TAXING TRANSACTIONS BETWEEN CLUBS AND THEIR MEMBERS: AN ELUSIVE

TERRAIN FOR THE LEGISLATURE?

*Tarun Jain

A. Background

The Constitution of India provides for distribution of legislative subjects between the Union and the
States.1 These subjects include taxing subjects as well. Before the Constitution (One Hundred and
First Amendment) Act, 2016 (hereinafter, the ‘101st Amendment’), the levy of ‘taxes on the sale or
purchase of goods’2 was within the remit of the States.3 Soon after the enforcement of the
Constitution, however, the Supreme Court in its famous decision in Gannon Dunkerley severely
limited the scope of this taxation power of the States.4 In this case, it was held that the expression
‘sale’ had a limited meaning and it encompassed only the traditional class of sale as understood in
law (i.e., the Sale of Goods Act, 1930).

Following the reasoning in Gannon Dunkerley, the Supreme Court on a number of occasions
invalidated the levy of tax by the States by highlighting the limitations on the taxing powers.
Subsequently, the Constitution was amended in order to address the reasons in Gannon Dunkerley
and subsequent decisions, and to expand the scope of taxing power of the States. Notwithstanding the
amendment, one issue which has persisted is the power of the States to tax transactions between an
association and its members. This aspect is addressed in this article which seeks to unravel the
controversy, the stipulations of the constitutional amendment, the judicial construction which
virtually sets to naught this amendment and the recent attempt made by the Parliament to assert its
taxing entitlement.

* Partner, BMR Legal and Advocate, Supreme Court of India. The author acknowledges assistance of Ms. Namrata
Rawat, 4th Year, B.A. LL.B. (Hons.), Rajiv Gandhi National University of Law (RGNUL), Punjab in finalisation of this
article.
1
Article 246 read with Schedule 7, Constitution of India.
2
Entry 54, List II, Seventh Schedule, Constitution of India.
3
It is noteworthy that the 101st Amendment does not omit this remit and instead only reduces its scope to select species
of goods. The amended Entry 54 provides for “Taxes on the sale of petroleum crude, high speed diesel, motor spirit
(commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not
including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of
such goods.”
4
State of Madras v. Gannon Dunkerley & Co., AIR 1958 SC 560.
B. YMIA decision: Sowing the seeds of discord

One of the leading cases reflecting the tussle between the tax authorities and clubs is the case where
the Young Men Indian Association (“YMIA”), Madras challenged the levy of sales tax on the supply
of food, snacks, beverages and other articles to their members or their guests. The High Court agreed
to hold that neither the Association could be considered a ‘dealer’ nor “was any ‘sale’ involved in the
aforesaid activity”. Rejecting the appeal against the determination by the High Court, the Supreme
Court in its decision in YMIA5 noted that the law was well settled in England and the Indian High
Courts were also consistent in the view that there appeared to be no sale by a club to its members.

Authoring the majority decision for the Supreme Court in YMIA, Grover J. stressed upon two aspects:
(a) the fact of non-incorporation of the clubs to affirm this position, distinguishing the situations of
clubs incorporated as co-operative societies, companies, etc., and (b) that the club was “only acting
as an agent for its members in matter of supply of various preparations to them [and therefore] no
sale would be involved as the element of transfer would be completely absent”.

In a separate concurring opinion in YMIA, Shah J. elaborated on the first aspect, inter alia, in the
following terms:

“Whether refreshments, beverages and other articles supplied by a Members’ Club

for consideration to its members are in law sold depends upon the circumstances in
which the transaction takes place. In each case the liability to tax of the transaction
will depend upon its strictly legal form. If an incorporated members’ club supplies its
property to its members at a fixed tariff, the transaction would readily be deemed to
be one for sale, even if the transaction is on a non-profit basis: such a transaction
would be liable to Sales Tax. Where, however, the club is merely acting on behalf of
the members to make available to them refreshments, beverages and other articles, the
transaction will not be regarded as a sale, for the club is the agency through which
the members have arranged that the refreshments, beverages and other articles should
be made available. The test in each case is whether the club transfers property

5
Joint Commercial Tax Officer, Harbour Division, II-Madras v. The Young Men’s Indian Association (Regd.), Madras,
(1970) 1 SCC 462.
 belonging to it for a price or the club acts as an agent for making available property
belonging to its members.”

