TaxTMI 
TaxTMI 
2020 (9) TMI 430
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....only excitement being when the tax collector 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 (App....
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....s judgment in CIT v. Indira Balkrishna (1960) 39 ITR 546 and held: "9. From the facts of the case, it is clear that members 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 as....
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....ars in question are way before 1st April, 2002, the law laid down by this Court in several judgments on association of persons would directly 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).....
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....unknown, no wealth tax is payable by such member in respect thereof. 21.3 In order to counter such attempts at tax avoidance through the medium of multiple associations 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. 1....
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....on takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against the persons referred to in sub-section (4) from the stage at which the proceedings 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 fac....
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....ater decisions of different High Courts to all of which it is unnecessary to call attention. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and 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....
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.... v. Bela Banerjee 1954 SCR 558, continued even after the 4th Amendment, a just equivalent in terms of money for land acquisition would continue having to be paid. The Court held: "... Even after the amendment, provision for compensation or laying down 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 fo....
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....peal of the Limitation Act of 1908, and the enactment of the Limitation Act of 1963 after the decisions of this Court, embodying a possibly questionable view, we think it is expedient and proper to overrule the submission made on behalf of the appellant that the correctness of the view 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 judici....
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....at 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. 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 o....
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.... amendment was effected by the Finance Act, 1981 with effect from 1-4-1981. It provides for assessment of association of persons in certain special cases and not otherwise." The Court then went on to hold: "17. It will be seen that assessment as an association of persons can be made only when the individual shares of members of the association 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....
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...., this Court, after referring to the object of the section held: "Thus it is not enough to attract the applicability of sub- section (2) that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeds the full value of the consideration declared in respect of the transfer by not less than 15 per cent of the value so declared, 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 defini....
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....y as well as by the first appellate authority on the ground that the assessee is an association of persons and the members are the owners of the assets and the individual shares of the members in the owners of the assets and the individual shares of the members in the income or assets or both of the association on the date of formation or any time thereafter or indeterminate or unknown and accordingly, 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 c....
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.... on liquidation to any of the members of these clubs. Thus, it was held in these cases that the members do not have any share in the income or assets of the club at all. The same cannot be said in the facts of this case inasmuch as under Rule 35 the members of the Bangalore Club are entitled to receive surplus assets in the circumstances stated in Rule 35 - equally on liquidation. However, the result remains 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 whic....
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....ithstanding anything contained in this section, where the shares of the persons on whose behalf or for whose benefit any such assets are held are indeterminate or unknown, the wealth-tax shall be levied upon and recovered from the court of wards, administrator-general, official trustee, receiver, manager, or other person aforesaid as if the person on whose behalf or for whose benefit the assets are held were an individual for 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 r....
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....he Gujarat High Court in Padmavati Jaykrishna Trust v.CIT [(1966) 61 ITR 66, 73-4 (Guj)]. The Calcutta High Court pointed out in Suhashini Karuri case: "The share of a beneficiary can be said to be indeterminate if at the relevant time the share cannot be determined but merely because the number of beneficiaries vary from time to time, one cannot say that it is indeterminate." The same proposition was formulated in slightly different 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 det....