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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 ..... or 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 is not registered as a society, a trust or a company. The assessing officer, without further ado, "after a careful perusal" of the rules of the Club, came to the conclusion that the rights of the members are not restricted only to user or possession, but definitely as persons to whom the assets of the Club belong. After referring to Section 167A, inserted into the Income Tax Act, 1961, and after referring to Rule 35 of the Club Rules, the assessing officer concluded that the number of members and the date of dissolution are all uncertain and variable and therefore indeterminate, as a result of which the Club was liable to be taxed under the Wealth Tax Act. By a cryptic order dated 25th October, 2000, the CIT (Appeals) dismissed the appeal against the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 surplus and not income of the assessee-club. It is an accepted principle that principle of mutuality is applicable to the assessee club and hence not liable to income-tax also. At the most, this. may be called the "Body of Individuals" but not an AOP formed with an intention to earn income." 5. It then referred to a CBDT Circular dated 11th January, 1992, explaining the pari materia provision of Sections 167A in the Income Tax Act, and therefore inferred, from a reading of the aforesaid Circular, that Section 21AA would not be attracted to the case of the Bangalore Club. It was then held, on a reading of Rule 35, that since members are entitled to equal shares in the assets of the Club on winding-up after paying all debts and liabilities, the shares so fixed are determinate also making it clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly 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 Club. He then referred to this Court's judgment in Bangalore Club v. CIT (2013) 5 SCC 509, in which, for income tax purposes, the Bangalore Club was assessed as an association of persons. This being the case, it cannot be that for income tax purposes, the Bangalore Club is treated as an association of persons but for wealth tax purposes, it cannot be so treated. He then referred to this Court's judgment in CWT v. Ellis Bridge Gymkhana (1998) 1 SCC 384 in order to support the impugned judgment of the High Court which, according to him, correctly followed Chikmagalur Club's case (supra) which, in turn, only relied upon this Court's judgment in Ellis Bridge Gymkhana (supra). He also stated that the finding of the Assessing Officer that the shares of a fluctuating body of members would be indeterminate is corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciations 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 persons (other than a company or a cooperative society) and the individual shares of the members of the said association in income or the assets of the association on the date of its formation or at any time thereafter, are indeterminate or unknown, wealth tax will be levied upon and recovered from such association in the like manner and to the same extent as it is leviable upon and recoverable from an individual who is a citizen of India and is resident in India at the rates specified in Part I of Schedule I or at the rate of 3 per cent, whichever course is more beneficial to the Revenue." 12. With this object in mind, Section 21AA was enacted w.e.f. 1st April, 1981 as follows: "21AA. Assessment when assets are held by certain associations of persons - (1) Where assets chargeable to tax under this Act are held by an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings 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 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. 14. The first question that arises is as to what is the meaning of the expression "association of persons" which occurs in Section 21AA. In an early judgment of this Court where the expression "association of persons" occurred in the Income Tax Act, 1922 - a cognate tax statute, this Court in CIT v. Indira Balkrishna (supra) posed question no.3 as follows: "(3) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the assessment made on the three widows of Balkrishna Purushottam Purani in the status of an association of persons is legal and valid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 to Indira Balakrishna (supra) and then held: "11. For forming an "Association of Persons", the members of the association must join together for the purpose of producing an income. An "Association of Persons" can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence volition on the part of the member of the association is an essential ingredient. It is true that even a minor can join an "Association of Persons" if his lawful guardian gives his consent. In the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two more shareholders functioned as an "Association of Persons" from. The mere fact that they jointly own one or more shares, and jointly receive the dividends declared those circumstances do not by thems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn 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 expressions, namely, "compensation" and "principles" as were found in Article 31 before the amendment is a clear indication that it accepted the meaning given by this Court to those expressions in Mrs Bela Banerjee case [(1954) SCR 558] . It follows that a legislature in making a law of acquisition or requisition shall provide for a just equivalent of what the owner has been deprived of or specify the principles for the purpose of ascertaining the "just equivalent" of what the owner has been deprived of. If Parliament intended to enable a legislature to make such a law without providing for compensation so defined, it would have used other expressions like "price", "consideration" etc. In Craies on Statute Law, 6th Edn., at p. 167, the relevant principle of construction is stated thus: "There is a well-known principle of construction, 'tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew 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. Apart from the above considerations, it is a well- settled principle of interpretation of statutes that where the Legislature uses an expression bearing a well-known legal connotation it must be presumed to have used the said expression in the sense in which it has been so understood. Craies on Statute Law observes as follows: "There is a well-known principle of construction, that where the legislature uses in an Act a legal term which has received judicial interpretation, it must be assumed that the term is used in the sense in which it has been judicially interpreted, unless a contrary intention appears." 