Highlighting the undisputed factual findings of the High Court “that the clubs or associations sought
to be rendered liable in these appeals were not transferring property belonging to them but were
merely acting as agents for and on behalf of the members”, Shah J. concluded that “[t]hey were not
selling goods but were rendering a service to their members”.

Thus, the Supreme Court concluded that the transactions between clubs and their members could not
be subjected to sales tax.

C. Law Commission’s 61st Report: No remedial proposal!

Perceiving the decision in Gannon Dunkerley and others as strenuous limitations on their taxing
entitlements, the States were unison that a solution was necessary in order to ensure their fiscal
stability. This translated into the 61st Report of the Law Commission of India6 which dedicated a
separate chapter to the issues relating to ‘Sale by Associations to Members’.7

The Law Commission acknowledged that “[t]he broad general principle which constitutes a common
feature of these transactions, is the absence of a transfer of property. It would appear that these
transactions are not ‘sale’, because there is no transfer of property.” However, uncharacteristically,
the Law Commission did “not recommend any change”. It attributed its conclusion to the following
reasons:

(a) In ordinary course the clubs could not be taxed under the existing sales tax laws and “the
taxability of such transactions … [could be achieved only] by expanding the concept of ‘sale’
for the purpose of the legislative power of the States, – a result which can be achieved only be
amending the Constitution”;

6
Law Commission of India, Sixty-First Report on Certain Problems Connected with Powers of the States to Levy a Tax
on the Sale of Goods and with the Central Sales Tax Act, 1956, (May 1974), available at
https://lawcommissionofindia.nic.in/51-100/Report61.pdf.
7
Ibid, Chapter 1-D.
 (b) Having said so, however, “it would not be appropriate to amend the Constitution for this
purpose … [because the] number of such clubs and associations would not be very large …
[and] taxation of such transactions might discourage the co-operative movement”;
(c) In particular, the option of a constitutional amendment to address the issue was not
pragmatic in view of the fact that “[u]nincorporated associations exist in a ‘myriad of structural
arrangements …”; and
(d) In any case, “there can be no serious question of evasion in such cases” and therefore a
constitutional amendment for this purpose was unnecessary.

In brief, despite accepting the existence of rigours on the taxing power of the States with regards to
the transactions between the clubs and their members, the Law Commission did not make any
recommendation so as to turn the tide against the clubs and their members.

D. 46th Constitutional Amendment: Plugging the gap?

Notwithstanding its reasons and merit, the lawmakers did not converge with the policy
recommendations of the Law Commission on the aspect of withholding tax on transactions between
clubs and their members. Instead, going diametrically opposite and adopting the same course which
the Law Commission desisted from, the lawmakers chose to amend the Constitution of India with an
objective of specifically empowering the States to levy tax on such transactions.8

As a part of a new definition clause, Article 366(29A) was inserted in the Constitution by the 46th
Amendment in the year 1982 wherein clause (e) exclusively addressed the issues relating to levy of
sales tax on transactions between clubs and their members. It provided that “a tax on the supply of
goods by any unincorporated association or body of persons to a member thereof for cash, deferred
payment or other valuable consideration” shall be considered as included in a tax on sale or purchase
of goods which the States are competent to levy.

8
Refer, Statement of Objects and Reasons, Constitution (Forty-sixth Amendment) Bill, 1981. It was inter alia stated in
this Statement that “(2) By a series of subsequent decisions, the Supreme Court has, on the basis of the decision in Gannon
Dunkerley’s case, held various other transactions which resemble, in substance, transactions by way of sales, to be not
liable to sales tax. … (3) This position has resulted in scope for avoidance of tax in various ways. … Similarly, while sale
by a registered club or other association of persons (the club or association of persons having corporate status) to its
members is taxable, sales by an unincorporated club or association of persons to its members is not taxable as such club
or association, in law, has no separate existence from that of the members. … (9) It is, therefore, proposed to suitably
amend the Constitution to include in article 366 a definition of ‘tax on the sale or purchase of goods’ by inserting a new
clause (29A). …” It is noteworthy that both, i.e. (a) this Statement of Objects and Reasons, and (b) clause (e) of Article
366(29) deal only with unincorporated clubs and do not make any reference to clubs in incorporated form.
E. Post-amendment jurisprudence: Non-taxation situation continues?

If the purpose of the amendment to the Constitution was to ensure that the States could reassert their
taxing entitlement upon the transactions between the clubs and their members, the purpose was not
realised in the wake of judicial refusal to completely abandon its enunciation of the pre-amendment
legal position.

