Deputy Commercial Tax Officer,
Saidapet & ANR Vs. Enfield India Ltd., Co-Operative Canteen Ltd.  INSC
270 (23 November 1967)
23/11/1967 SHAH, J.C.
CITATION: 1968 AIR 838 1968 SCR (2) 421
CITATOR INFO :
RF 1970 SC1212 (9) D 1985 SC1748 (9) RF 1986
Madras General Sales Tax Act 1 of
1959-Co-operative Society supplying goods to its members whether
'dealer'--supply of goods to members whether 'sale'-Explanation to s. 2(g) and
Explanation (1) to s.2(n) whether ultra vires.
The respondent was a registered Co-operative
Society under the Madras Co-operative Societies Act 6 of 1932. Its object was
to provide it canteen for the employees of a company.
The Society was assessed by the Deputy
Commercial Tax Officer to pay sales tax for the years 1959-60 and 1960-61 on
its turnover of refreshments supplied to its members. It challenged the
assessments in a writ petition under Art. 226 of the: Constitution contending
that supply of goods to its members did not amount to sale and therefore the
Explanation to s. 2(g) treating it as a 'dealer' and Explanation (1) to s. 2(n)
treating its transactions as, 'sales' were ultra vires. The High Court held in
favour of the Society. The Revenue appealed.
HELD : (i) A cooperative society registered
under the Madras Cooperative Societies Act, 1932 is by virtue of s. 20 of that
Act a body corporate with perpetual succession and common seal, and with power
to hold property, to enter into contracts, to institute and defend suits and
other legal proceedings and to do all things necessary for the purposes for
which it was constituted. Such a cooperative society which carries on the
business of supplying goods to its members for cash or deferred payment falls
within the definition of 'dealer' in s. 2(g). The Explanation to s. 2(g) was
not intended to overstep the limits of legislative power. By the Explanation
the State Legislature has merely clarified that a taxable entity will be
regarded as a dealer within the meaning of the Act even though it buys, sells,
supplies or distributes goods, from or to its members, whether in the course of
business or not : it is not intended' by the Explanation to declare all
transactions of the taxable entity with its members to he transactions of sale
or purchase. The explanation is a part of the definition of 'dealer' and not of
'sale'. For the purpose of levying sales tax it was open to the legislature to
devise a definition of the word 'dealer' and further to provide that certain
bodies shall be deemed to be dealers within the meaning of the Act. The High
Court therefore wrongly held the Explanation to s. 2(g) to be ultra vires the
State Legislature. [445 H-426 D] (ii) It cannot be urged as a proposition of
law that when a cooperative society supplies to its members refreshments for a
price under a scheme for distribution and supply of refreshments, the
transaction can in no event be regarded as a sale of the refreshments supplied
at a price. [429 IF] The question was one of lability under a taxing statute
and the court in determining the liability of the respondent society could not
ignore the form and look at what is called the 'substance of the transaction'.
The Society being incorporated was a person. It would not be, assumed 422 That
the property which it held was property of which its members were. the owners.
It was not an agent of the members or a trustee of the property on their
behalf. The property in the refreshments which it supplied to the members
vested in the Society and when refreshments were supplied for a price paid or
promised transfer of property in the refreshments resulted. Ex facie, the
transaction was one in which the legal owner of property transferred it to
another pursuant to a contract for a price. The transaction must be regarded as
a 'sale' within the substantive part of the definition of that expression and
no assistance from the Explanation (1) to s. 2(n) was necessary. The question
regarding the validity of the said Explanation did not therefore fall to be
determined in the present case. [429 F430 B] Young Mens' Indian Association
(Regd.) Madras & Anr. v. Joint Commercial-Tax Officer, Harbour Division II,
Madras, 14 S.T.C. 1030, State of Madras v. Gannon Dunkerley & Co.
Ltd.,  S.C.R. 379, .New Indian Sugar
Mills v. Commissioner of Sales Tax,  Supp. 2 S.C.R. 459 and Bhopal Sugar
Industries v. Sales Tax Officer,  1 S.C.R. 481, referred to.
