2020 (9) TMI 430 - SC - Wealth-tax

Social club exempt from wealth tax under Wealth Tax Act as not an association of persons

M/s BANGALORE CLUB Versus THE COMMISSIONER OF WEALTH TAX & ANR.

The Supreme Court held that Bangalore Club, a social club without a profit motive, was not liable to pay wealth tax under the Wealth Tax Act. It ... Wealth Tax Liability - Whether Club can be treated as 'Association of Person'? - ITAT said No - HC said Yes - What is the meaning of the expression “association of persons” which occurs in Section 21AA? - Whether 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? - HELD 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. After 1st April, 2002, as income tax is concerned. It is well-settled that when Parliament used the expression “association of persons” in Section 21AA of the 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 been created to escape tax liability - Held that:- A perusal of the judgment in ELLIS BRIDGE GYMKHANA AND OTHERS [1997 (10) TMI 2 - SUPREME COURT] would show that Section 21AA has been introduced in order to prevent tax evasion. The reason why it was enacted was not to rope in association of persons per se as “one more taxable person” to whom the Act would apply. The object was to rope in certain assessees who have resorted to the creation of a large number of association of persons without specifically defining the shares of 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. 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. - It is clear that Section 21AA of the Wealth Tax Act does not get attracted to the facts of the present case. Charging provisions under the Income Tax versus under the Wealth Tax - Held that:- For all the reasons, we cannot accede to Shri Banerjee’s argument that being taxed as an association of persons under the Income Tax Act, the Bangalore Club must be regarded to be an ‘association of persons’ for the purpose of a tax evasion provision in the Wealth Tax Act as opposed to a charging provision in the Income Tax Act. Effect of Dissolution / liquidation clause as per section 21AA(2) - Held that:- What has to be seen in the facts of the present case is the list of members on the date of liquidation as per Rule 35 cited hereinabove. Given that as on that particular date, there would be a fixed list of members belonging to the various classes mentioned in the rules, it is clear that, applying the ratio of Trustees of H.E.H. Nizam's Family [1977 (5) TMI 1 - SUPREME COURT] such list of members not being a fluctuating body, but a fixed body as on the date of liquidation would again make the members ‘determinate’ as a result of which, Sec. 21AA would have no application. Issues Involved:1. Liability of Bangalore Club under the Wealth Tax Act.2. Applicability of Section 21AA of the Wealth Tax Act.3. Determination of Bangalore Club as an 'association of persons' (AOP).4. Interpretation of 'indeterminate or unknown' shares of members.5. Relevance of previous judicial interpretations and legislative intent.Detailed Analysis:1. Liability of Bangalore Club under the Wealth Tax Act:The primary issue was whether Bangalore Club is liable to pay wealth tax under the Wealth Tax Act for the assessment years 1981-82 and 1984-85 to 1990-91. The Wealth Tax Officer assessed that Bangalore Club, not being registered as a society, trust, or company, had members who were entitled to the assets of the Club, and thus, it was liable for wealth tax. The Income Tax Appellate Tribunal (ITAT) later overturned this decision, stating that the Club's members did not join to earn income or share profits but to enjoy facilities, and thus, the principle of mutuality applied, making the Club not liable for wealth tax.2. Applicability of Section 21AA of the Wealth Tax Act:Section 21AA was introduced to prevent tax evasion by associations of persons (AOPs) with indeterminate or unknown shares of members. The ITAT held that Section 21AA did not apply to Bangalore Club as the members' shares in the assets were determinate upon dissolution, as per Rule 35 of the Club Rules. The High Court, however, applied Section 21AA, relying on the precedent set in CWT v. Club 197 ITR Karnataka 609.3. Determination of Bangalore Club as an 'association of persons' (AOP):The Supreme Court analyzed whether Bangalore Club could be considered an AOP under Section 21AA. It referred to the established legal interpretation that an AOP must be formed with the objective of earning income or profits. The Club, being a social club, did not meet this criterion as its members did not band together for any business or commercial purpose.4. Interpretation of 'indeterminate or unknown' shares of members:The Court examined whether the members' shares in the Club's assets were indeterminate or unknown. It was noted that Rule 35 of the Club Rules specified that upon liquidation, any surplus assets would be divided equally among the members. This determinacy of shares meant that Section 21AA did not apply. The Court also referenced previous judgments that supported the view that fluctuating membership does not make shares indeterminate if the shares can be determined at a specific point in time, such as the date of liquidation.5. Relevance of previous judicial interpretations and legislative intent:The Court emphasized the importance of interpreting the term 'association of persons' consistently with previous judicial interpretations in the context of taxation statutes. It noted that the legislative intent behind Section 21AA was to prevent tax evasion through AOPs with indeterminate shares, not to expand the scope of taxable entities under the Wealth Tax Act. The judgment in CWT v. Chikmagalur Club was overruled as it incorrectly applied Section 21AA to a social club without considering the established legal principles.Conclusion:The Supreme Court concluded that Bangalore Club, being a social club without a business or commercial objective, could not be considered an AOP for the purposes of Section 21AA of the Wealth Tax Act. The members' shares in the Club's assets were determinate upon liquidation, and thus, Section 21AA did not apply. The High Court's judgment was set aside, and the appeal was allowed.