To exemplify, as early as in the year 1994, by way of a short order, the Supreme Court in Automobile
Association observed that “for the period commencing from 1-10-1983 in view of the constitutional
amendment, the levy can be sustained” on the club.9 However, this position was not consistently
applied by the Supreme Court. For illustration, in the year 1998 in Fateh Maidan, the Supreme Court
continued to apply the YMIA principle being of the view that “[a] club is identified with its members
at a given point of time, so that it cannot be said that a club has an existence apart from its members”.10
It is noteworthy the constitutional amendment and Article 366(29A)(e) were not referred by the
Supreme Court in Fateh Maidan. In Cosmopolitan Club (2008), however, despite noting the
constitutional amendment, the Supreme Court continued to give credence to the YMIA principle.11

These decisions and other vagaries in the application of Article 366(29A)(e) were acknowledged by
the Supreme Court in 2017 to opine that a categorical enunciation of the correct legal position was
warranted because it was “desirable that the position should be clear”. Accordingly, the liswas
referred for consideration before a larger bench seeking determination of the following questions:12

“(i) Whether the doctrine of mutuality is still applicable to incorporated clubs or any
club after the 46th Amendment to Article 366(29-A) of the Constitution of India?
(ii) Whether the judgment of this Court in the Young Men India Association still holds
the field even after the 46th Amendment of the Constitution of India; and whether the
decisions in Cosmopolitan Club and Fateh Maidan which remitted the matter applying
the doctrine of mutuality after the constitutional amendment can be treated to be
stating the correct principle of law?

9
Automobile Association of Eastern India v. State of West Bengal, (2017) 11 SCC 811.
10
Fateh Maidan Club v. Commercial Tax Officer, (2017) 5 SCC 638.
11
Cosmopolitan Club v. State of Tamil Nadu, (2017) 5 SCC 635.
12
State of West Bengal v. Calcutta Club Ltd., (2017) 5 SCC 356.
 (iii) Whether the 46th Amendment to the Constitution, by deeming fiction provides that
provision of food and beverages by the incorporated clubs to its permanent members
constitute sale thereby holding the same to be liable to sales tax?”

It is noteworthy that while making this reference, the Supreme Court recorded the contention of the
tax authorities that the ‘principle of mutuality’ and the ‘principle of agency’ – which constituted the
underlying rationale for debarring the levy of sales tax on transactions between clubs and their
members – had lost force in view of the constitutional amendment. While making the reference, the
Supreme Court also sought to elaborate the context in which the principle of mutuality was relied
upon by the clubs to claim their non-taxable position and the rationale for a clearer enunciation of the
law. It was in this background that a larger bench, comprising of three-judges of the Supreme Court,
was constituted which rendered the 2019 decision in Calcutta Club.13

F. Calcutta Club decision: Making constitutional amendment redundant?

Speaking through Nariman J., a unanimous Supreme Court in Calcutta Club, turned the cart before
the constitutional amendment and answered the reference in the following terms:

“1. The doctrine of mutuality continues to be applicable to incorporated and

unincorporated members’ club after the 46th Amendment adding Article 366(29A) to
the Constitution of India.
2. Young Men India Association and other judgments which applied this doctrine
continue to hold the field after the 46th Amendment.
3. Sub-section (f) of Article 366(29A) has no application to members’ clubs.”

In other words, according to the Supreme Court in Calcutta Club, the constitutional amendment was
not relevant to address the lis and the transactions between clubs and their members continued to
remain outside the scope of tax. The Supreme Court in Calcutta Club, in fact, extended this
declaration even to service tax which was imposed as a new tax by the Parliament after the 46th
Amendment to the Constitution.

The key findings of the Supreme Court in Calcutta Club are summarised below:

13
State of West Bengal v. Calcutta Club Ltd., (2019) 19 SCC 107.
 (a) The decision in YMIA “made no distinction between a club in the corporate form and a club
by way of a registered society or incorporated by a deed of trust. What is the essence of the
judgment is that the holding of property must be a holding for and on behalf of the members
of the club, there being no transfer of property from one person to another. Proprietary clubs
were distinguished, as there the owner of the club would not be the members themselves,
but somebody else.” [paragraph 26]

