2023 (3) TMI 1268 - HC - VAT and Sales Tax

Club and Association Services - applicability of doctrine of mutuality - supply of goods/services/amenities/luxuries by the club to its members - supply effected by one person to another for consideration or not - HELD THAT - In Lotus Club 2018 (10) TMI 452 - KERLA HIGH COURT , the Division Bench essentially followed an earlier division bench judgment of this Court in Trivandrum Club v. Sales Tax Officer (Luxury Tax) 2013 (1) TMI 606 - KERALA HIGH COURT that unambiguously held that under the KTL Act, the charging section recognised the club as the person liable to luxury tax. The Division Bench therefore recognised the club as the person on whom the incidence of tax fell. Since the later division bench in Lotus Club did not find any cause for doubting the propositions laid down in Trivandrum Club and dismissed the appeal preferred by Lotus Club by following the decision in Trivandrum Club, we cannot read the observations of the Division Bench in Lotus Club as having laid down the proposition that the incidence of tax under the KTL Act is on the person enjoying the luxury and not on the proprietor who provides the luxury. Similarly, the observation of the division bench of this court in M/s Madhavaraja Club 2013 (2) TMI 614 - KERALA HIGH COURT that the doctrine of mutuality is relevant only for the purposes of the Income Tax Act and is not apposite in the context of the KTL Act cannot be seen as laying down the correct law in the light of the subsequent judgment of the Supreme Court in Calcutta Club Ltd 2019 (10) TMI 160 - SUPREME COURT where the doctrine of mutuality was held applicable in the context of legislations regulating the levy of indirect taxes such as VAT and Service Tax - the principle recognised in Calcutta Club Ltd, that the absence of two distinct persons to a transaction viz. a supplier/provider of goods/ services/ amenities/ luxuries and a recipient thereof, makes the transaction a supply to oneself, which cannot be taxed under the statute, applies equally to the KTL Act which contemplates the levy of tax whenever a luxury is provided by one specified person to another. Matters remanded to the assessing authority for de novo assessment taking note of the observations in this judgment as also the applicability of the mutuality principle to the assessment of members' clubs under the KVAT Act, as declared by the Supreme Court in Calcutta Club Ltd. - petition allowed by way of remand.

Summary

Issues Involved:
1. Applicability of the principle of mutuality in tax matters.
2. Levy of luxury tax under the Kerala Tax on Luxuries Act (KTL Act).
3. Assessment orders and penalties under the KTL Act.
4. Re-adjudication of assessments under the Kerala Value Added Tax Act (KVAT Act).

Summary:

1. Applicability of the Principle of Mutuality:
The primary issue in these cases revolves around the applicability of the principle of mutuality in tax matters. The principle of mutuality recognizes that if there is a commonality between contributors of funds and participators in an activity, a complete identity is established. This identity is not broken even if the surplus from the common fund is not distributed among members but is retained for common purposes. The Supreme Court in State of West Bengal v. Calcutta Club Ltd held that the doctrine of mutuality applies to members' clubs, insulating them from tax liabilities on amounts collected from members for providing goods/services/amenities/luxuries.

2. Levy of Luxury Tax under the KTL Act:
The Kerala Tax on Luxuries Act (KTL Act) imposes a luxury tax on "luxury provided" by various entities. The taxable event under the Act is the "providing of luxury," and the person responsible for paying the tax is the 'proprietor' who manages the entity providing the luxury. The court noted that the doctrine of mutuality applies to insulate members' clubs from the levy of luxury tax under the KTL Act, except for Section 4 (2A), which specifically provides for tax on membership charges.

3. Assessment Orders and Penalties under the KTL Act:
The petitioner, M/s Madhavaraja Club, challenged the assessment orders and penalties imposed under the KTL Act for various assessment years. The court found that the mutuality principle applies to insulate the club from the levy of tax on charges collected from members for amenities provided. Consequently, the court set aside the orders of the Appellate Tribunal and the penalties imposed for the assessment years 2008-09, 2009-10, 2010-11, and 2011-12. The court also quashed the assessment orders and first appellate orders for the assessment years 2014-15, 2015-16, 2016-17, and 2017-18, directing the assessing authority to redo the assessments by excluding the turnover covered by the mutuality principle.

4. Re-adjudication of Assessments under the KVAT Act:
The petitioner also challenged the assessment orders under the Kerala Value Added Tax Act (KVAT Act) for the assessment years 2012-13 and 2013-14. Although the petitioner did not raise the mutuality principle before the lower authorities, the court noted the subsequent declaration of law by the Supreme Court in Calcutta Club Ltd. The court set aside the orders of the Appellate Tribunal and remitted the matters to the assessing authority for de novo assessment, taking into account the mutuality principle as declared by the Supreme Court.

Conclusion:
The court allowed the petitions and revisions, setting aside the impugned orders and remitting the matters for fresh assessments in light of the mutuality principle. The assessing authorities were directed to complete the reassessments within three months.