Expert Advisory Committee

1.40 Query:

Whether a club registered as a company is exempted from MAOCARO.

1.The querist has drawn the attention of the Committee to paragraph 1(2)(a) of Manufacturing and Other Companies (Auditor’s Report) Order (MAOCARO), 1988, wherein it is stated that the said Order is applicable to every company including a foreign company as defined in section 591 of the Companies Act, 1956, which is engaged or proposes to engage in one or more of the following activities.

(i) Manufacturing, mining or processing;

(ii) Supplying and rendering services;

(iii) Trading; and

(iv) The business of financing, investment, chit fund, nidhi or mutual benefit societies.

2. In respect of certain social clubs, the querist has furnished the following information:

(a) These clubs are registered under the Companies Act.

(b) These clubs are formed with the object of offering facilities and services of the club to the members and their guests only; and to encourage various social activities.

(d) The surplus at the end of the year/period is utilised for the promotion of the objectives mentioned in paragraph (b) above.

(e) The distribution of the surplus as dividend to the members is prohibited.

These clubs also manufacture certain bakery products exclusively for the use of the members and not for sale to outsiders.

3. It has been argued by the management of one of the clubs that these clubs cannot be said to be engaged in the activities of manufacturing or supplying and rendering services within the meaning of clause 1(2)(a) of Manufacturing and Other Companies (Auditor’s Report) Order, 1988, as the activity of manufacturing necessarily involves sale of goods manufactured, as will appear from various provisions of the said Order, requiring statements relating to sales under clause 4(A) X and XI. It has been the settled law that the clubs are self-serving institutions. Even if guests are allowed to avail of the services, they are merely the invitees and agents of the members. Guests cannot demand supply of goods or services independently nor can they pay for the same and it is only the members who incur the liability for the same. Sale of food products and beverages by the club does not assume a commercial character of trading but is only dealing between the members, inter se, the club being considered only as an agent for its members and a convenient instrument of incorporated entity to cater to the needs of the members. One cannot make profit or loss out of oneself and mutual transactions of club with its members do not assume business character. In such supply of goods, there is no sale or element of transfer of property [Refer (1970) 26 S.T.C. 241 (SC) Joint Commercial Tax Officer vs YMCA]. In Madras Gymkhana Club Employees vs Management of Gymkhana Club (AIR 1968 S.C.554), the Supreme Court has pointed out that “services to members themselves are for their own pleasure and amusement and the material goods used are for their own consumption. In other words, the club existed for their members even when the admission of guests was open, the club remained the same, that was to say a member’s self-servicing institution”. Therefore, the club was not held to be industry under industrial law and not doing any trade or business.

4. In view of the foregoing and the fact that characteristics of such clubs are common with those companies licensed under section 25 of the Companies Act, whether it can be construed that the MAOCARO is not applicable to these clubs even though no specific licence under section 25 of the Companies Act has been obtained.

Opinion October 28, 1991

1.The Committee notes that as per paragraph 1(2)(a) of MAOCARO, 1988, the Order is applicable to every company which is engaged or proposes to engage in “Supplying and rendering services”. The Committee further notes that the company in question provides various services to its members or their guests. It can, therefore, be considered as a company rendering services.

2. The Committee also notes para 15 of the Statement on the Manufacturing and Other Companies (Auditor’s Report) Order, 1988, issued by the Institute of Chartered Accountants of India, which states, inter alia as follows:

“15. A service company has been defined as a company engaged in business of supplying, providing, maintaining and operating any services, facilities, conveniences, bureaux and the like for the benefit of the others’………… It may also be noted that the company must supply the service for the benefit of others. Therefore, a company which maintains its own service departments, e.g., running a canteen, providing transport facilities to its employees, etc. would not be covered by the Order if it is not already covered by some other definition of the classes of companies covered by the Order. In this regard, it may be noted that the Order has expressly been made inapplicable to companies licensed to operate under section 25 of the Companies Act, 1956”.

3. The Committee is of the view that although it may be argued that the club in question is not carrying on a business in the strict commercial sense as stipulated in the definition of service company, yet it is engaged in the activity of supplying and rendering services as stipulated in the main part, i.e., paragraph 1(2)(a) of the MAOCARO, 1988. Further, even though the club is supplying and rendering services for the benefit of only its shareholders, it would be considered to be supplying and rendering services for the benefit of others since a company is a legal entity distinct from its shareholders. Also, the Order specifically exempts, inter alia, those companies which are registered under section 25 of the Companies Act, 1956. It is, therefore, legally not permissible to extend the exemption to all companies carrying on activities similar to the ones carried on by the section 25 companies.

4. On the basis of the above, the Committee is of the opinion that MAOCARO 1988 would be applicable to the club in question which is not registered under section 25 of the Companies Act, 1956.

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