M/S Bangalore Club v. the Commissioner of Wealth Tax & Anr.
R. F. NARIMAN, J.
1. In the year of grace 1868, a group of British officers banded
together to start the Bangalore Club.In the year of grace 1899, one Lt.
W.L.S. Churchill was put up on the Club’s list of defaulter s, which
numbered 17, for an amount of Rs.13/- being for an unpaid bill of the
Club. The “Bill” never became an “Act”. Till date, this amount remains
unpaid.Lt. W.L.S. Churchill went on to become Sir Winst on Leonard
Spencer Churchill, Prime Minister of Great Britain. And the Bangalore
Club continues its mundane existence, the only excitement being when
the tax collector knocks at the door to extract his pound of flesh.
2. Fast forward now from British India to free India and we come
to assessment years 1981-82 and 1984-85 upto 1990-91. The question
for determination in these appeals is whether Bangalore Club is liable to
pay wealth tax under the Wealth Tax Act.The order of assessment dated
3rd March, 2000, passed by the Wealth Tax Officer, Bangalore, referred
to the fact that Bangalore Club is not registered as a society, a trust or a
company. The assessing officer, without further ado, “aft er a careful
perusal” of the rules of the Club, came to the conclusion that the rights
of the members are not restricted only to user or possession, but definitely
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR.
as persons to whom the assets of the Club belong.After r eferring to
Section 167A, inserted into the Income Tax Act, 1961, and after referring
to Rule 35 of the Club Rules, the assessing officer concluded th at the
number of members and the date of dissolution are all unce rtain and
variable and therefore indeterminate, as a result of which the Club was
liable to be taxed under the Wealth Tax Act. By a cryptic order dated
25th October, 2000, the CIT (Appeals) dismissed the appeal against the
aforesaid order. On the other hand, by a detailed order passe d by the
Income Tax Appellate Tribunal, Bangalore dated 7 th May, 2002, the
Appellate Tribunal first referred to the Objects of the Bangalore Club,
which it described as a “social” Club, as follows:
“1. To provide for its Members, social, cultural, s porting,
recreational and other facilities;
2. To promote camaraderie and fellowship among its members.
3. To run the Club for the benefit of its Members from out of the
subscriptions and contributions of its member.
4. To receive donations and gifts without conditions fo r the
betterment of the Club. The General Committee may use its
discretion to accept sponsorships for sporting Areas
5. To undertake measures for social service consequent on natural
calamities or disasters, national or local.
6. To enter into affiliation and reciprocal arrangements with other
Clubs of similar standing both in India and abroad.
7. To do all other acts and things as are conducive or incidental to
the attainment of the above objects.
Provided always and notwithstanding anything herein after
contained, the aforesaid objects of the Club, shall not be altered,
amended, or modified, except, in a General Meeting, for which
the unalterable quorum shall not be less than 300 members. Any
resolution purporting to alter, amend, or modify the objects of the
Club shall not be deemed to have been passed, except by a tw o
thirds majority of the Members present and voting thereon.”
3. The Tribunal then set out Rule 35 of the Club Rules, whi ch
stated as follows:
495
“RULE 35 APPOINTMENT OF LIQUIDATORS:
If it be resolved to wind up, the Meeting shall appoint a liquidator
or liquidators and fix his or their remuneration. The li quidation
shall be conducted as nearly as practicable in accordance with
thelaws governing voluntary liquidation under the Companies Act
orany statutory modifications thereto and any surpl us
assetsremaining after all debts and liabilities of the Cl ub have
beendischarged shall be divided equally amongst the Members of
theClub as defined in Rules 6.1(i), 6.1(ii), 6.1 (i ii), 6.2(i),
6.2(ii),6.2(iii), 6.2(vii), 6.2(viii) and 6.2(ix).
4. After setting out Section 21AA of the Wealth Tax Act, t he
Tribunal then referred to this Court’s judgment in CIT v. Indira
Balkrishna (1960) 39 ITR 546 and held:
“9. From the facts of the case, it is clear that members who have
joined here have not joined to earn any income or to share any
profits.They have joined to enjoy certain facilities as pe r the
objectsof the club.The members themselves are contributing t o
the receipts of the club. Themembers themselves are contributing
to the receipts of the club (sic) and whatis the difference between
the Income and Expenditurecan be said to beonly surplus and not
income of the assessee-club. It is an acceptedprinciple that principle
of mutuality is applicable to the assessee club andhence not liable
to income-tax also. At the most, this. may be called the”Body of
Individuals” but not an AOP formed with an intentio n to
earnincome.”
5. It then referred to a CBDT Circular dated 11th January, 1992,
explaining the pari materia provision of Sections 167A in the Income
Tax Act, and therefore inferred, from a reading of the aforesaid Circular,
that Section 21AA would not be attracted to the case of the Bangalore
Club. It was then held, on a reading of Rule 35, that since members are
entitled to equal shares in the assets of the Club on windi ng-up after
paying all debts and liabilities, the shares so fixed are determinate also
making it clear that Section 21AA would have no application to the facts
of the present case. As a result, the Appellate Tribunal allowed the appeal
and set aside the orders of the Assessing Officer and the CIT (Appeals).
6. Against this order, by a cryptic order of the High Co urt, the
decision in CWT v. Club 197 ITR Karnataka 609 was stated to cover
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
the facts of the present case, as a result of which the ques tion raised
was decided in favour of the revenue by the impugned order dated 23rd
January, 2007. A Review Petition filed against the aforesaid order was
dismissed on 19th April, 2007.
