2009 (11) TMI 830 - HC - VAT and Sales Tax

Validity and legality of the circular dated February 17, 2004 issued by the Commissioner, Trade Tax, U.P. wherein it has been provided that sale and purchase of eatable goods by the club to its members is taxable as the same is included within the extended definition of sale and purchase after 46th Amendment of the Constitution in article 366(29A) of the Constitution of India, has been challenged Held that - We see no illegality in the impugned circular of the Commissioner, and the submission of the petitioner to the contrary is misconceived. The petitioner was assessed ex parte in the said assessment year 1994-95 on the basis of the certain information received. The appellate authority examined the said information and was satisfied that the said information was inadequate to hold the petitioner a dealer. The information was that some demonstration of cold drink by Pepsi Company was made and the said company after the demonstration had removed its machines and goods. On these facts, it was found that the petitioner-company is not a dealer and no cold drink was sold. The amended definition of sale as contained in section 2(h) was not up for consideration before the appellate court, nor was considered. The appellate authority proceeded to address the controversy treating that the assessee was a society nor indulged in sale and purchase transaction and is running on no-profit and no-loss basis. On these facts, it cannot be said that initiation of reassessment proceeding is based on change of opinion. Appeal dismissed.

Issues Involved:
1. Legal entity status of the petitioner-company and its members.
2. Classification of the petitioner-club as a members' club or proprietary club.
3. Validity of the impugned circular dated February 17, 2004, regarding taxability of sales by clubs.

Detailed Analysis:

1. Legal Entity Status:
The court examined whether the petitioner-company, being incorporated, constitutes a distinct legal entity from its members, thus making the transfer of property to its members a "sale" under the Trade Tax Act. The petitioner argued that there is no sale of eatables as the club and its members are not separate legal entities. However, the court disagreed, noting that the petitioner is incorporated under the Companies Act, making it distinct from its shareholders. Citing precedents such as *Electronics Corporation of India Ltd. v. Secretary Revenue Deptt., Govt. of Andhra Pradesh* and *Western Coalfields Ltd. v. Special Area Development Authority*, the court affirmed that a company is different from its members and thus, transactions between the company and its members can be considered sales.

2. Classification of the Petitioner-Club:
The court considered whether the petitioner-club is a members' club or a proprietary club. Although the petitioner claimed in the rejoinder affidavit that it is a members' club, no such averment was made in the initial petition. The court noted that members' clubs are governed by the doctrine of mutuality, whereas proprietary clubs are commercial undertakings. The standing counsel demonstrated through audited accounts and balance sheets that the petitioner operates akin to a proprietary club, with significant purchases and sales. The court left this issue to be determined by the assessing officer, emphasizing that the principle of mutuality and the nature of supplies need to be investigated by the fact-finding authority.

3. Validity of the Impugned Circular:
The petitioner argued that the impugned circular dated February 17, 2004, is violative of Article 366(29A) and Section 2(h)(iv) of the U.P. Trade Tax Act, as it does not distinguish between incorporated and unincorporated bodies. The court reviewed the historical background of the legislation and amendments following the 46th Amendment of the Constitution, which broadened the definition of "sale" to include various transactions. The court noted that the definition of "dealer" under Section 2(c) of the Act includes incorporated bodies, thus the petitioner's activities fall within the scope of taxable sales. The court found no illegality in the impugned circular, as it aligns with the amended definitions and legislative intent to include such transactions within the ambit of sales tax.

Additional Considerations:
The court addressed the petitioner's argument regarding the timing of the reassessment proceedings and the issuance of the circular, noting that the proceedings were initiated before the circular's issuance. The court also dismissed the petitioner's reliance on the *Commissioner of Income-tax v. Bankipur Club Ltd.* case, as it was decided under different facts and laws. Lastly, the court rejected the petitioner's claim of reassessment being a change of opinion, emphasizing that the reassessment was based on new information and the amended definition of "sale."

Conclusion:
The court dismissed the writ petitions, affirming the validity of the reassessment proceedings and the impugned circular. The petitioner's arguments were found to be without merit, and the court upheld the taxability of sales by the petitioner-club to its members under the extended definition of "sale" post the 46th Amendment. No costs were awarded.

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