TMI Blog1991 (3) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... persons, is not an individual and hence is not an assessable entity for the purpose of wealth-tax. It is, thereafter, at the instance of the Revenue that the question aforesaid was referred to this court for decision. It is urged by learned counsel for the Revenue that the expression "individual" in section 3 of the Wealth-tax Act is wide enough to include an association of persons and the respondent-club being an association can be subjected to payment of wealth-tax. On the other hand, it is contended by learned counsel for the respondent that an association of persons is not an assessable entity and the word "individual" cannot be construed so as to include a body of individuals. In order to appreciate the rival contentions, it is appropriate to refer to section 3 of the Wealth-tax Act (for short "the Act"). The section reads : "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, a tax (hereinafter referred 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 specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect from April 1, 1975. The assessment year commencing from April 1, 1975, is also included in the assessment years under consideration in these references. For those years, an association or body can be subjected to wealth-tax provided the Board declares by general or special order that the association or body is a company. The Board referred to in this clause means the Central Board of Direct Taxes. The Revenue has not brought to our notice any order declaring the respondent-club as company. The respondent cannot, therefore, be considered as a company for the purpose of section 3 of the Act. The only question that falls for consideration is whether the respondent is an individual. That the respondent is a members' club, an unregistered association of persons, is not disputed. What a club is has been explained in Daly's Club Law, Seventh Edition, page 1. It is pointed out that the word "club" means: "Essentially an association of individuals in a way that involves to some degree the factors of free choice (which connotes a power of exclusion), permanence, corporate identity and the pursuit as a common aim of some joint interest other than the acquisition of gain' (or some mutual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangements for carrying it on, depends upon the rules. Members are entitled to enjoy the use of the club premises, if any, and other privileges of the society in accordance with the rules so long as they duly pay the subscriptions and continue to be members. In an unincorporated members' club, there are usually trustees, appointed in pursuance of the provisions in the rules, in whom the property and assets of the club are vested in trust for the members for the time being and who are given power to invest the funds of the club, sometimes at their own discretion and sometimes according to the directions of the committee. In a non-proprietary club, the members for the time being are jointly entitled to all the property and funds and it is only on dissolution that the individual interest of the members becomes capable of realisation." The Bombay High Court noticed the difference between the two concepts "association of persons" and "body of individuals". Particular reference was made to section 4 of the Act which brings out a distinction between an individual and an association of persons. That section provides for computation of the net wealth of an individual. The section provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not an individual for the purpose of the Wealth-tax Act and hence not an assessable entity as an individual. It is observed that the Legislature has given a clear indication that an association of persons is not an assessable entity covered by the word "individual" in section 3 of the Wealth-tax Act and that is clear on a reading of rule 2(1) of the Wealth-tax Rules, 1957, along with section 4(1)(b) of the Act. Rule 2 prescribes the manner in which the interest of an individual member in property held by an association of persons is to be valued and, under sub-rule (1) of rule 2, the value of the interest of a person in an association of persons in which he is member shall be determined in the manner provided in sub-rule (1). The court observed that sections 5 and 21 of the Act give a positive indication that the word "individual" covers trustees of a trust and section 2(h)(iii) and section 4(1)(b) read with rule 2 of the Wealth-tax Rules give a negative indication that the word "individual" in section 3 does not cover body of individuals or an association of persons. The Calcutta High Court has also taken the same view. A question arose as to whether the Royal Calcutta Turf Club ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angh [1988] 171 ITR (Short Notes of Cases) p, iii. There is thus a sharp cleavage of opinion between the Madras High Court on the one hand and the High Courts of Bombay, Calcutta and Gujarat on the other. The majority of the High Courts have expressed the opinion that "individual" in section 3 of the Act does not include an association of persons. The Madras High Court has relied on the decision of the Supreme Court in CIT v. Sodra Devi [1957] 32 ITR 615. The Supreme Court held that the word "individual" has not been defined in the Act (Indian Income-tax Act, 1922) and there is authority for the proposition that the word "individual" does not mean only a human being, but is wide enough to include a group of persons forming a (natural) unit. The decision in WTO v. C. K. Mammed Kayi [1981] 129 ITR 307 (SC) was also relied on by the Madras High Court. In that case, a question arose whether Mappilla Marumakkathayam tarwads of North Malabar-Muslim undivided families governed by the Mappilla Marumakkathayam Act (Madras Act 17 of 1939) fall within the expression "individual" and are assessable to tax under section 3 of the Wealth-tax Act, 1957. The Supreme Court held that the term "indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y refers to an "association of persons" as contradistinguished from the "individual" which is treated as a taxable unit. After referring to the two decisions of the Supreme Court which have given a wider meaning to the word "individual", the Bombay High Court observed that the width of the interpretation was limited by a consideration of the meaning with reference to a Hindu or non-Hindu undivided family. We are in respectful agreement with the observations of the Bombay High Court. It has also to be remembered that the scope of section 4 of the Act and the reference to an "association of persons" as distinguished from an "individual" was not considered by the Supreme Court iii Mammed Kayi's case [1981] 129 ITR 307. That decision is therefore, of no assistance to the Revenue. None of the decisions cited at the Bar except CWT v. George Club [1991] 191 ITR 368 (AP) has considered the scope and effect of section 21AA of the Wealth-tax Act. That section was inserted by the Finance Act, 1981, with effect from April 1, 1981. In the Memo Explaining the Provisions in the Finance Bill, 1981, the reasons for the proposed amendments to the Wealth-tax Act and measures for countering tax avoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e through the medium of associations of persons wherein shares of the members are indeterminate or unknown. The section was amended by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989, and by the Finance Act of 1989. Section 21AA is thus in operation from the assessment year 1981-82, but it is not applicable up to and inclusive of the assessment year 1980-81. In these references, we are concerned with the assessment years up to 1978-79. Section 21AA cannot, therefore, be, resorted to by the Revenue for assessing the wealth of the respondent for the years under dispute in these references. The Department was thus aware that only individuals and undivided families were taxable entities under the Wealth-tax Act, 1957, before the introduction of section 21AA in the Act. It is mentioned in the Memo Explaining the Provisions in the Finance Bill, 1981, that an association of persons is not charged to wealth-tax on its net wealth. The Legislature had drawn a distinction between an individual in section 3 and an association of persons in section 4 of the Act. That an "association of persons" will not come within the charging provision contained in section 3 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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