR RJ OZA, ADVOCATE for the Respondent(s) No. 2 MR YN RAVANI, ADVOCATE for the Respondent(s) No. 1 – 4 ============================================================ ==== CORAM: HONOURABLE MR.JUSTICE RAVI R.TRIPATHI and HONOURABLE MR.JUSTICE R.D.KOTHARI Date : 25/03/2013 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE RAVI R.TRIPATHI) 1. Three different clubs of City of Ahmedabad, named, Sports Club of Gujarat Limited, Rajpath Club Limited and Karnavati Club Limited are before this Court making almost identical prayers. Prayer made in SCA No.13654 of 2005 by petitioner - Sports Club of Gujarat Limited in Para.16(A) is as under : “16(A) Your Lordships be pleased to issue a writ Page 2 of 12 C/SCA/13654/2005 JUDGMENT of or in the nature of mandamus declaring Section 65(25a), Section 65(105) (zzze) and Section 66 of the Finance (No.2) Act,1994 as incorporated / amended by the Finance Act,2005 to the extent that the said provisions purport to levy service tax in respect of services purportedly provided by the petitioner club to its members, as being ultra vires, beyond the legislative competence of the Parliament, unconstitutional, illegal and void.” 2. It is also prayed in Clause (B) that, “16(B). Your Lordships be pleased to issue a writ of or in the nature of mandamus commanding the respondents to forebear from imposing or enforcing the provisions of the Finance (No.2) Act,1994 as amended by the Finance Act,2005 or Rules, Notifications or Orders thereunder so as to levy service tax in respect of services purportedly provided by the petitioner club to its members.” 3. Heard learned Senior Advocate Mr.S.N.Soparkar with learned advocate Mr.V.N.Nair for petitioner in SCA No.13654 of 2005, learned Senior Advocate Mr. Mihir Joshi with learned advocate Mr.V.N.Nair for petitioner in SCA No.13655 of 2005 and learned Senior Advocate Mr.S.I.Nanavati with learned advocate Mr.V.N.Nair for the petitioner in SCA No.13656 of 2005. 4. Learned Senior Advocates for the petitioners made a common argument that the matters are covered by the Page 3 of 12 C/SCA/13654/2005 JUDGMENT judgments which are more than one in number but, last in the line is the judgment of the Division Bench of Jharkahnd High Court at Ranchi in the matter of Ranchi Club Ltd. v. Chief Commr. of C.Ex & S.T., Ranchi Zone, reported in 2012 (26) S.T.R. 401 (Jhar.). Learned Senior Advocates submitted that the principle which fell for consideration of the Division Bench of Jharkhand High Court was the principle of mutuality and in this regard, learned Senior Advocates invited attention of the Court to the facts set out in the said judgment in Para.3 which reads as under : “As we have noticed that petitioner's contention is that petitioner is a club and also registered company under the Companies Act, 1956. The petitioner is giving service to its members but the club is formed on the principle of mutuality and, therefore, any transaction by the club with its member is not a transaction between two parties. However, being a company, it may enter into a transaction with anybody, a 3rd person, not a member, then in that situation, this club becomes a legal entity and can certainly enter into any transaction and such transaction are not on the principle of mutuality and, therefore, may be liable to any tax as a transaction between two parties. However, when the club is dealing with its members, it is not a separate and distinct individual. It is submitted that in identical facts and circumstances, however, in the matter of imposition of sales tax, when the club was expressly included in the statutory definition of 'dealer' under Madras Page 4 of 12 C/SCA/13654/2005 JUDGMENT General Sales Tax Act, 1959, so as to bring the club within the purview of taxing statute of the Madras Sales Tax, the Hon'ble Supreme Court, in the case of the Joint Commercial Tax Officer Vs. The Young Mens' Indian Association, considered the definition of the 'dealer' by which the club was declared “dealer” and after considering the definition of “sale” as given in the Act of 1959 and explanation-I appended to Section 2(n), specifically declaring the “sale” or “supply or distribution of goods by a club” to its members whether or not in the course of business was declared deemed to be a “sale” for the purpose of the said Act. In that situation, Hon'ble Supreme Court considered the issue that the club is rendering service or selling any commodity to its members for a consideration then whether that amounts to sale or not. Hon'ble Supreme Court held that it is a mutuality which constitutes the club and, therefore, sale by a club to its member and its services rendered to the members, is not a sale by club to the members. In sum and substance, the ratio is that for a transaction of sale, there must be two persons in view of this judgement as well as in view of the Full Bench Judgement of this Court delivered in the petitioner's own case i.e., Commissioner of Income Tax Vs. Ranchi Club Limited reported in 1992(1)PLJR 252 (Pat) (Fb). The Full Bench of this Court while considering the identical issue in the matter of imposition of income tax, observed that no Page 5 of 12 C/SCA/13654/2005 JUDGMENT one can earn profit out of himself on the basis of principle of mutuality and held that income tax cannot be imposed on the transaction of the club with its members.” (emphasis supplied.) 