23. In Barras v. Aberdeen Steam Trawling and Fishing Company [1933 AC 402, 411] Lord Buckmaster pointed out as follows: "It has long been a well-established principle to be applied in the consideration of Acts of Parliament that where a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion 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. In fact, the nature of these kind of clubs has been set out in Cricket Club of India Ltd v. Bombay Labour Union (1969) 1 SCR 600 as follows: "What we have to see is the nature of the activity in fact and in substance. Though the Club is incorporated as a Company, it is not like an ordinary Company constituted for the purpose of carrying on business. There are no shareholders. No dividends are ever declared and no distribution of profits takes place. Admission to the Club is by payment of admission fee and not by purchase of shares. Even this admission is subject to balloting. The membership is not transferable like the right of shareholders. There is the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation 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 associations as mentioned in sub-section (1). That means only association of persons in which individual shares of the members were unknown or indeterminate can be subjected to wealth tax. Sub-section (3) also deals with association of persons referred to in sub-section (1). Sub- sections (4) and (5) deal with some consequences which will follow the members of an association of persons spoken of in sub-section (1) in the case of discontinuance or dissolution. xxx xxx xxx 19. In our view, Section 21-AA far from helping the case of the Revenue directly goes against its contention. An association of persons cannot be taxed at all under Section 3 of the Act. That is why an amendment was necessary to be made by the Finance Act, 1981 whereby Section 21-AA was inserted to bring to tax net wealth of an association of persons where individual shares of the members of the association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared, 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 the consideration in respect of the transfer has been correctly declared or disclosed by the assessee, even if the condition of 15 per cent difference between the fair market value of the capital asset as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied." (at page. 652, 653) 28. 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. For all these reasons, it is clear that Section 21AA of the Wealth Tax Act does not get attracted to the facts of the present case. 29. However, the impugned judgment of the High Court relies solely upon CWT v. Chikmagalur Club (supra). This case dealt with a club that was registered under the provisions of the Karnataka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, 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. If all these paragraphs would have been referred to, what would have been clear is that a social club like the Chikmagalur Club could not possibly be said to be an association of persons regard being had to the object sought to be achieved by enacting Section 21AA, which is a Section enacted in order to prevent tax evasion. As has been pointed out by us hereinabove, 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. Further, the High Court judgment is completely oblivious of the line of judgments starting with Indira Balakrishna's case (supra) by which "association of persons" must mean persons who are banded together with a common object - and, in the context of a taxation statute, common object being a business object being to earn income or profits. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mains 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 that the Bangalore Club was taxed as an AOP under the Income Tax Act and cannot and should not therefore, escape liability under the Wealth Tax Act (an allied and cognate Act). First and foremost, 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. This distinction has been made by the Andhra Pradesh High Court in Deccan Wine and General Stores v. CIT 106 ITR 111 at pages 116, 117. Quite apart from this, to be taxed as an association of persons under the Income Tax Act is to be taxed as an associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 Act would apply and not Sec. 21(1). This was repelled by this Court stating: "This immediately takes us to the question as to which of the two sub-sections, (1) or (4) of Section 21 applies for the purpose of assessing the assessees to wealth tax in respect of the beneficial interest in the remainder qua each set of unit or units allocated to the relatives specified in the Second Schedule. Now it is clear from the language of Section 3 that the charge of wealth tax is in respect of the net wealth on the relevant valuation date, and, therefore, the question in regard to the applicability of sub-section (1) or (4) of Section 21 has to be determined with reference to the relevant valuation date. The Wealth Tax Officer has to determine who are the beneficiaries in respect of the remainder on the relevant date and whether their shares are indeterminate or unknown. It is not at all relevant whether the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent 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 taxation. Therefore, whatever may be the position - as to any future date, so far as the relevant date in each year is concerned, it is upon the terms of the trust deed always possible to determine who are the sharers and what their shares respectively are." The Gujarat High Court also observed in Padmavati Jaykrishna Trust case [(1966) 61 ITR 66, 73-4 (Guj)] : ". . . in order to ascertain whether the shares of beneficiaries and their numbers were determinate or not, the Wealth Tax Officer has to ascertain the facts as they prevailed on the relevant date and therefore any variation in the number of beneficiaries in future would not matter and would not make sub-section (4) of Section 21 applicable." These observations represent correct statement of the law and we have no doubt that in order to determine the applicability of sub-section (1) of Section 21, what has to be seen is whether on the relevant valuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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