Trebanog Working Men's Club and Institute
Ltd. v. Macdonald and Monkwearmouth Conservative Club Ltd. v. Smith,  1
K.B. 576, Graff v. Evans,  8 Q.B.D. 373, Metford v. Edwards,  1
K.B. 171 and National Sporting Club Ltd.
v. Cope, 82 L.T. 353, distinguished.
[Quaere : Whether an unincorporated club
supplying goods for a pi-ice to its members may be regarded as selling goods to
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 737 to 739 of 1966.
Appeals by special leave from the judgment
and order dated October 21, 1964 of the Madras High Court in Writ Appeals Nos.
289 to 291 of 1964.
A. K. Sen and A. V. Rangam, for the
appellants (in all the ;appeals).
K. R. Chaudhuri, for the respondents (in all
The Judgment of the Court was delivered by
Shah, J. The Enfield India Ltd. Co-operative Canteen Ltd.
respondent herein was registered as a
Co-operative Society under -the Madras Co-operative Societies Act 6 of 1932.
The object of the Society was to provide a canteen for the employees of Enfield
India Ltd. The Society was assessed by the Deputy Commercial Tax Officer to pay
sales tax for the years 1959-60 & 1960-61 on its turnover from refreshments
supplied to its members. The respondent Society then moved in the High Court of
Judicature at Madras three petitions under Art. 226 of the Constitution for orders
quashing the proceedings of the Deputy Commercial Tax Officer, Saidapet
assessing the Society to sales-tax in 'respect of its transactions. Srinivasan
J., following a decision of the Madras High Court : Young Mens Indian
Association (Regd.) 423 Madras and Another v. Joint Commercial Tax Officer,
Harbour Division II, Madras and Another(1) quashed the orders of assessment. In
appeal to the High Court, the orders passed by Srinivasan , J., were confirmed.
With special leave, the Deputy Commercial Tax Officer has appealed to this
Section 3 of the Madras General Sales Tax Act
1 of 1959 makes every dealer whose total turn-over for a year is not less than
ten thousand rupees, and every casual trader or agent of a non-resident dealer,
whatever be his turnover for the, year, liable to pay a tax for each year at
the rate of two per cent. of his taxable turnover. 'Dealer' is defined in s.
2(g) as meaningany 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
and includesExplanation.-A society (including
a cooperative 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;" Clause (n) of s. 2 defines 'sale' :
"sale" with all its grammatical
variations and 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, and includes a transfer of
property in goods involved in the execution of a works contract, 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 purposes of this Act.
Explanation (2) (1) 14 S.T.C. 1030.
424 Explanation (3).Explanation (4)."Turnover"
is defined in S. 2(r) and insofar as it is material it provides
"turnover" means the aggregate amount for which goods are bought or
sold, or supplied or distributed, by a dealer, either directly or through
another, on his own account or on account of others whether for cash or for
deferred payment or other valuable consideration, provided...............
The High Court of Madras in the case of Young
Mens' Indian Association(1) held that the Explanation to s. 2(g) and
Explanation (1) to s. 2(n) of the Act were ultra vires the State Legislature,
because they "created a fiction by which the concept of the word 'sale'
was extended to include, a transaction which properly speaking would not amount
to sale". The Court held that within the meaning of the Act an
incorporated members' club distributing refreshments to its members was not a
'dealer' and supply of food by it to its members for a price was not a 'sale',
since the members of a. club registered as a Company or as a Society merely
utilise the services of the club for their needs and the members divide amongst
themselves the total expenses.
Essentially, in the view of the Court, the
matter is not different from the case of a number of persons in a family
purchasing jointly an article and later sharing the same among themselves. In
such a case, it was said, there is no element of transfer of property from one
to another, and the fact that the; club helps its members in arranging to run a
common mess will not make it the owner of the articles supplied to the members,
for it is at best an agent or mandatory whose services are utilised by the
members for obtaining their needs,, and there is no transfer of property involved
in the arrangement. The Court proceeded further to observe that the distinction
between members' clubs unincorporated and incorporated is that in the former
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 latter the
supply of articles to a member is tantamount to delivery by an agent or trustee
to the principal or beneficiary, and there is in either case no transfer of
ownership by a person absolutely entitled to the property to another who
acquires title thereto on such transfer.