7. Shri Nikhil Nayyar, learned counsel appearing on behalf of the
appellant, referred to the object for the enactment of Secti on 21AA of
the Wealth Tax Act and then took us through the provisions of Section
21AA. According to him, it is settled law by several judgments of this
Court that “association of persons” in the context of a taxing sta tute
would only refer to persons who band together with a common object in
mind – the common object being to create income and make a profit.As
it is clear that the present Club is a social club where the members do
not band together for any commercial or business purpose of making
income or profits, the section does not get attracted at all.Further, in any
case, as a without prejudice argument, it is clear that the individual shares
of the members of the said association in income or assets of the
association must be indeterminate or unknown to attract the provision of
Sec. 21AA. He took us to the Appellate Tribunal judgment and to Rule
35, in particular, to argue that since on winding-up all members get an
equal share in the surplus that remains after all debtsand liabilities are
dealt with, their shares cannot be said to be indeterminate or unknown.For
this purpose, he cited a number of judgments of the High Cour ts.He
then adverted to an explanation that was added to the defini tion of
“person” contained in Section 2(31) of the Income Tax Act, which made
it clear that on and from 1st April, 2002, an association of persons need
not be persons who band together for the object of deriving income or
profits. This explanationdoes not apply to the Wealth Tax Act, and, in
any case, given the fact that the assessment years in quest ion are way
before 1st April, 2002, the law laid down by this Court in several judgments
on association of persons would directly apply.
8. To counter these arguments, Shri Vikramjit Banerjee, learned
Additional Solicitor General, referred to Rule 35 of the Club Rules and
relied heavily upon Section 21AA(2). According to Shri Banerjee, sub-
section (2) deals with a situation where the association of persons is
dissolved, and given Rule 35, the Section, therefore, would directly apply
to the Bangalore Club. He then referred to this Court’s judgme nt in
Bangalore Club v. CIT (2013) 5 SCC 509, in which, for income tax
purposes, the Bangalore Club was assessed as an association of persons.
497
This being the case, it cannot be that for income tax purp oses, the
Bangalore Club is treated as an association of persons but for wealth
tax purposes, it cannot be so treated.He then referred to t his Court’s
judgment in CWT v. Ellis Bridge Gymkhana (1998) 1 SCC 384 in
order to support the impugned judgment of the High Court which,
according to him, correctly followed Chikmagalur Club’s case (supra)
which, in turn, only relied upon this Court’s judgment in Ellis Bridge
Gymkhana (supra). He also stated that the finding of the Assessing
Officer that the shares of a fluctuating body of membe rs would be
indeterminate is correct and therefore, even on this ground i t is clear
that the High Court judgment can be supported.
9. Having heard learned counsel for both sides, it is important to
first advert to Section 3, which is the charging section in the Wealth Tax
Act. Section 3(1) states as follows:
“3. Charge of wealth-tax—(1) Subject to the other provisions
contained in this Act, there shall be charged for every assessment
year commencing on and from the first day of April, 1957 but
before the first day of April, 1993, a tax (hereinafter refe rred to
as wealth-tax) in respect of the net wealth on the corresponding
valuation date of every individual, Hindu undivided family and
company at the rate or rates specified in Schedule I.”
10. It will be noticed that only three types of persons can be
assessed to wealth tax under Section 3 i.e. individuals, Hindu undivided
families and companies. It is clear that if Section 3(1) alone were to be
looked at, the Bangalore Club neither being an individual, nor a HUF, nor
a company cannot possibly be brought into the wealth tax net under this
provision.
11. By the Finance Bill of 1981, Section 21AA was introduced
into the Wealth Tax Act.The explanatory notes on the introduction of
Section 21AA were as follows:
“21.1 Under the Wealth Tax Act, 1957, individuals and Hindu
Undivided Families are taxable entities but an association of persons
is not charged to wealth tax on its net wealth. Where an individual
or a Hindu Undivided Family is a member of an association of
persons, the value of the interest of such member in the association
of persons is determined in accordance with the provisions of the
rules and is includible in the net wealth of the member.
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
21.2 Instances had come to the notice of the Government where
certain assessees had resorted to the creation of a large num ber
of associations of persons without specifically defining the shares
of the members therein with a view to avoiding proper tax liability.
Under the existing provisions, only the value of the interest of the
member in the association which is ascertainable is includible in
his net wealth. Accordingly, to the extent the value of the interest
of the member in the association cannot be ascertained o r is
unknown, no wealth tax is payable by such member in respect
thereof.
21.3 In order to counter such attempts at tax avoidance through
the medium of multiple associations of persons without defining
the shares of the members, the Finance Act has inserted a new
Section 21-AA in the Wealth Tax Act to provide for assessment
in the case of associations of persons which do not define the
shares of the members in the assets thereof. Sub-se ction (1)
provides that where assets chargeable to wealth tax are he ld by
an association of persons (other than a company or a cooperative
society) and the individual shares of the members of the said
association in income or the assets of the association on the date
of its formation or at any time thereafter, are indetermin ate or
unknown, wealth tax will be levied upon and recovered from such
association in the like manner and to the same extent as it is leviable
upon and recoverable from an individual who is a citizen of India
and is resident in India at the rates specified in Part I of Schedule
I or at the rate of 3 per cent, whichever course is more beneficial
to the Revenue.”
12. With this object in mind, Section 21AA was enacted w.e.f. 1st
April, 1981 as follows:
“21AA. Assessment when assets are held by certain
associations of persons —(1) Where assets chargeable to tax
under this Act are held by an association of persons, other than a
company or cooperative society or society registered under the
Societies Registration Act, 1860 (21 of 1860) or under any law
corresponding to that Act in force in any part of India, and the
individual shares of the members of the said association in t he
income or assets or both of the said association on the date of its
formation or at any time thereafter are indeterminate or unknown,
499
the wealth-tax shall be levied upon and recovered from such
association in the like manner and to the same extent as it would
be leviable upon and recoverable from an individual who is a citizen
of India and resident in India for the purposes of this Act.
