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TMI Blog2020 (9) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Whether the club has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Respondent : Mr. Vikramjit Banerjee, ASG.Mr. K. Radhakrishnan, Sr. Adv.Ms. Gargi Khanna, Adv.Ms. Niranjana Singh, Adv.Mrs. Anil Katiyar, AOR JUDGMENT 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 defaulters, which numbered 17, for an amount of ₹ 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 Winston 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : If it be resolved to wind up, the Meeting shall appoint a liquidator or liquidators and fix his or their remuneration. The liquidation shall be conducted as nearly as practicable in accordance with the laws governing voluntary liquidation under the Companies Act or any statutory modifications thereto and any surplus assets remaining after all debts and liabilities of the Club have been discharged shall be divided equally amongst the Members of the Club as defined in Rules 6.1(i), 6.1(ii), 6.1 (iii), 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, the 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 per the objects of the club. The members themselves are contributing to the receipts of the club. The members themselves are contributing to the receipts of the club (sic) and what is the difference between the Income and Expenditure can be said to be only surplu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, to argue that since on winding-up all members get an equal share in the surplus that remains after all debts and 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 Courts. He then adverted to an explanation that was added to the definition 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 explanation does not apply to the Wealth Tax Act, and, in any case, given the fact that the assessment years in question 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 Clu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation of persons is determined in accordance with the provisions of the rules and is includible in the net wealth of the member. 21.2 Instances had come to the notice of the Government where certain assessees had resorted to the creation of a large number 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 or 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-section (1) provides that where assets chargeable to wealth tax are held by an association of pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of persons was guilty of any of the acts specified 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 other 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 other sum. (5) Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against the persons referred to in sub-section (4) from the stage at which 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 been brought into the tax net so far as wealth tax is concerned w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute 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 call 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 be drawn or not. 16. Likewise, in G. Murugesan Brothers v. CIT 88 ITR 432 (1973), this Court referred with approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a taxation statute in order to earn income or profits. This presumption is felicitously referred to in the following judgments. 20. In P. Vajravelu Mudaliar 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 compensation being a just equivalent in money to be paid for acquisition continued to be a just equivalent or something less. This Court held that since 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 continue having to be paid. The Court held: 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 specify the principles for ascertaining the compensation. The fact that Parliament used the same expressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication. 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 dictum of Lord Buckmaster in Barras v. Aberdeen Steam Trawling and Fishing Company 1933 AC 402 and held as under: 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. [Rayala Corpn. (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 Boards (P) 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 been 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 associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 transferred by the assessee as on the date of the transfer exceeds the full value of the consideration declared in respect of the transfer by not less than 15 per cent of the value so declared, but it is furthermore 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of its formation or any time thereafter are indeterminate or unknown can be subjected to wealth tax. In the present case, the assessee is a club registered under the provisions of the Karnataka Societies Registration Act and had declared nil wealth and had claimed 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 individual shares of the members in the income or assets or both of the association on the date of formation or any time thereafter 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ories 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 as this aspect is concerned, have no direct relevance. The judgment in CWT v. 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 facts 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tamentary or otherwise (including a trustee under a valid deed of wakf), the wealth-tax shall be levied upon 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 xxx xxx (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 wealth-tax shall be levied upon and recovered from the court of wards, 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 thereof 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first decision in which this view was taken was rendered as far back as 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 Tribhu wandas Trust [(1967) 69 ITR 527 (Bom)] and the Gujarat High Court in Padmavati Jaykrishna Trust v.CIT [(1966) 61 ITR 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 merely 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 beneficiaries are determinate or known has to be judged as on the relevant date in each respective year of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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