In these appeals the Deputy Commercial Tax
Officer contends that the transactions of the respondent Society are taxable
and (1) 14 S.T.C. 1030.
425 submits that the High Court was in error
in holding that the Explanations to s. 2(g) and s. 2(n) are ultra vires the
powers of the State Legislature. Entry 54 of List II of the Seventh Schedule of
the Constitution authorises the State Legislature to legislate on the topic of
tax on the sale or purchase of goods other than newspapers, subject to the
provisions of Entry 92A of List I. This Court has consistently held that the
expression "sale of goods" used in the legislative entries in the
Constitution and the Government of India Act, 1935, bears the same meaning
which it has in the Sale of Goods Act, 1930, and therefore the State
Legislature may under Entry 54 List II legislate in respect of the series of
acts beginning with an agreement of sale between parties competent to contract
and resulting in transfer of property from one of the parties to the agreement
to the other for a price, and matters incidental thereto, but cannot make a
transaction which is not a sale within the Sale of Goods Act a sale by a
statutory fiction and impose tax thereon : State of Madras v. Gannon Dunkerley
& Co. Ltd: (1), New Indian Sugar Mills v. Commissioner of Sales Tax: ( 2
and Bhopal Sugar Industries v. Sales Tax Officer(3). Consequently if the
element of transfer of property from one person to another is lacking in any
transaction, there is no sale and the Legislature cannot by treating it as a
sale by a deeming clause bring it within the ambit of the taxing statute.
We are however unable to hold that the
transactions of the respondent Society of supplying refreshments-to its members
for a price paid or promised were not taxable under the Madras General Sales
Tax Act, 1959. By the definition in s. 2(g) a 'dealer' is a person who carries
on the business of buying, selling. supplying or distributing goods, whether
for cash, or for deferred payment, or for other valuable consideration. The
expression 'business' is defined in s. 2(d) as meaning any trade, commerce or
manufacture or any adventure or concern in the nature of trade. commerce or
manufacture, whether or not any profit accrues from such trade, commerce,
manufacture, adventure or concern. A scheme for supplying goods to its members
by a Society for price may partake of the activity of the nature of adventure
or concern in the nature of trade, even if the activity is not actuated by a
profit motive. The respondent Society which has according to its object of incorporation
made arrangements for the supply and distribution of refreshments, to its
members without a profit motive may be regarded as carrying on trade and would
on that account fall within the definition of a 'dealer' within the meaning of
s. 2(g). A Co-operative Society registered under the Madras Co-operative
Societies Act 6 of 1932 is by virtue of s. 20 of that (1)  S.C.R. 379.
 Supp. 2 S.C.R. 459.
(3)  1 S.C.R. 481.
426 Act a body corporate with perpetual
succession and a common seal, and with power to hold property, to enter into
contracts, to institute and defend suits and other legal proceedings and to do
all things necessary for the purposes for which it was constituted. Such a
co-operative society which carries on the business of supplying goods to its
members for cash or deferred payment falls within the definition of 'dealer' in
s. 2(g). We are unable to hold.
that by the -Explanation to s. 2(g) it was
intended to overstep the limits of legislative power. By the Explanation the
State Legislature has merely clarified that a taxable entity will be regarded
as a dealer within the meaning of the Act even though it buys, sells, supplies
or distributes goods from or to its members, whether in the course of business
or not : it is not intended by the Explanation to declare all transactions of
the taxable entity with its members to be transactions of sale or purchase. The
Explanation is a part of the definition of "dealer" and not of
"sale". For the purpose of levying sales tax it was open to the
Legislature to devise a definition of the word "dealer" and further
to provide that certain bodies shall be, deemed to be dealers within the
meaning of the Act. We are unable, therefore, to agree with the -High Court
that the Explanation to s. 2(g) is ultra vires the State Legislature.
For turnover from a transaction to be taxable
under the Act, the transaction must have, four constituent elements, viz.