(2) Where any business or profession carried on by an association
of persons referred to in subsection (1) has been discontinued or
where such association of persons is dissolved, the Assessing
Officer shall make an assessment of the net wealth of the
association of persons as if no such discontinuance or dissolution
had taken place and all the provisions of this Act, includ ing the
provisions relating to the levy of penalty or any oth er sum
chargeable under any provisions of this Act, so far as may be,
shall apply to such assessment.
(3) Without prejudice to the generality of the provisions of sub-
section (2), if the Assessing Officer or the Deputy Commissioner
(Appeals) or the Commissioner (Appeals) in the course of any
proceedings under this Act in respect of any such association of
persons as is referred to in sub-section (1) is satisfied t hat the
association of persons was guilty of any of the acts specif ied in
section 18 or section 18A, he may impose or direct the imposition
of a penalty in accordance with the provisions of the said sections.
(4) Every person who was at the time of such discontinuance or
dissolution a member of the association of persons, and the legal
representative of any such person who is deceased, shall be jointly
and severally liable for the amount of tax, penalty or othe r sum
payable, and all the provisions of this Act, so far as may be, shall
apply to any such assessment or imposition of penalty or ot her
sum.
(5) Where such discontinuance or dissolution takes place afte r
any proceedings in respect of an assessment year ha ve
commenced, the proceedings may be continued against the persons
referred to in sub-section (4) from the stage at wh ich the
proceedings stood at the time of such discontinuance or dissolution,
and all the provisions of this Act shall, so far as may be , apply
accordingly.”
13. It can be seen that for the first time from 1st April, 1981, an
association of persons other than a company or cooperative society has
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
been brought into the tax net so far as wealth tax is concerned with the
rider that the individual shares of the members of such association in the
income or assets or both on the date of its formation or at an y time
thereafter must be indeterminate or unknown. It is only then that the
section gets attracted.
14. The first question that arises is as to what is the mean ing of
the expression “association of persons” which occurs in Section 21AA.
In an early judgment of this Court where the expression “association of
persons” occurred in the Income Tax Act, 1922 – a cognate tax statute,
this Court in CIT v. Indira Balkrishna (supra) posed question no.3 as
follows:
“(3) Whether on the facts and in the circumstances of the cas e
the Tribunal was right in holding that the assessment made on the
three widows of Balkrishna Purushottam Purani in the status of
an association of persons is legal and valid in law?”
15. After referring to the amendments made in the Income Tax
Act speaking of “association of persons” and “association of individuals”,
this Court went on to hold:
“8…In the absence of any definition as to what constitutes an
association of persons, we must construe the words in their plain
ordinary meaning and we must also bear in mind that the words
occur in a section which imposes a tax on the total income of
each one of the units of assessment mentioned therein including
an association of persons. The meaning to be assigned to t he
words must take colour from the context in which they occur…
9. It is enough for our purpose to refer to three decisions: In re,
B.N. Elias [(1935) 3 ITR 408]; CIT v. Laxmidas Devidas [(1937)
5 ITR 584]; and In re. Dwaraknath Harishchandra
Pitale [(1937) 5 ITR 716]. In B.N. Elias Derbyshire, C.J. rightly
pointed out that the word “associate” means, accord ing to
the Oxford dictionary, “to join in common purpose, or to join in
an action”. Therefore, an association of persons must be one in
which two or more persons join in a common purpose or common
action, and as the words occur in a section which imposes a tax
on income, the association must be one the object of which is to
produce income profits or gains. This was the view expressed by
Beaumont, C.J. in CIT v. LaxmidasDevidas at p. 589 and also
501
in Re. Dwaraknath Harishchandra Pitale . In re. B.N.
Elias [(1935) III ITR 408] Costello, J. put the test in more forceful
language. He said: “It may well be that the intention of the
legislature was to hit combinations of individuals who were engaged
together in some joint enterprise but did not in law constitut e
partnership…. When we find …. that there is a combination of
persons formed for the promotion of a joint enterprise …. then I
think no difficulty arise in the way of saying that these persons did
constitute an association….”
10. We think that the aforesaid decisions correctly lay down the
crucial test for determining what is an association of persons within
the meaning of Section 3 of the Income Tax Act, and they have
been accepted and followed in a number of later decisions of
different High Courts to all of which it is unnecessary to c all
attention. It is, however, necessary to add some words of caution
here. There is no formula of universal application as to what facts,
how many of them and of what nature, are necessary to come to
a conclusion that there is an association of persons within the
meaning of Section 3; it must depend on the particular facts and
circumstances of each case as to whether the conclusion can b e
drawn or not.”
16. Likewise, in G . Murugesan & Brothers v. CIT 88 ITR 432
(1973), this Court referred with approval to Indira Balakrishna (supra)
and then held:
“11. For forming an “Association of Persons”, the members of
the association must join together for the purpose of producing an
income. An “Association of Persons” can be formed only when
two or more individuals voluntarily combine together for a certain
purpose. Hence volition on the part of the member o f the
association is an essential ingredient. It is true that even a minor
can join an “Association of Persons” if his lawful guardian gives
his consent. In the case of receiving dividends from shares, where
there is no question of any management, it is difficult to draw an
inference that two more shareholders functioned as an “Association
of Persons” from. The mere fact that they jointly own one or
more shares, and jointly receive the dividends declared thos e
circumstances do not by themselves go to show that they acted
as an “Association of Persons”. “
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
17. These judgments have since been referred to with approval in
Meera and Co. v. CIT (1997) 4 SCC 677 (see paras 19 and 20) and
Ramanlal Bhailal Patel v. State of Gujarat (2008) 5 SCC 449 (see
paragraph 28). It may be mentioned in passing at this stage that under
the Income Tax Act an explanation has been added to the definition of
“person” contained in Section 2(31), sub-clause (v) of which i ncludes
“an association of persons or a body of individuals, whether incorporated
or not”. The explanation inserted by amendment, which is w.e.f. 1s t
April, 2002, is as follows:
“Explanation.—For the purposes of this clause, an association
of persons or a body of individuals or a local authority or an artificial
juridical person shall be deemed to be a person, whether or not
such person or body or authority or juridical person was formed
or established or incorporated with the object of deriving income,
profits or gains;”
18. Obviously, therefore, after 1 st April, 2002, the ratio of the
aforesaid judgments has been undone by this explanation insofar as income
tax is concerned.
