2012 (2) TMI 106 - HC - Wealth-tax

Court Rules Society Members Not Liable for Wealth Tax

The court held that the respondent/assessee was not liable to pay wealth tax under Section 21AA for the assessment years in question. The court agreed ... Liability to wealth-tax of an association of persons - interpretation of Section 21AA of the Wealth Tax Act - member's shares in income or assets being indeterminate or unknown - effect of registration under the Societies Registration Act on assessment under Section 21AA - relevance of CBDT Circular No.508 to Section 21AAMember's shares in income or assets being indeterminate or unknown - interpretation of Section 21AA of the Wealth Tax Act - Whether the individual shares of members of a society registered under the Societies Registration Act in the income or assets of the society were indeterminate or unknown, so as to bring the society within Section 21AA. - HELD THAT: - The Court adopted the view that where a society is registered under the Societies Registration Act the assets belong to the society and members do not have any proprietary share in the income or assets; such shares are therefore nil (zero) and not 'indeterminate or unknown' within the meaning of Section 21AA. The Court accepted the reasoning in George Club and the exposition in Ellis Bridge Gymkhana that Section 21AA applies only where members' interests are unknown or indeterminate; in registered societies the members' interests are not of that character. Consequently a society registered under the Societies Registration Act does not fall within Section 21AA on the ground that members' shares are indeterminate or unknown. [Paras 11, 15]Members of a society registered under the Societies Registration Act have no share in the society's income or assets (shares are nil) and therefore such a society is not taxable under Section 21AA on the ground of indeterminate or unknown member shares.Interpretation of Section 21AA of the Wealth Tax Act - relevance of CBDT Circular No.508 to Section 21AA - effect of registration under the Societies Registration Act on assessment under Section 21AA - Whether the amendment to Section 21AA effective 01.04.1989 applies to the assessment years in controversy and whether a society registered under the Societies Registration Act is excluded from assessment under Section 21AA for assessment year 1989-90. - HELD THAT: - The Court noted the temporal effect of the amendment: the insertions w.e.f. 01.04.1989 do not apply to assessment year 1988-89 but do apply to 1989-90. However, the amendment expressly excluded societies registered under the Societies Registration Act from the scope of Section 21AA as effected by the insertion; the Court relied on the statutory text and the explanatory CBDT Circular No.508, concluding that a registered society was excluded from assessment under Section 21AA for assessment year 1989-90. The Court rejected the Revenue's contrary reading of a subsequent circular and observed that accepting Revenue's interpretation would create anomalies inconsistent with legislative intent and prior decisions of the Supreme Court. [Paras 4, 16, 17]The amendment to Section 21AA effective 01.04.1989 does not affect AY 1988-89; for AY 1989-90 a society registered under the Societies Registration Act stands excluded from assessment under Section 21AA and is not exigible to wealth-tax thereunder.Final Conclusion: The substantial questions are answered against the Revenue: a society registered under the Societies Registration Act is not assessable under Section 21AA because members have no proprietary shares (their shares are nil) and, moreover, the 1989 amendment excludes registered societies for assessment year 1989-90; accordingly the appeals are decided in favour of the respondent and against the Revenue. Issues Involved:1. Applicability of Section 21AA or Section 21A of the Wealth Tax Act, 1957.2. Justification of the Income Tax Appellate Tribunal's decision regarding the Assessee's liability to wealth tax under Section 21AA.3. Liability of the respondent/assessee to pay wealth tax on its net wealth under Section 21AA.Detailed Analysis:1. Applicability of Section 21AA or Section 21A of the Wealth Tax Act, 1957:The court examined whether Section 21AA or Section 21A of the Wealth Tax Act, 1957, was applicable to the facts of the case. Section 21AA, as amended w.e.f. 01.04.1989, applies to associations of persons where individual shares of members in the income or assets are indeterminate or unknown. The court noted that for the assessment year 1988-89, the amendments were not applicable, whereas for 1989-90, the amendments were applicable.The court stated that the term 'association of persons' includes a society, whether registered or not, as per the Black's Law Dictionary and previous judgments like Swami Satichitanand and Ors. vs. Additional Income Tax Officer (1964) 53 ITR 533 (Ker). However, the court emphasized that the individual shares of the members must be indeterminate or unknown for Section 21AA to apply.2. Justification of the Income Tax Appellate Tribunal's Decision:The Income Tax Appellate Tribunal (ITAT) held that the Assessee was not liable to wealth tax under Section 21AA. The tribunal noted that members do not have a share in the income or assets of the association at any time. Hence, the society is not chargeable with wealth tax. The tribunal relied on the decision of the Andhra Pradesh High Court in Commissioner of Wealth Tax vs. George Club (1991) 191 ITR 368, which held that members of a club registered under the Societies Registration Act do not hold shares in the income or assets of the club.The court agreed with the tribunal's view, stating that the assets of a society registered under the Societies Registration Act, 1860, belong to the society itself, and members do not have any right in the income or assets. Therefore, their shares are nil or zero, making Section 21AA inapplicable.3. Liability to Pay Wealth Tax on Net Wealth:The court considered whether the respondent/assessee is liable to pay wealth tax on its net wealth under Section 21AA. The court referred to the CBDT Circular No. 508 dated 29.06.1989, which explained that Section 21AA was introduced to counter tax avoidance through associations of persons with indeterminate member shares. The court noted that the Assessing Officer had not examined whether the individual shares were indeterminate or unknown.The court also discussed the conflicting views of the Karnataka High Court in Commissioner of Wealth Tax vs. Chikmagalur Club (2007) 290 ITR 522, which held that members of an association are owners of the assets, making their shares indeterminate or unknown. However, the court preferred the view of the Andhra Pradesh High Court and the Supreme Court in Ellis Bridge Gymkhana (1998) 229 ITR 1 (SC), which held that the term 'individual' in the Wealth Tax Act does not include an association of persons.For the assessment year 1989-90, the court noted that the amendment w.e.f. 01.04.1989 excluded societies registered under the Societies Registration Act, 1860, from the ambit of Section 21AA. The court rejected the Revenue's interpretation that this exclusion did not apply to societies, citing Circular No. 550 dated 01.01.1990, which clarified that societies were excluded from Section 21AA.The court concluded that the respondent/assessee was not liable to pay wealth tax under Section 21AA for the assessment years in question. The questions of law were answered in the affirmative and against the Revenue, with no order as to costs.