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TMI Blog2002 (12) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1974-75 onwards. However, by section 40 of the Finance Act, 1983, the levy of wealth-tax on closely held companies was revived. Hence, the assessee-club by its representation dated January 31, 1995, requested the Central Board of Direct Taxes to grant exemption from the levy of wealth-tax under sub-section (6) of section 40 of the Finance Act, 1983. The said request was rejected by the Board on March 21, 1986. Again another request was made for exemption under section 40(6), since the assessee is a deemed company under section 2(h)(iii) of the Wealth-tax Act and not a closely held company. An alternate request was made to declare the assessee-club as a company under section 2(17)(iv) of the Income-tax Act and then issue an order under section 2(18)(ab) of the Income-tax Act declaring the assessee-club as a company, in which the public are substantially interested so as to enable the assessee-club to continue to enjoy the benefit of exemption from wealth-tax as provided by section 13 of the Finance Act, 1960. This request was also rejected by the Board by its reply dated January 13, 1987. For the assessment year 1984-85, the assessee filed a return admitting a wealt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/Mds. of 1990, consequently dismissed the appeal of the Revenue. Having failed to get an order of referral to this court, the Revenue filed T.C.P. No. 562 of 1996 and obtained an order directing the Tribunal to state a case and refer the question of law for the opinion of this court relating to the assessment year 1984-85 and under section 27(3) of the Wealth-tax Act. In obedience of the same, the Tribunal stated a case and referred the following question of law: "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?" Mrs. Pushya Sitaraman, learned senior standing counsel appearing for the Revenue, submitted that the Tribunal went wrong in allowing the appeal notwithstanding the fact that the assessee, a members' club obtained an order from the Central Board of Direct Taxes declaring it as a "company" under section 2(h)(iii) of the We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... September 30, 1982, with retrospective effect from 1974-75. The reason for such a declaration was also obviously to get the benefit of exemption from the wealth-tax to the assessee-club. It is also not disputed that the assessee was run by the subscription of members and entrance fee of the new members. Members also did not share any profit except enjoying the recreation facilities provided to them by the club. It is also evident that it was registered under the Societies Registration Act, 1860. Thus the assessee was not a company in its true sense, since it was not registered under the provisions of the Companies Act, 1956, nor formed and registered under any law relating to companies formerly in force in any part of India. The assessee became a company by virtue of the declaration of the Central Board of Direct Taxes within the meaning of the inclusive definition of "company" contained under section 2(h)(iii). By section 40(1) of the Finance Act, 1983, the levy of tax on company, not being a company in which the public are substantially interested has been revived at the rate of two per cent. of such net wealth. Section 40(1) of the Finance Act, 1983, runs as follows: "40. Revi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewellery, real estate, etc., to such companies. The said provision, which was revived was only intended to curb such a mischief and cannot be used against the assessee-club, because of the simple reason that it got itself declared as a company under section 2(h)(iii) for the purpose of claiming exemption from wealth-tax. The assessee is a members' club. There is no question of any of its members transferring his personal wealth or assets such as jewellery, bullion or real estate in favour of the club. The assets such as land and building of the club belonged to the club itself and no member of the club can claim any share or right of ownership over any portion of that property. Further under article 6 of the memorandum of association of the assessee club upon the winding up or dissolution of the club the property remaining after the satisfaction of all its debts could not be paid or distributed among the members of the club but should be given or transferred to some other institution or institutions having objects similar to the object of the assessee-club to be determined by the members of the club. No member can claim any proprietary right in the property of the club. As such th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax avoidance, by transfer of personal properties by the director or other persons interested in such companies to such companies. We are of the view that though the language employed in section 40 of the Finance Act, 1983, is wide, yet, considering the object of section 40 of the Finance Act it does not encompass entities which are not really companies, but recognised as companies by the Board. We are of the view that the following ratio laid down by the Supreme Court in the case of K.P. Verghese v. ITO [1981] 131 ITR 597, would apply to the facts of the present case: "A statutory provision must be so construed, if possible, that absurdity and mischief, may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction. Speeches made by the Members of the Legislature on the floor of the House when the Bill is being debated are inadmissible for the purpose of interpreting the statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Sub-section (7) of section 40 of the Finance Act, 1983, provided that subject to the provisions of sub-section (5), this section shall be construed as one within the Wealth-tax Act. Sub-section (5) of section 40 provided that for the purposes of the levy of wealth-tax under the Wealth-tax Act, in pursuance of the provisions of this section, section 5 and clause (d) of section 45 of that Act and Part 11 of Schedule I to that Act shall not apply and shall have no effect. The remaining provisions of that Act shall be construed so as to be in conformity with the provisions of this section. We directed Mrs. Pushya Sitharaman, learned senior standing counsel for the Income-tax Department, to produce the copy of any notification issued by the Central Government granting exemption in exercise of the powers under section 40(7) of the Finance Act, 1983. Learned counsel submitted that in spite of her best efforts she could not trace out any such notification. We are of the view that if the assessee does not come within the ambit of section 40(1) of the Finance Act, it is not possible to enlarge the scope of sub-section (1) of section 40 of the Finance Act by reading section 40(7) of the Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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