19. It is well-settled that when Parliament used the expres sion
“association of persons” in Section 21AA of the Wealth Tax Act, it must
be presumed to know that this expression had been the subject matter of
comment in a cognate allied legislation, namely, the Income Tax Act, as
referring to persons banding together for a common purpose, bein g a
business purpose in the context of a taxation statute in order t o earn
income or profits.This presumption is felicitously refer red to in the
following judgments.
20. In P. VajraveluMudaliar v. Special Deputy Collector for
Land Acquisition (1965) 1 SCR 614, this Court had to decide whether
the 4th Amendment to the Constitution of India, which amended Article
31(2) of the Constitution, made any change in whether compen sation
being a just equivalent in money to be paid for acquisition continued to
be a just equivalent or something less. This Court held that s ince the
expression “compensation”,as interpreted in State of W.B. v. Bela
Banerjee 1954 SCR 558, continued even after the 4th Amendment, a
just equivalent in terms of money for land acquisition would conti nue
having to be paid. The Court held:
503
“… Even after the amendment, provision for compensation or
laying down of the principles for determining the compensation is
a condition for the making of a law of acquisition or requisition. A
legislature, if it intends to make a law for compulsory acquisition
or requisition, must provide for compensation or specif y the
principles for ascertaining the compensation. The f act that
Parliament used the same expressions, namely, “compensation”
and “principles” as were found in Article 31 before the amendment
is a clear indication that it accepted the meaning given by this
Court to those expressions in Mrs Bela Banerjee case [(1954)
SCR 558] . It follows that a legislature in making a law of acquisition
or requisition shall provide for a just equivalent of what the owner
has been deprived of or specify the principles for the purpose of
ascertaining the “just equivalent” of what the owner has b een
deprived of. If Parliament intended to enable a legislature to make
such a law without providing for compensation so defined, it would
have used other expressions like “price”, “consideration” etc. In
Craies on Statute Law, 6th Edn., at p. 167, the relevant principle
of construction is stated thus:
“There is a well-known principle of construction, ‘that where the
legislature used in an Act a legal term which has received judicial
interpretation, it must be assumed that the term is used in the
sense in which it has been judicially interpreted unless a contrary
intention appears.”
The said two expressions in Article 31(2) before the Constitution
(Fourth Amendment) Act, have received an authoritat ive
interpretation by the highest court in the land and it must be
presumed that Parliament did not intend to depart from the meaning
given by this Court to the said expressions.”
(at page. 626)
21. In Sakal Deep Sahai Srivastava v. Union of India (1974) 1
SCC 338, in the context of the Limitation Act, this Court held:
“8. The only question of some difficulty raised before us is whether
Article 102 or Article 120 of the Limitation Act of 1908 would
apply to the case. After having heard the attractive arguments of
Mr Yogeshwar Prasad, we have no doubt that a good deal can be
said in favour of the contention that a claim for arrears of salary
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
is distinguishable from a claim for wages. But, our difficul ty is
that the question appears to us to be no longer ope n for
consideration afresh by us, or, at any rate, it is not advi sable to
review the authorities of this Court, after such a lapse of ti me
when, despite the view taken by this Court that Article 102 of the
Limitation Act of 1908 was applicable to such cases, the Limitation
Act of 1963 had been passed repeating the law, contained in
Articles 102 and 120 of the Limitation Act of 1908, in identical
terms without any modification. The Legislature must be presumed
to be cognizant of the view of this Court that a claim of the nature
before us, for arrears of salary, falls within the purview of Article
102 of the Limitation Act of 1908. If Parliament, which is deemed
to be aware of the declarations of law by this Court, did not alter
the law, it must be deemed to have accepted the interpretation of
this Court even though the correctness of it may be open to doubt.
If doubts had arisen, it was for the Legislature to clear these
doubts. When the Legislature has not done so, despite the repeal
of the Limitation Act of 1908, and the enactment of the Limitation
Act of 1963 after the decisions of this Court, embodying a possibly
questionable view, we think it is expedient and proper to overrule
the submission made on behalf of the appellant that the correctness
of the view adopted by this Court in its decisions on the question
so far should be re-examined by a larger Bench.”
22. Likewise, in Diwan Bros. v. Central Bank of India (1976)
3 SCC 800, this Court referred to the well-known dict um ofLord
Buckmaster in Barras v. Aberdeen Steam Trawling and Fishing
Company1933 AC 402and held as under:
“22. Apart from the above considerations, it is a well-settl ed
principle of interpretation of statutes that where the Le gislature
uses an expression bearing a well-known legal connotation it must
be presumed to have used the said expression in the sense i n
which it has been so understood. Craies on Statute Law observes
as follows:
“There is a well-known principle of construction, that where the
legislature uses in an Act a legal term which has received judicial
interpretation, it must be assumed that the term is used in the
sense in which it has been judicially interpreted, unless a contrary
intention appears.”