(1) parties competent to contract; (2) mutual
assent; (3) thin-, the absolute or general property in which is transferred
from the seller to the buyer; and (4) price in money paid or promised. When a
Co-operative Society supplies to its members for a price refreshments in the
canteen maintained by it the four constituent elements of sale are normally
present : the parties are competent to contract;
there is mutual assent; refreshments which
belonged absolutely to the Society stand transferred to the buyer and price is
either paid or promised.
There is nothing on the record of the case
which shows that the Society is acting merely as anagent of its members in
providing facilities for making food available to the members. From the mere
fact that the Society. supplies refreshments to its members only and claims to
make no profit, it cannot be inferred that in preparing refreshments, and
making them available to its members it is acting as an agent of the members.
Nor can it be said that the Society is holding its property including
refreshments prepared by it for supply to its members as a trustee for its
members. A registered Society is a body 'corporate with power to hold property
and is capable of entering into contracts. It cannot be assumed that property
which it holds is property of which its members are owners. The property in law
is the property of 427 the Society. The members are undoubtedly entitled to
compel the Society to act according to its constitution and to apply the
property for the purposes for which it is held, but on that account the
property of the Society cannot be treated as the property of the members. The
Society is a person : the property in the refreshments which it supplies to its
members is vested in the Society and when refreshments are supplied for a price
paid or promised transfer of property in the refreshment results. In the case,
of an unincorporated Society, club or. a firm or an association ordinarily the
supply and distribution by such a Society, club, firm or an association of
goods belonging to it to its members may not result in sale of the goods which
are jointly held for the benefit of the members by the Society, club, firm or
the association, when by virtue of the relinquishment of the common rights of
the members the property stands transferred to a member in payment of a price,
and the transaction may not prima facie be regarded as a 'sale' within the
meaning of the Act. By providing that a transfer of property in goods from a
corporate body to its members for a price, the Legislature does not overstep
the limits of its authority,_ and it cannot on that account be held that the
first Explanation to s. 2(n) is in its entirety ultra vires the State
Legislature. It is, however, unnecessary in this case to say more, for, the
case of the respondent Society falls within the definition of 'sale' and no
assistance need be sought from the first Explanation to s. 2(n).
Reference may briefly be made to the judgment
in Trebanog Working Men's Club and Institute Ltd. v. Macdonald and Monkwearmouth
Conservative Club Ltd. v. Smith(1), on which the High Court strongly relied. In
a members' club incorporated under the Industrial and Provident Societies Acts,
the shareholers and the members were identical. The club purchased intoxicating
liquor and supplied it from time to time to individual members for payment as
in an ordinary club. The Society was convicted of selling by retail, contrary
to s. 65 ,of the Licensing (Consolidation) Act, 1910, certain intoxicating
liquor without a justices' licence. The Court of Appeal quashed the conviction
holding the incorporated society was a legal entity distinct from the members,
and could act as their agents or trustees, the real interest in the liquor
being in the members, and the Society was not obliged to take out a licence,
for sale of liquor by retail. The principle of that case has, in our judgment,
no application to the case before us. There was a long course of authorities in
the Courts in England dealing with the liability of the clubs supplying
intoxicating liquors to their members to obtain the justices' licence.
In Graff v. Evans (2) , Graff, the manager of
an unincor(1)  1 K.B. 576. (2)  8 Q.B.D. 373.
428 porated club, the property of which was
vested in trustees, and the committee of management whereof arranged to supply
liquor to its, members at a fixed percentage above its cost, supplied liquor to
a member, and he was prosecuted for selling by retail intoxicating liquor
without a licence. It was held that there was no sale by retail, for the member
was as much a co-owner of the liquor supplied as any other member of the club.
Any member of the club was entitled to obtain liquor on payment of the price
.and since there was no bargain, nor any contract with the manager in respect
of the liquor supplied, and the member to whom the liquor was supplied was acting
upon his rights as an member of tile club, not by reason of any new contract,
but under his old contract of association by which he subscribed a sum to the
funds ,of the club, and on that account he became entitled to have liquor
supplied to him as a member at a certain price.