(b) In view of the decisions in Bangalore Club14 and Richard Evans15, “it is clear that if persons
carry on a certain activity in such a way that there is a commonality between contributors
of funds and participators in the activity, a complete identity between the two is then
established. This identity is not snapped because the surplus that arises from the common
fund is not distributed among the members – it is enough that there is a right for disposal
over the surplus, and in exercise of that right they may agree that on winding up, the surplus
will be transferred to a club or association with similar activities. Most importantly, the
surplus that is made does not come back to the members of the club as shareholders of a
company in the form of dividends upon their shares. Since the members perform the
activities of the club for themselves, the fact that they incorporate a legal entity to do it for
them makes no difference. … What is of essence, therefore, in applying this doctrine is that
there is no sale transaction between two persons, as one person cannot sell goods to itself.”
[paragraph 32]

(c) The lawmakers did not read the decision in YMIA “in its correct perspective. As had been
noticed hereinabove, YMIA had three separate appeals before it, in one of which a company
was involved. To state, therefore, that under the law as it stood on the date of the 46th
Amendment, a sale of goods by a club having a corporate status is taxable, is wholly
incorrect. Proceeding on this incorrect basis, what the 46th Amendment sought to do was to
then bring to tax sales by clubs which have no separate existence from that of their members.
In doing so, the 46th Amendment used the expression ‘any unincorporated association or
body of persons’. This expression, when read with the Statement of Objects and Reasons,
makes it clear that it was only clubs which are not in corporate form that were sought to be

14
Bangalore Club v. Commissioner of Income Tax, (2013) 5 SCC 509.
15
Thomas (Inspector of Taxes) v. Richard Evans and Co. Ltd., (1927) 1 KB 33 (CA).
 brought within the tax net, as it was wrongly assumed that sale of goods by members’ clubs
in the corporate form were taxable. ‘Any’ is the equivalent of ‘all’. This word, therefore,
also lends itself to the aforesaid interpretation, as the emphasis of the legislature is on all
unincorporated associations or bodies being brought within sub-clause (e).” [paragraph 35]

(d) For the aforesaid reason, the constitutional amendment is relevant “only to clubs which
were not in the corporate form”. [paragraph 36]

(e) Even the unincorporated associations cannot be subjected to tax for the reason that Article
366(29A)(e) requires “cash, deferred payment of valuable consideration” which, in view of
Section 2(d) of the Indian Contract Act, 1872, “necessarily posits consideration passing
from one person to another”. [paragraph 39]

(f) In view of the YMIA decision and the doctrine of mutuality, “there is no sale transaction
between a club and its members”, and in any case “there cannot be a sale of goods to
oneself.” Significantly, “it is clear that the ratio of YMIA has not been done away by the
limited fiction introduced by Article 366(29A)(e).” [paragraph 41]

(g) The fact that ‘doctrine of mutuality’ has not been done away with by the constitutional
amendment is evident from comparison of other provisions16 which specifically institute a
deeming fiction to tax a person by deeming his actions to be taxable transactions.
[paragraph 48-51]

(h) The aforesaid conclusion is not affected even if clause (f) of Article 366(29A)17 is taken
into consideration. [paragraph 42-45]

From the aforesaid, it is evident that the Supreme Court in Calcutta Club, albeit by the process of
interpretation, reached a conclusion that the 46th Amendment of the Constitution was of no avail in
so far as it inserted clause (e) in Article 366(29A) because despite this clause, the transactions between

16
The Supreme Court made reference to the following provisions of Income Tax Act, 1961 for the purpose of this
comparison, (a) Section 2(24)(vii), (b) Section 44, (c) Section 45(2).
17
Article 366(29A)(f) brings “a tax on the supply, by way of or as part of any service in any other manner whatsoever,
of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such
supply or service, is for cash, deferred payment or other valuable consideration” as within the fold of taxes on sale or
purchase of goods.
clubs and its members could not be taxed. The Supreme Court, furthermore, adverted to the guidance
sought in the 2017 reference, by declaring that its conclusion was not based upon the incorporation
status of the club and instead the declaration of non-taxability was extended to both classes of clubs,
i.e., incorporated and unincorporated clubs.