505
23. In Barras v. Aberdeen Steam Trawling and Fishing
Company [1933 AC 402, 411] Lord Buckmaster pointed out as
follows:
“It has long been a well-established principle to be applied in the
consideration of Acts of Parliament that where a word of doubtful
meaning has received a clear judicial interpretation, the subsequent
statute which incorporates the same word or the same phra se in
a similar context must be construed so that the word or phrase is
interpreted according to the meaning that has previously b een
ascribed to it.”
Craies further points out that the rule as to words judicially
interpreted applies also to words with well-known legal meanings,
even though they have not been the subject of judic ial
interpretation. Thus applying these principles in the instant case it
would appear that when the Court Fees Act uses the word
“decree” which had a well-known legal significance or meaning,
then the Legislature must be presumed to have used this term in
the sense in which it has been understood, namely, as defined in
the Code of Civil Procedure even if there has been no expr ess
judicial interpretation on this point.”
23. A recent judgment of this Court namely, Shree Bhagwati
Steel Rolling Mills v. CCE (2016) 3 SCC 643, refers to the same
presumption as follows:
“21. It is settled law that Parliament is presumed to know the law
when it enacts a particular piece of legislation. The Prevention of
Corruption Act was passed in the year 1988, that is long aft er
1969 when the Constitution Bench decision in RayalaCorpn.
[RayalaCorpn. (P) Ltd. v. Director of Enforcement, (1969) 2
SCC 412] had been delivered. It is, therefore, presumed t hat
Parliament enacted Section 31 knowing that the decisio n in
RayalaCorpn. [RayalaCorpn. (P) Ltd. v. Director of Enforcement,
(1969) 2 SCC 412] had stated that an omission would not amount
to a repeal and it is for this reason that Section 31 was enacted.
This again does not take us further as this statement of the law in
Rayala Corpn. [RayalaCorpn. (P) Ltd. v. Director of Enforcement,
(1969) 2 SCC 412] is no longer the law declared by the Supreme
Court after the decision in Fibre Board case [Fibre Boar ds (P)
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
Ltd. v. CIT, (2015) 10 SCC 333]. This reason therefore again
cannot avail the appellant.”
24. This being the case, it is clear that in order to be an association
of persons attracting Section 21AA of the Wealth Tax Act, it is necessary
that persons band together with some business or commercial object in
view in order to make income or profits.The presump tion gets
strengthened by the language of Sec. 21AA (2), which speaks o f a
business or profession carried on by an association of persons which
then gets discontinued or dissolved. The thrust of the provision therefore,
is to rope in associations of persons whose common object is a business
or professional object, namely, to earn income or profits.Bangalore Club
being a social club whose objects have been referred to by the Appellate
Tribunal in this case make it clear that persons who are banded together
do not band together for any business purpose or commercial purpose in
order to make income or profits. In fact, the nature of the se kind of
clubs has been set out in Cricket Club of India Ltd v. Bombay Labour
Union (1969) 1 SCR 600 as follows:
“What we have to see is the nature of the activity in f act and in
substance. Though the Club is incorporated as a Company, it is
not like an ordinary Company constituted for the purpose of carrying
on business. There are no shareholders. No dividends are ever
declared and no distribution of profits takes place. Admission to
the Club is by payment of admission fee and not by purchase of
shares. Even this admission is subject to balloting. The membership
is not transferable like the right of shareholders. There is the
provision for expulsion of a Member under certain circumstances
which feature never exists in the case of a shareholder hol ding
shares in a Limited Company. The membership is fluid. A person
retains rights as long as he continues as a Member and gets nothing
at all when he ceases to be a Member, even though he may have
paid a large amount as admission fee. He even loses his rights on
expulsion. In these circumstances, it is clear that the Club cannot
be treated as a separate legal entity of the nature of a Limited
Company carrying on business. The Club, in fact, continues to be
a Members’ Club without any shareholders and, consequently, all
services provided in the Club for Members have to be treated as
activities of a self-serving institution.”
(at page. 614)
507
This judgment has been referred to with approval recently in State
of West Bengal v. Calcutta Club Limited (2019) 13 SCALE 474 at
paragraph 28.
25. At this stage, it is important to refer to CWT v. Ellis Bridge
Gymkhana, (supra). In this case, the Ellis Bridge Gymkhana, like the
Bangalore Club, is an unincorporated club.The assessment years involved
in this case are from 1970-71 to 1977-78 i.e. prior to Section 21AA
coming into force. Despite the fact that Section 21AA did not apply, this
Court referred to Section 21AA as follows:
“15. All these provisions go to show that the Wealth Tax Act has
been drafted on the same lines as the Indian Income Tax Act,
1922. There is great similarity of wording between the various
provisions of the Wealth Tax Act and corresponding provisions of
the Indian Income Tax Act, 1922. But in the case of the charging
Section 3 of the Wealth Tax Act, the phraseology of the charging
Section 3 of the Indian Income Tax Act, 1922 has not bee n
adopted. Unlike Section 3 of the Income Tax Act, Section 3 of the
Wealth Tax Act does not mention a firm or an association of persons
or a body of individuals as taxable units of assessment.
16. The position has been placed beyond doubt by insertion of
Section 21-AA in the Wealth Tax Act itself. This amendment was
effected by the Finance Act, 1981 with effect from 1-4-1981. It
provides for assessment of association of persons in certain special
cases and not otherwise.”