5. Learned Senior Advocates for the petitioners invited attention of the Court to Para.15, 16 and 17 which are reproduced for ready perusal. “15. The question which was considered by the Hon'ble Supreme Court in the case of Joint Commercial Tax Officer, Harbour Division, II- Madras Vs. The Young Men's Indian Association reported in 1970(1) SCC 462 was that whether the supply of various preparations by each club to its members involve a transaction of sale within the meaning of Sales of Goods Act, 1930. Hon'ble Supreme Court held that - ‘Thus in spite of the definition contained in Section 2(n) read with Explanation I of the Act if there is no transfer of property from one to another there is no sale which would be exigible to tax. If the club even though a distinct legal entity is only acting as an agent for its members in matter of supply of various preparations to them no sale would be involved as the element of transfer would be completely absent. This position has been rightly accepted even in the previous decision of this Court’. Page 6 of 12 C/SCA/13654/2005 JUDGMENT 16. The Hon'ble Supreme Court held so after considering the English Law also and observed that the law in England has always been that members' clubs to which category the clubs in the present case belong cannot be made subject to the provisions of the Licensing Acts concerning sale because the members are joint owners of all the club property including the excisable liquor. The supply of liquor to a member at a fixed price by the club cannot be regarded to be a sale. If, however, liquor is supplied to and paid for by a person who is not a bona fide member of the club or his duly authorised agent, there would be a sale. With regard to incorporated clubs a distinction has been drawn. Where such a club has all the characteristics of a members' club consistent with its incorporation, that is to say, where every member is a shareholder and every shareholder is a member, no licence need to be taken out if liquor is supplied only to the members. If some of the shareholders are not members or some of the members are not shareholders, that would be the case of a proprietary club and would involve sale. Proprietary clubs stand on a different footing. The members are not owners of or interested in the property of the club and then the Hon'ble Supreme Court observed that above view was accepted by the various High Courts in India. The Hon'ble Supreme Court, relying upon other judgements held that members' club is only structurally a company and it did not carry on trade or business so as to attract the corporation Page 7 of 12 C/SCA/13654/2005 JUDGMENT profit tax. Therefore, in spite of specific inclusion of the club in the definition of the dealer in the Madras General Sales Tax Act, 1959 by providing an explanation to include the clubs which are selling or distributing the goods to its members for cash have been included in the definition of dealer and by explanation I to Section 2(n) defining the sale the statutory provision was made to include any transfer of property by club to its members to be a sale for the purpose of the said Act, Hon'ble Supreme Court categorically held that in absence of two, there cannot be transaction of transfer of property. 17. The Full Bench of Patna High Court in the case of writ petitioner itself i.e., in the case of Commissioner of Income Tax Vs. Ranchi Club Limited (Supra), after finding that Ranchi Club is a limited company incorporated under the Indian Companies Act, considered the various clauses of the main objects of the club and relying upon various judgements, in paragraph 12 observed as under :- 12. Therefore, by applying the principle of mutuality Members” Clubs always claim exemption in respect of surplus accruing to them out of the contributions received by the clubs from their members. But this principle cannot have any application in respect of the surplus received from non-members. It is not difficult to Page 8 of 12 C/SCA/13654/2005 JUDGMENT conceive of cased where one and the same concern may indulge in activities which are partly mutual and partly non-mutual. True, keeping in view the principle of mutuality, the surplus accruing to a Members' Club from the subscription