One may argue, besides multiple other contentions that can be formulated, that the decision in
Calcutta Club does not appear to lay down the correct legal position, on grounds of technicality and
on merits. On technicality, because the constitutional stipulation regarding the bench-strength of the
Supreme Court seems to be have been bypassed.18 On the ground of substantive inquiry, in view of
the settled principle of interpretation that the courts do not render statutory provisions as inert,
superfluous or redundant by process of interpretation19 – and therefore when statutory provisions
cannot be rendered meaningless by process of interpretation, can a constitutional provision be
rendered moot by indicating that its underlying rationale is not reasoned? This is because the Supreme
Court in Calcutta Club has not quashed Article 366(29A)(e) – and therefore it remains as a valid
constitutional provision – unlike the past instances20 wherein the constitutional provisions have been
struck as invalid for any reason. Nonetheless, in view of the constitutional mandate,21 the decision of
the Supreme Court is final and binding on all, unless reviewed by the Supreme Court itself.

G. 2021 GST Amendment: Background for another showoff?

Undeterred by the invalidation of the Supreme Court in Calcutta Club, the lawmakers have continued
to attempt taxing transactions between clubs and their members. Let us take the illustration of Goods
and Services Tax (‘GST’) which was introduced in India on July 1, 2017 in view of the empowerment
vested in the Parliament and the States under the 101st Amendment of the Constitution.

18
Article 145(3) of the Constitution states “[t]he minimum number of Judges who are to sit for the purpose of deciding
any case involving a substantial question of law as to the interpretation of this Constitution or for the purpose of hearing
any reference under article 143 shall be five.”
19
See generally, Justice G.P. Singh, Principles of Statutory Interpretation, pp. 90-91, 14th edition, 2016.
20
For illustration, see Kesavananda Bharati v. State of Kerala, AIR 1973 SC 1461 and Minerva Mills v. Union of India,
AIR 1980 SC 1789 wherein parts of Article 31C was declared invalid and Supreme Court Advocates-on-Record
Association and Another v. Union of India, AIR 2016 SC 117 which struck down amendments to Part V, Chapter IV of
the Constitution by the Constitution (Ninety-ninth Amendment) Act, 2014.
21
Article 141 of the Constitution states “[t]he law declared by the Supreme Court shall be binding on all courts within
the territory of India”.
The definition of ‘business’22 under GST specifically covers “provision by a club, association,
society, or any such body (for a subscription or any other consideration) of the facilities or benefits
to its members”. For this reason, certain orders have been passed under the GST laws which confirm
that the contributions received by associations from their members towards providing common
facilities are liable to tax under GST.23 However, perceiving the clouds of uncertainty owing to the
declaration in Calcutta Club, a specific amendment has recently been introduced in the GST law.

Expanding the scope24 of ‘supply’ on which GST is levied, “the activities or transactions, by a person,
other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or
other valuable consideration” has specifically been inserted in law. The expression “by a person, other
than an individual” may have been inspired by the reasoning in Calcutta Club and is likely to be
highlighted as the deeming fiction which was found missing in Article 366(29A)(e). Furthermore, in
order to obviate any doubts arising on the levy of tax in the past, the validation provision has also
been inserted, apparently designed to dilute the impact of Calcutta Club declaration in the context of
GST laws:

“Explanation.––For the purposes of this clause, it is hereby clarified that,

notwithstanding anything contained in any other law for the time being in force or any
judgment, decree or order of any Court, tribunal or authority, the person and its
members or constituents shall be deemed to be two separate persons and the supply of
activities or transactions inter se shall be deemed to take place from one such person
to another”.

It is therefore clear that the lawmakers, continue to assert their legislative right to tax transactions
between clubs and their members notwithstanding the judicial scuttling of their past attempts, such
as in YMIA and Calcutta Club.

22
Section 2(17)(e), Central Goods and Services Tax Act, 2017.
23
For illustration, see Vaishnavi Splendour Homeowners Welfare Association (2020) 34 GSTL 360 (AAAR).
24
Section 7(1)(aa), Central Goods and Service Tax Act, 2017, inserted vide Section 108 of Finance Act, 2021.
H. Conclusion

On a larger perspective, taxpayers’ challenge to legislative actions are not unknown. Instead, the
judicial reports are replete with instances wherein the tax liability has been dislodged on account of
deficiency in the concerned legislation. The trend traversed in this article is similar though the
challenge by the taxpayers has been to the limitations of the constitutional empowerment of the
legislature itself, the success to which is rare but nonetheless has been achieved twice in succession
by the taxpayer. It is undeniable that challenge to the present attempt of the legislature, in the GST
law, to tax transactions between clubs and their members is expected to be a matter of yet another
challenge in courts. Which side the camel will sit on this time, however, is as elusive a question as
always.