The Court then went on to hold:
“17. It will be seen that assessment as an association of persons
can be made only when the individual shares of members of the
association in the income or assets or both of the association on
the date of its formation or any time thereafter are indeterminate
or unknown. It is only in such an eventuality that an assessment
can be made on an association of persons, otherwise not. Sub-
section (2) of Section 21-AA deals with cases of such associations
as mentioned in sub-section (1). That means only association of
persons in which individual shares of the members were unknown
or indeterminate can be subjected to wealth tax. Sub-section (3)
also deals with association of persons referred to in sub-sec tion
(1). Sub-sections (4) and (5) deal with some consequences which
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
will follow the members of an association of persons spoken of in
sub-section (1) in the case of discontinuance or dissolution.
xxx xxxxxx
19. In our view, Section 21-AA far from helping the case of the
Revenue directly goes against its contention. An association of
persons cannot be taxed at all under Section 3 of the Act. That is
why an amendment was necessary to be made by the Finance
Act, 1981 whereby Section 21-AA was inserted to bring to tax
net wealth of an association of persons where individual share s
of the members of the association were unknown or
indeterminate.”
After referring to the explanatory notes introducing Section 21AA
in paragraph32, the Court then went on to hold:
“33. It will appear from this notification that the Central Board of
Direct Taxes clearly recognised that the charge of wealt h tax
was on individuals and Hindu Undivided Families and not on any
other body of individuals or association of persons. Section 21-
AA has been introduced to prevent evasion of tax. In a normal
case, in assessment of an individual, his wealth from every source
will be added up and computed in accordance with provisions of
the Wealth Tax Act to arrive at the net wealth which has to be
taxed. So, if an individual has any interest in a firm or any other
non-corporate body, then his interest in those bodies or associations
will be added up in his wealth. It is only where such addition is not
possible because the shares of the individual in a body holdi ng
property is unknown or indeterminate, resort will be taken to
Section 21-AA and association of individuals will be taxed a s
association of persons.”
26. A perusal of this judgment would show that Section 21AA has
been introduced in order to prevent tax evasion. The reason why it was
enacted was not to rope in association of persons per se as “one more
taxable person” to whom the Act would apply. The object was to rope in
certain assessees who have resorted to the creation of a l arge number
of association of persons without specifically defining the shares of the
members of such associationsof persons so as to evade tax. In construing
Section 21AA, it is important to have regard to this object.
509
27. In K P Varghese v. ITO, 1982 (1) SCR 629, what arose for
interpretation before the Supreme Court was in the context of capital
gains – as to whether, to attract the applicability of Sec.52 (2) of the
Income Tax Act, understatement of consideration is a prerequisite. On a
purely literal reading of Sec.52(2), it would be clear that no such condition
has been mentioned.However, this Court, after referring to the object of
the section held:
“Thus it is not enough to attract the applicability of sub-section (2)
that the fair market value of the capital asset transfe rred by the
assessee as on the date of the transfer exceeds the full v alue of
the consideration declared in respect of the transfer by no t less
than 15 per cent of the value so declared, but it is furtherm ore
necessary that the full value of the consideration in respect of the
transfer is understated or in other words, shown at a lesser figure
than that actually received by the assessee. Sub-section ( 2) has
no application in case of an honest and bona fide transaction where
the consideration in respect of the transfer has been c orrectly
declared or disclosed by the assessee, even if the condition of 15
per cent difference between the fair market value of the capital
asset as on the date of the transfer and the full valu e of the
consideration declared by the assessee is satisfied.”
(at page. 652, 653)
28. The Bangalore Club is an association of persons and not the
creation, by a person who is otherwise assessable, of one among a large
number of associations of persons without defining the shares of the
members so as to escape tax liability. For all these reasons, it is clear
that Section 21AA of the Wealth Tax Act does not get attracted to the
facts of the present case.
29. However, the impugned judgment of the High Court relies
solely upon CWT v. Chikmagalur Club(supra). This case dealt with a
club that was registered under the provisions of the Karnataka Societies
Registration Act, 1960. After referring copiously t o the Appellate
Authority’s orders on facts in this case, the Court went on to hold:
“10. … Several High Courts and the Tribunals have taken different
view on the question whether a club registered under the provisions
of Karnataka Societies Registration Act is exigible to t ax under
the provisions of the Wealth Tax Act, but in our view, for t he
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
present, the issue is now settled by the pronouncement of the
Supreme Court in the case of the Commissioner of Wealth
Tax v. Ellis Bridge Gymkhana [ 229 ITR 1.] — wherein it is
held that ‘club is not assessable to wealth tax in assessment years
1970-1971 to 1977-1978 as an Association of Persons’ and while
saying so, the Court has observed that’ the position has been placed
beyond doubt by the insertion of Section 21AA in the Wealth Tax
Act itself.”
For this purpose, paragraph 17 already extracted in the Ellis
Bridge Gymkhana case (supra) was referred to by the said judgment.
After referring to paragraph 17, the Court then concluded:
“13. … Now that the scope of Section 21AA of the Act has
been explained by the Apex Court in Ellies Bridge Gymkhana
Club’s case-229 ITR 1, we need not dilate much on the scope
and interpretation of the said Section. It would be suffice to notice
that assessment as an association of persons can be made only,
when the individual shares of the members of the association in
the income or assets or both of the association on the date of its
formation or any time thereafter are indeterminate or unk nown
can be subjected to wealth tax. In the present case, the ass essee
is a club registered under the provisions of the Karnataka Societies
Registration Act and had declared ‘nil’ wealth and had claime d
that it is not susceptible to the provision of wealth Tax Act, since
it is only an association of persons providing recreation facilities
to its members. This claim, in our view, is rightly rejected by both
the assessing authority as well as by the first appellate authority
on the ground that the assessee is an association of persons and
the members are the owners of the assets and the individual shares
of the members in the owners of the assets and the individu al
shares of the members in the income or assets or both of the
association on the date of formation or any time thereafte r or
indeterminate or unknown and accordingly, has subjected the
assessee to wealth tax.”