charges received from its members cannot be said to be income within the meaning of the Act. But, if such receipts are from sources other than the members, then still can it be s aid that such receipts are not taxable in the hands of the club? The answer is obvious. No exemption can be claimed in respect of such receipts on the plea of mutuality. To illustrate, a Members' Club may have income by way of interest, security, house property, capital gains and income from other sources. But such income cannot be said to be arising out of the surplus of the receipts from the members of the club. and answered the question in affirmative and questions referred were as under :- (I) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the assessee-club is a 'mutual concern'? (II) Whether, on the facts and circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from its house property let to its members and their guests is not chargeable to tax? (III) Whether, on the facts and in the circumstances Page 9 of 12 C/SCA/13654/2005 JUDGMENT of the case, the Tribunal has rightly held that the income derived by the assessee-club from sale of liquor, etc., to its members and their guests is not taxable in its hands?” 6. Learned Senior Advocates submitted that after the careful consideration of the facts of the case, the Division Bench of the Jharkhand High Court held as under : “18. However, learned counsel for the petitioner submits that sale and service are different. It is true that sale and service are two different and distinct transaction. The sale entails transfer of property whereas in service, there is no transfer of property. However, the basic feature common in both transaction requires existence of the two parties; in the matter of sale, the seller and buyer, and in the matter of service, service provider and service receiver. Since the issue whether there are two persons or two legal entity in the activities of the members' club has been already considered and decided by the Hon'ble Supreme Court as well as by the Full Bench of this Court in the cases referred above, therefore, this issue is no more res integra and issue is to be answered in favour of the writ petitioner and it can be held that in view of the mutuality and in view of the activities of the club, if club provides any service to its members may be in any form including as mandap keeper, then it is not a service by one to another in the light of the decisions referred above as foundational facts of Page 10 of 12 C/SCA/13654/2005 JUDGMENT existence of two legal entities in such transaction is missing. However, so far as services by the club to other than members, learned counsel for the petitioner submitted that they are paying the tax.” 7. Learned advocate Mr.Ravani appearing for the Authorities i.e. Union of India, Commissioner of Central Excise, and Deputy Commissioner / Assistant Commissioner, Service Tax Cell, vehemently opposed the petitions and submitted that the Department has not accepted the aforesaid judgment. Learned advocate submitted that the Department has filed SLP before the Hon’ble Apex Court and the judgment is under challenge. Merely because the judgment is not accepted by the Department, its persuasive value is not lost and it can always be considered by this Court for its persuasive value, more particularly when the said judgment has relied upon a decision of the Full Bench of Patna High Court in the matter of Commissioner of Income-tax v. Ranchi Club Ltd., 1992 (1) PLJR 252 (Pat) (FB), which is referred to by the Division Bench. 7.1 Learned advocate for the Department also submitted that there is no question of mutuality because the club is a legal entity as it is incorporated under the Companies Act. This Court is unable to accept the submissions made by learned advocate for the Department because they were the very facts before the Division Bench for consideration and learned advocate for the Department could not set out any convincing grounds on which this Court should not follow the decision of the Division Bench of Jharkhand High Court. Page 11 of 12 C/SCA/13654/2005 JUDGMENT 8. In the result, these petitions are allowed and it is hereby declared that Section 65(25a), Section 65(105) (zzze) and Section 66 of the Finance (No.2) Act,1994 as incorporated / amended by the Finance Act,2005 to the extent that the said provisions purport to levy service tax in respect of services purportedly provided by the petitioner club to its members, to be ultra vires. Rule is made absolute with no order as to costs. 8.1 At this juncture, learned advocate for the Department prays that this judgment be stayed for a period of six weeks so as to enable the Department to carry the matter further. Request is granted. (RAVI R.TRIPATHI, J.) (R.D.KOTHARI, J.) vipul Page 12 of 12 "