GST Mutuality Tax

Concept of Mutuality and its application to GST vis-a-vis the decision of the Supreme Court in State of West Bengal v. Calcutta Club

by Rishav Ray & Subhadeepa Sen


The doctrine of mutuality on the Goods and Service Tax regime (GST) has been a subject-matter of much deliberation after the landmark judgment rendered by the Honorable Supreme Court of India in the case of State of West Bengal v. Calcutta Club Limited AIR 2019 SC 5310. Before diving into the judicial analysis of the concept of mutuality and its application to GST, it is pertinent to briefly elucidate the very doctrine of mutuality. The concept of mutuality stems from the basic understanding that a person cannot trade with his own self. It finds its foundational basis from the common law principles, which states that “a person cannot make a profit from himself.” The crux of the rule of mutuality lies in the shared trait of the contributors and members who additionally, constitute the beneficiaries. Here, the people who constitute the contributors to the basic asset/fund shall be qualified for taking part in the surplus and likewise the participators to the surplus herein, will be considered contributors to the common fund/asset. The rationale behind the law is that it envisions a parallel between the contributors and the participants in this sense. The doctrine proposes that whatever is returned is basically a contribution that is made by a member. As aforementioned, whatever surplus is created to the common fund shall not be considered as “income” but shall be deemed as an increment in the common fund that is intended to meet any abrupt outcomes that may arise.

 This very doctrine of mutuality was challenged in the said judgment. The Calcutta Club is one of the most prestigious clubs in Kolkata which is incorporated under section 26 of the Companies Act. The club provided drinks and other refreshments to its permanent members in return of payment. However, it did not pay sales tax on these transactions on the ground that its members and the club had the same identity. The Assistant Commissioner of Commercial Taxes had issued a notice to Calcutta Club informing that it had failed to pay the sales tax on the sale of refreshments to its members in a particular quarter. The Club contented that it was not a “dealer” under Sales Tax Act. The matter went before a Tribunal, then to the High Court of Calcutta and finally to the Honourable Apex Court.

The Honourable Supreme Court had before itself three important questions.

“i) Whether doctrine of mutuality is applicable to incorporated clubs or any clubs after 46th amendment to Article 366(29A) of the Constitution?

ii) Whether decision of CTO Young Men’s Indian Association (1970) 1 SCC 462 (SC) still holds field after 46th amendment to Constitution? And whether decisions of Cosmopolitan Club v. State of TN (2009) 19 VST 456 (SC) and Fateh Maidan Club v. CTO 12 VST 598 (SC) which applied doctrine of mutuality after 46th amendment to Constitution lay down the correct law?

iii) Whether 46th amendment by its deeming fiction affirms the position that provision of food, beverages etc. by an incorporated club to its permanent members constitutes ‘sale’ liable to sales tax?”

It was held by the Apex Court that action which is undertaken by the clubs or the incorporated/ unincorporated associations for the purpose of sale or supply of goods or any services rendered by the same shall not be accountable for the payment of sales tax because the doctrine of mutuality is in operation even after the 46th Amendment. The bedrock of the principle of mutuality lies in the theory that “one cannot derive profit from one’s own self.”

The Apex Court had defined this doctrine of mutuality on several occasions as “an amount that is received from oneself, cannot be regarded as income and taxable.” The Judiciary has been polishing this principle of mutuality since a very long time. The essence of this doctrine can be elucidated from Dublin Corporation v. M’Adam (Surveyor of Taxes), which opined that “No man, in my opinion, can trade with himself; he cannot, in my opinion, make, in what is its true sense of meaning, taxable profit by dealing with himself.”

Tax Evasion is always kept under strict scrutiny by the state taxation authorities and therefore, a tendency persists to even tax those transactions which will normally not constitute a ‘sale’ by these authorities. The conundrum here is also with regard to one such transaction viz. the applicability of tax on supply of goods by a club irrespective of whether incorporated or not to its members in return of cash, deferred payment, or valuable consideration. It was contended by such clubs that the implementation of tax in such transactions dilutes the very essence of the principle of mutuality. Their contention was further substantiated by adding that any supplies that are made to its members will be the same as dealing with their own self and hence, no profit can be construed therein. The concept of mutuality clearly mandates the fact that only one person shall be involved in the transaction, and the present case satisfactorily justifies that supplies rendered by such clubs to its members do not placate the prerequisite of taxation that is, presence of two persons and hence, it has been continually argued by the clubs that levying tax is inapplicable in such transactions.

Such defence undertaken by the clubs was gravely objected to by the State Taxation Authorities who then initiated amending their respective tax laws. The authorities argued that a club constitutes a “dealer” and even though, there does not exist any profit motive, the activity that is undertaken by such clubs shall be construed as a “business”. In addition, the action taken up by such clubs which is, supplying goods to its members for consideration was encompassed within the ambit of the definition of “sale”. However, the clubs vociferously have been rejecting such contentions and amendments that are ushered in by the State Taxation Authorities.

In order to understand this concept with more clarity, one must look into the landmark judgment of Young Men’s India Association, on which the Honourable Apex Court had heavily relied while deciding the present case of State of West Bengal v Calcutta Club Limited.  The Honourable Supreme Court in the case of the Young Men’s Indian Association held that there was no transfer of property between one person to another despite the definition contained in the sales tax law. It was held that even though the club was a separate and distinct legal entity, it was merely acting as an agent for the members in supplying various preparations to them and therefore it cannot be considered a sale as the element of transfer was absent in totality.

Post this judgement, the Ministry of Law and Justice approached the Law Commission to draft a report on problems related to the levy of sale taxes on goods. The Commission submitted its 61st Report on May 1974 which amongst several recommendations included two specific recommendations in relation to the matter in hand. The report highlighted and put an emphasis on the view of Justice J C Shah who gave a dissenting opinion in the Young Men’s Case. Secondly, it stated that unless amendment is made to Constitution so as to include sales for supplies made by incorporated clubs in the ambit of ‘tax on sale’ as existing in the Entry 54 of List II, taxes cannot be levied on such supplies.

The Government vide the Forty-Sixth Amendment Act of 1982, introduced a new definition to the expression ‘tax on sale or purchase of goods’. The Amendment to Article 366(29-A) included entries dealing with a tax on the supply of goods by associations to its members. Para 3 of the Statement of Objects and Reasons appended to Constitution (Forty-Sixth Amendment) Act, 1982 clarified that while sale by registered/incorporated clubs to its members was taxable, the sale by unincorporated clubs or associations to its members would not be taxable since they had no distinct legal identity separate from the members.

The Apex Court has affirmed that the judgement passed in Young Men’s Indian Association and other such judgements continue to hold strong and will remain undeterred by the 46th Amendment. Now, it is required to be understood, whether or not the judgement of Calcutta Club Ltd. applies to the GST Regime. One might argue that the judgement does not have any direct impact on taxation under GST Laws. However, the impact of the judgement cannot be side-lined in its entirety. It must be understood that cases, where the club is acting as an agent to its members, shall undoubtedly affect the GST Regime since in such cases, the Principle of Mutuality shall continue to apply unless there is a specific exclusion rendered by the usage of language, which is absent in the GST Laws. However, a greater bottleneck that persists is the determination of what all activities that are carried out by the club would amount to an action that is undertaken by such club as an “agent” to its members, to which the Honourable Supreme Court is yet to provide clarity upon. It is one such aspect that is required to be taken into consideration in order to settle the dust in this context.

Views are personal.

Image credits: Provided by the authors


Rishav Ray and Subhadeepa Sen are currently pursuing law at School of Law, Christ( Deemed to be University), Bangalore.

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