30. What will be noticed is that the High Court in Chikmagalur
Club (supra) only referred to paragraph 17 and omitted to refer to paras
19, 32 and 33 of the Ellis Bridge Gymkhana judgment (supra) which
have been referred to by us hereinabove. If all these paragraphs would
have been referred to, what would have been clear is that a social club
511
like the Chikmagalur Club could not possibly be said to be an association
of persons regard being had to the object sought to be achie ved by
enacting Section 21AA, which is a Section enacted in order to prevent
tax evasion. As has been pointed out by us hereinabove, the Section was
not introduced to add one more category to the category of taxable
persons – that could have been done by amending the charging section
i.e. Section 3(1) of the Wealth Tax Act. Further, the High Court judgment
is completely oblivious of the line of judgments starting wit h Indira
Balakrishna’s case (supra) by which “association of persons” must
mean persons who are banded together with a common object – and, in
the context of a taxation statute, common object being a business object
being to earn income or profits. This judgment does not refer to Indira
Balakrishna (supra) and the judgments following it at all. For all these
reasons, the judgment in CWT v. Chikmagalur Club (supra) not being
correctly decided, is overruled. Equally, the High Court judgment which
rests solely upon the decision in Chikmagalur Club’s case(supra) has
no legs to stand.
31. We now come to some of the points raised by the learned
Additional Solicitor General, Shri Banerjee. The submission that Section
21AA(2) which deals with dissolution of an association of persons and
the fact that on dissolution under Rule 35 of the Bangalore Club, members
get an equal share would show first, that the Bangalore C lub is an
association of persons; and second, that the member’s share in its income
and assets are indeterminate or unknown, is an argument which has to
be stated to be rejected.First and foremost, sub-section (2) begins with
the words “any business or profession carried on” by an association of
persons. No business or profession is carried on by a social m embers
club. Further, the association of persons mentioned in sub-sec tion (1)
must be persons who have banded together for a business objective – to
earn profits – and if this itself is not the case, then sub-section (2) cannot
possibly apply.Insofar as Rule 35 is concerned, again what is clear is
that on liquidation, any surplus assets remaining after al l debts and
liabilities of the club has been discharged, shall be divided equally amongst
all categories of members of the club. This would show that “at any time
thereafter” within the meaning of Section 21AA(1), the members’ shares
are determinate in that on liquidation each member of whatsoever category
gets an equal share.
32. The judgments cited by Shri Nikhil Nayyar in so far a s this
aspect is concerned, have no direct relevance.The judgment in CWT v.
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
Rama Varma Club 226 ITR 898 and CWT v. George Club 191 ITR
368 are both judgments in which no part of the assets is to be distributed
even on liquidation to any of the members of these clubs. Thus, it was
held in these cases that the members do not have any share in the income
or assets of the club at all.The same cannot be said in the f acts of this
case inasmuch as under Rule 35 the members of the Bangalore Club
are entitled to receive surplus assets in the circumstances stated in Rule
35 - equally on liquidation. However, the result remains the same – viz.,
that even if it be held that the Bangalore Club is an association of persons,
the members’ shares being determinate do not attract Section 21AA.
33. Shri Banerjee then relied upon the judgment in Bangalore
Club v. CIT(2013) 5 SCC 509 only in order to point out that the Bangalore
Club was taxed as an AOP under the Income Tax Act and cannot and
should not therefore, escape liability under the Wealth Tax Act (an allied
and cognate Act). First and foremost, the definition of “person” in Section
2(31) of the Income Tax Act would take in both an association of persons
and a body of individuals. For the purposes of income tax, the Bangalore
Club could perhaps be treated to be a ‘body of individuals’ which is a
wider expression than ‘association of persons’ in which such body of
individuals may have no common object at allbut would include a
combination of individuals who had nothing more than a unity of interest.
This distinction has been made by the Andhra Pradesh High Court in
Deccan Wine and General Stores v. CIT 106 ITR 111 at pages 116,
117. Quite apart from this, to be taxed as an association of pers ons
under the Income Tax Act is to be taxed as an association of persons
per se.We have already seen that Section 21AA does not enlarge the
field of tax payers but only plugs evasion as the association of persons
must be formed with members who have indeterminate shares i n its
income or assets. For all these reasons, we cannot accede to Shri
Banerjee’s argument that being taxed as an association of persons under
the Income Tax Act, the Bangalore Club must be regarded to be an
‘association of persons’ for the purpose of a tax evasion provision in the
Wealth Tax Act as opposed to a charging provision in the Income Tax
Act. One last argument of Shri Banerjee needs to be addressed.
According to the learned ASG, the fact that the membership of the club
is a fluctuating body of individuals would necessarily lead to the conclusion
that the shares of the members in the assets or the incom e of the club
would be indeterminate. In CWT v. Trustees of H.E.H. Nizam’s
Family108 ITR 555 (1977), this court had to construe Sec. 21 of the
513
Wealth Tax Act. Sec. 21(1) & (4) which are relevant for ou r purpose
are set out hereinbelow:
“21. (1) In the case of assets chargeable to tax under this Act ,
which are held by a court of wards or an administrator-general or
an official trustee or any receiver or manager or any other person,
by whatever name called, appointed under any order of a court to
manage property on behalf of another, or any trustee appoint ed
under a trust declared by a duly executed instrument in writing,
whether testamentary or otherwise (including a trustee under a
valid deed of wakf), the wealth-tax shall be levied u pon and
recoverable from the court of wards, administrator-general, official
trustee, receiver, manager or trustee, as the case may be, in the
like manner and to the same extent as it would be leviable upon
and recoverable from the person on whose behalf or for whose
benefit the assets are held, and the provisions of this Act shall
apply accordingly.
xxx xxxxxx
(4) Notwithstanding anything contained in this section, where the
shares of the persons on whose behalf or for whose benefit any
such assets are held are indeterminate or unknown, the wea lth-
tax shall be levied upon and recovered from the court of wa rds,
administrator-general, official trustee, receiver, manager, or other
person aforesaid as if the person on whose behalf or for whose
benefit the assets are held were an individual for the purposes of
this Act.”
