2002 (12) TMI 70 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in overlooking sub-section (7) of section 40 of the Finance Act, 1983, and holding that the said section relating to levy of wealth-tax in the case of closely held companies does not apply to the assessee-club, which has been declared on its own request as a company under section 2(h)(iii) of the Wealth-tax Act? - we are of the view that the Tribunal has come to a clear and correct conclusion and no irregularity could be attributed to the order of the Tribunal. We are also not expressing any opinion on the question whether the assessee is assessable to tax under section 21AA of the Wealth-tax Act as the said question is not before us. Hence, we answer the question in favour of the assessee and against the Revenue.

Issues Involved:
1. Whether the assessee-club is liable to wealth-tax as a company under section 40(1) of the Finance Act, 1983.
2. Applicability of section 40(1) of the Finance Act, 1983, to the assessee-club.
3. Interpretation of section 40(1) in the context of the legislative intent and the definition of "company."
4. Relevance of sub-section (7) of section 40 of the Finance Act, 1983, to the assessee-club.
5. The Tribunal's decision on granting a discount on the valuation of the property for computation of net wealth.

Detailed Analysis:

1. Liability to Wealth-tax as a Company:
The primary issue revolves around whether the assessee-club, which was declared a company under section 2(h)(iii) of the Wealth-tax Act by the Central Board of Direct Taxes (CBDT), is liable to wealth-tax under section 40(1) of the Finance Act, 1983. The Wealth-tax Officer and the Commissioner of Wealth-tax (Appeals) held that the assessee was liable as a company. However, the Tribunal allowed the assessee's appeal, leading to the Revenue seeking a referral to the High Court.

2. Applicability of Section 40(1) of the Finance Act, 1983:
Section 40(1) of the Finance Act, 1983, revives the levy of wealth-tax on companies not substantially interested by the public. The court noted that the intent behind this provision was to prevent tax avoidance by individuals transferring personal wealth to closely-held companies. The assessee-club, being a members' club, did not fit this category as it was not a closely-held company and its members did not transfer personal wealth to the club. The court emphasized that the legislative intent was to tax unproductive assets in closely-held companies, not entities like the assessee-club.

3. Interpretation of Section 40(1):
The court highlighted that the assessee-club was not a company in the true sense as it was not registered under the Companies Act, 1956, but was declared a company by CBDT for tax exemption purposes. The court reasoned that applying section 40(1) to the assessee-club would lead to an absurd and unjust result, contrary to the legislative intent. The court referenced the Supreme Court's ruling in K.P. Verghese v. ITO, emphasizing that statutory provisions should be construed to avoid absurdity and mischief.

4. Relevance of Sub-section (7) of Section 40:
The Revenue contended that sub-section (7) of section 40, which integrates the section with the Wealth-tax Act, should apply. However, the court found no notification from the Central Government granting exemption under this provision. The court concluded that sub-section (7) could not expand the scope of section 40(1) to include the assessee-club, which was not a closely-held company.

5. Tribunal's Decision on Property Valuation:
The Tribunal had granted a 70% discount on the valuation of the property for computing net wealth, considering the restrictive covenants on its use and alienation. The Revenue's appeal against this discount was dismissed by the Tribunal. The High Court did not find any irregularity in the Tribunal's decision and upheld it.

Conclusion:
The High Court concluded that section 40 of the Finance Act, 1983, does not apply to the assessee-club, which is deemed a company under section 2(h)(iii) of the Wealth-tax Act. The court emphasized the legislative intent to tax unproductive assets in closely-held companies and not entities like the assessee-club. The Tribunal's decision was upheld, and the question was answered in favor of the assessee and against the Revenue.

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