Wealth Tax Act, 1957 – ss.3, 21AA – Liability of Bangalore Club to pay wealth tax – Assessing Officer held that Club was liable to be taxed under 1957 Act – Appeal dismissed by CIT (Appeals) – Appellate Tribunal set aside the orders of the Assessing Officer and CIT (Appeals) – High Court decided in favour of revenue – Review Petition dismissed – Held: s.21AA was introduced in order to prevent tax evasion – It was enacted not to rope in association of persons per se as “one more taxable person” to whom the Act would apply – 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 – In order to be an association of persons attracting s.21AA it is necessary that persons band together with some business or commercial object in view in order to make income or profits – Bangalore Club is a social club – Persons who are banded together do not band together for any business purpose or commercial purpose in order to make income or profits – s.21AA does not get attracted to the facts of the present case –Impugned judgment and review judgment set aside –Income Tax Act, 1961 – s.2(31), 167A.
Allowing the appeals, the Court
HELD: 1.1 Section 3 is the charging section in the Wealth Tax Act. Only three types of persons can be assessed to wealth tax under Section 3 i.e. individuals, Hindu undivided families and companies. 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. By the Finance Bill of 1981, Section 21AA was introduced into the Wealth Tax Act. Section 21AA was enacted w.e.f 1st April, 1981.For the first time from 1st April, 1981, an association of persons other than a company or cooperative society has 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 any time thereafter must be indeterminate or unknown. It is only then that the section gets attracted. [Paras 9-13][497-C, E-F; 499-H; 500-A-B]
1.2 When Parliament used the expression “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, being a business purpose in the context of a taxation statute in order to earn income or profits. 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 presumption gets strengthened by the language of Sec. 21AA (2), which speaks of 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. A perusal of judgment in Ellis Bridge Gymkhana 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 large number of association of persons without specifically defining the shares of the members of such associations of persons so as to evade tax. In construing Section 21AA, it is important to have regard to this object. [Paras 19, 24 & 26][502-E-F; 506-A-D; 508-G-H] Cricket Club of India Ltd v. Bombay Labour Union [1969] 1 SCR 600 – relied on.
1.3 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. Section 21AA of the Wealth Tax Act does not get attracted to the facts of the present case. 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. The judgment in CWT v. Chikmagalur Club not being correctly decided, is overruled. Equally, the High Court judgment which rests solely upon the decision in Chikmagalur Club’s case has no legs to stand. 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 members club. Further, the association of persons mentioned in sub-section (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 all 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. Under Rule 35 the members of the Bangalore Club are entitled to receive surplus assets in the circumstances stated in Rule 35equally 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. [Paras 28, 30-32][509-E-F; 511-A-B, C-D, E-G; 512-B-C]
CWT v. ChikmagalurClub 197 ITR Karnataka 609 – overruled.
CIT v. Indira Balkrishna (1960) 39 ITR 546 – relied on.
1.4 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 all but would include a combination of individuals who had nothing more than a unity of interest. To be taxed as an association of persons under the Income Tax Act is to be taxed as an association of persons per se. 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 in its income or assets. [Para 33][512-D-F]
1.5 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. Given that as on that particular date, there would 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, 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. The impugned judgment and the review judgment are set aside. [Paras 35, 36][515-G-H; 516-A-B] CWT v. Trustees of H.E.H. Nizam’s Family 108 ITR 555 (1977); P. Vajravelu Mudaliar v. Special Deputy Collector for Land Acquisition [1965] 1 SCR 614; Sakal Deep Sahai Srivastava v. Union of India (1974) 1 SCC
338 : [1974] 2 SCR 485; Shree Bhagwati Steel Rolling Mills v. CCE (2016) 3 SCC 643 : [2015] 12 SCR 332; Diwan Bros. v. Central Bank of India (1976) 3 SCC
800 : [1976] Suppl. SCR 664 – relied on.
CWT v. Ellis Bridge Gymkhana (1998) 1 SCC 384 : [1997] 4 Suppl. SCR 626; Bangalore Club v. CIT (2013) 5 SCC 509 : [ 2013] 1 SCR 267; G.Murugesan & Brothers v. CIT 88 ITR 432 (1973); Meera and Co. v. CIT (1997) 4 SCC 677 : [1997] 2 SCR 991; Ramanlal Bhailal Patel v. State of Gujarat (2008) 5 SCC 449 : [2008] 2 SCR 468; State of W.B. v. Bela Banerjee [1954] SCR 558; State of West Bengal v. Calcutta Club Limited (2019) 13 SCALE 474; K P Varghese v. ITO [1982] 1 SCR 629 – referred to.
CWT v. Rama Varma Club 226 ITR 898; CWT v. George Club 191 ITR 368 – distinguished.
Deccan Wine and General Stores v. CIT106 ITR 111 – referred to.
Barras v. Aberdeen Steam Trawling and Fishing Company 1933 AC 402 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.