34. The argument made in this case was that, as the members of
the Nizam’s family trust who are beneficiaries there of would be a
fluctuating body of persons, the beneficiaries must be said to be
indeterminate as a result of which Sec. 21(4) of the Act would apply and
not Sec. 21(1). This was repelled by this Court stating:
“This immediately takes us to the question as to which of the two
sub-sections, (1) or (4) of Section 21 applies for the purp ose of
assessing the assessees to wealth tax in respect of the beneficial
interest in the remainder qua each set of unit or units allocated to
the relatives specified in the Second Schedule. Now it is cle ar
from the language of Section 3 that the charge of wealth tax is in
respect of the net wealth on the relevant valuation date, and,
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
therefore, the question in regard to the applicability of sub-section
(1) or (4) of Section 21 has to be determined with reference to
the relevant valuation date. The Wealth Tax Officer has to
determine who are the beneficiaries in respect of the re mainder
on the relevant date and whether their shares are indete rminate
or unknown. It is not at all relevant whether the beneficiaries may
change in subsequent years before the date of distr ibution,
depending upon contingencies which may come to pass in future.
So long as it is possible to say on the relevant valuation date that
the beneficiaries are known and their shares are determinate, the
possibility that the beneficiaries may change by re ason of
subsequent events such as birth or death would not take the case
out of the ambit of sub-section (1) of Section 21. It is no answer
to the applicability of sub-section (1) of Section 21 to say that the
beneficiaries are indeterminate and unknown because it cannot
be predicated who would be the beneficiaries in respect of the
remainder on the death of the owner of the life interest . The
position has to be seen on the relevant valuation date as if the
preceding life interest had come to an end on that date and if, on
that hypothesis, it is possible to determine who precisely would be
the beneficiaries and on what determinate shares, sub-section (1)
of Section 21 must apply and it would be a matter o f no
consequence that the number of beneficiaries may vary in the
future either by reason of some beneficiaries ceasing to exi st or
some new beneficiaries coming into being. Not only does th is
appear to us to be the correct approach in the application of sub-
section (1) of Section 21, but we find that this has also been the
general consensus of judicial opinion in this country in various
High Courts during the last about thirty years. The first decision
in which this view was taken was rendered as far back a s 1945
by the Patna High Court in Khan Bahadur M. Habibur
Rahman v.CIT [(1945) 13 ITR 189 (Pat)] and since then, this
view has been followed by the Calcutta High Court in Suhashini
Karuri v. WTO [(1962) 46 ITR 953 (Cal)] the Bombay High Court
in Trustees of Putlibai R.F. Mulla Trust v. CWT [(1967) 66 ITR
653, 657-8 (Bom)] and CWT v. Trustees of Mrs Hansabai
Tribhuwandas Trust [(1967) 69 ITR 527 (Bom)] and the Gujarat
High Court in Padmavati Jaykrishna Trust v.CIT [(1966) 61 ITR
515
66, 73-4 (Guj)]. The Calcutta High Court pointed out in Suhashini
Karuri case:
“The share of a beneficiary can be said to be indeterminate if at
the relevant time the share cannot be determined but me rely
because the number of beneficiaries vary from time to time, one
cannot say that it is indeterminate.”
The same proposition was formulated in slightly different language
by the Bombay High Court in Trustees of Putalibai R.F. Mulla
Trust case [(1967) 66 ITR 653, 657-8 (Bom)]:
“The question whether the shares of the beneficiari es are
determinate or known has to be judged as on the relevant date in
each respective year of taxation. Therefore, whatever may be
the position — as to any future date, so far as the relevant date in
each year is concerned, it is upon the terms of the trust deed
always possible to determine who are the sharers and what their
shares respectively are.”
The Gujarat High Court also observed in Padmavati Jaykrishna
Trust case [(1966) 61 ITR 66, 73-4 (Guj)] :
“. . . in order to ascertain whether the shares of beneficiaries and
their numbers were determinate or not, the Wealth Tax Of ficer
has to ascertain the facts as they prevailed on the relev ant date
and therefore any variation in the number of beneficiaries in future
would not matter and would not make sub-section (4) of Section
21 applicable.”
These observations represent correct statement of the law and
we have no doubt that in order to determine the applicability of
sub-section (1) of Section 21, what has to be seen is whether on
the relevant valuation date, it is possible to say with certainty and
definiteness as to who would be the beneficiaries and whet her
their shares would be determinate and specific, if the event on the
happening of which the distribution is to take place occurred on
that date. If it is, sub-section (1) of Section 21 would apply: if not,
the case will be governed by sub-section (4) of Section 21.”
35. It is thus clear that what has to be seen in the facts of the
present case is the list of members on the date of liquidation as per Rule
35 cited hereinabove. Given that as on that particular date, there would
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
be a fixed list of members belonging to the various classes mentioned in
the rules, it is clear that, applying the ratio of Trustees of H.E.H. Nizam’s
Family(supra), such list of members not being a fluctuating body, but a
fixed body as on the date of liquidation would again make the members
‘determinate’ as a result of which, Sec. 21AA would have no application.
36. For all these reasons, the impugned judgment and the review
judgment are set aside. The appeals are allowed with no orde r as to
costs.
Divya Pandey Appeals allowed