In Metford v. Edwards(1) a working men's club
was registered under the Friendly Societies Act, 1896. It was held that .liquor
kept on the premises of the club by the members who are owners of the liquor
and intended for consumption by the members, is distributed to the members by
one of them in return for payment, is not sold by retail within the meaning of
the Licensing (Consolidation) Act, 1910.
In Notional Sporting Club Ltd. v. Cope(1) it
was held that member's club formed into a joint stock company, of which shares
were held by persons who were not members, was guilty of breaches of s. 17 of
the Beerhouse Act, 1834, and S. 19 of the Refreshment Houses Act, 1860, when in
carrying on the club retail intoxicating liquors and tobacco were supplied to
the members of the club. The Court held in that case that the: Company was a
separate legal entity from the members, and the sale of 'intoxicating liquors
to members was not a distribution of the common property of the members among
themselves. Channell -J.,, observed at p. 354 :
"Now the law with reference to purely
members' clubs may be taken to be settled, namely, that in the, cases of purely
members' clubs a licence is not required, that the form that is gone through in
the coffee room or in other parts of the club house where refreshments are sold
is in one sense not a selling of liquors so as, to make the licensing laws
applicable, but that it is merely a mode of distributing, common
property." The question was again raised before the Court of Appeal in
Trebanog working Men's Club and Institute Ltd. v. Mac(1)  1 K.B. 171 (2)
82 L.T. 353.
429 donald(1). Hewart, C.J., delivering the
judgment of the Court observed that the principle of the decision in Graff v.
Evans(2) applied even though the clubs before the Court were incorporated
either, under the Industrial and Provident Societies Acts or the companies Act.
The learned Chief Justice observed at p. 582 "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 entities 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 liquor
remains, as in this case it clearly does, in the members of the club. There is
no magic in this connection in the expressions "trustee" or
"agent". What is essential is that the holding of the property by the
agent or trustee must be a holding for and on behalf of, and not holding
antagonistic to, the members of the club." The Courts in these cases were
dealing with case of quasicriminal nature, and the substance of the transaction
rather than the legal form in which it may be clothed had to be determined. It
was held that if in substance the property in the liquor held the club-whether
incorporated or unincorporated-was vested in the members, when a member
received and paid for it, there was no sale within the meaning of the Licensing
Act, but was a transfer of a special property in the goods from all the other
members of the club to the consumer in consideration of the price paid.
We are not dealing in this case with
liability criminal or quasicriminal. The question is one of liability under a
taxing statute and the Court in determining the liability of the Society to pay
tax cannot ignore the form and look at what is called the "substance of
the transaction". Ex facie, the transaction is one in which the legal
owner of property transfers it to another pursuant to a contract for a price,
and that transaction must be regarded as a sale.
Whether by appropriate provisions in the
Articles of Association or Rules, a scheme may be devised tinder which the
goods supplied may be treated as belonging to the members of the Society, and
the Society merely acts as an agent in supplying the food to its members, need
not be considered in the present case. It will suffice to state that it cannot
be urged as a proposition of law that when a Co-operative Society supplies to
its members refreshments for a price under a scheme for distribution or (1)
 1 K.B. 576.
L1Sup.CI/68-13 (2)  8 Q.B.D. 373.
430 supply of refreshments, the, transaction
can in no event be regarded as a sale of the Refreshments supplied for a price.
We are not called upon in this case to decide
whether an unincorporated club supplying goods for a price to its members may
be regarded as selling goods to its members.
We are of the view that the Explanation to s.
2(g) of the Madras General Sales Tax Act 1 of 1959 is not ultra vires the
Legislature. Whether any part of the Explanation (1) to S. 2(n) is ultra vires
the Legislature does not fall to be determined in this case, for, we are of the
view that the transactions of the respondent Society fell within the
substantive part of the definition of the expression " sale", and on
that account those transactions are taxable under the Madras General Sales Tax
Act 1 of 1959.
The appeals must therefore be allowed, and
the petitions file by the Society dismissed. In view of the order passed by
this Court on August 12, 1965, when leave was granted to appeal to this Court,
the appellant will pay costs of these appeals to the respondent. There will be
one hearing fee in the three appeals.