M/S. Bangalore Club vs The Commissioner Of Wealth Tax on 8 September, 2020


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Supreme Court of India

M/S. Bangalore Club vs The Commissioner Of Wealth Tax on 8 September, 2020

Author: Rohinton Fali Nariman

Bench: Rohinton Fali Nariman, Navin Sinha, Hon’Ble Ms. Banerjee

                                                                        REPORTABLE



                                   IN THE SUPREME COURT OF INDIA

                                    CIVIL APPELLATE JURISDICTION

                                   CIVIL APPEAL NOS. 3964-71 OF 2007

                M/S BANGALORE CLUB                                     …Appellant


                                                VERSUS


                THE COMMISSIONER OF WEALTH TAX & ANR.                 ...Respondents



                                             JUDGMENT

R.F. Nariman, J.

1. In the year of grace 1868, a group of British officers banded together to

start the Bangalore Club. In the year of grace 1899, one Lt. W.L.S.

Churchill was put up on the Club’s list of defaulters, which numbered 17,

for an amount of Rs.13/- being for an unpaid bill of the Club. The “Bill”

never became an “Act”. Till date, this amount remains unpaid. Lt. W.L.S.

Churchill went on to become Sir Winston Leonard Spencer Churchill,

Prime Minister of Great Britain. And the Bangalore Club continues its
Signature Not Verified

Digitally signed by
Nidhi Ahuja
Date: 2020.09.08
17:47:19 IST
Reason:

mundane existence, the only excitement being when the tax collector

knocks at the door to extract his pound of flesh.

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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 aforesaid order. On the other hand, by a detailed

order passed by the Income Tax Appellate Tribunal, Bangalore dated

7th May, 2002, the Appellate Tribunal first referred to the Objects of the

Bangalore Club, which it described as a “social” Club, as follows:

“1. To provide for its Members, social, cultural, sporting,
recreational and other facilities;

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2. To promote camaraderie and fellowship among its
members.

3. To run the Club for the benefit of its Members from out
of the subscriptions and contributions of its member.

4. To receive donations and gifts without conditions for the
betterment of the Club. The General Committee may use
its discretion to accept sponsorships for sporting Areas

5. To undertake measures for social service consequent
on natural calamities or disasters, national or local.

6. To enter into affiliation and reciprocal arrangements
with other Clubs of similar standing both in India and
abroad.

7. To do all other acts and things as are conducive or
incidental to the attainment of the above objects.

Provided always and notwithstanding anything hereinafter
contained, the aforesaid objects of the Club, shall not be
altered, amended, or modified, except, in a General
Meeting, for which the unalterable quorum shall not be
less than 300 members. Any resolution purporting to alter,
amend, or modify the objects of the Club shall not be
deemed to have been passed, except by a two thirds
majority of the Members present and voting thereon.”

3. The Tribunal then set out Rule 35 of the Club Rules, which stated as

follows:

“RULE 35 APPOINTMENT OF LIQUIDATORS:

If it be resolved to wind up, the Meeting shall appoint a
liquidator or liquidators and fix his or their remuneration.

The liquidation shall be conducted as nearly as
practicable in accordance with the laws governing
voluntary liquidation under the Companies Act or any
statutory modifications thereto and any surplus assets
remaining after all debts and liabilities of the Club have
been discharged shall be divided equally amongst the

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Members of the Club as defined in Rules 6.1(i), 6.1(ii), 6.1

(iii), 6.2(i), 6.2(ii), 6.2(iii), 6.2(vii), 6.2(viii) and 6.2(ix).

4. After setting out Section 21AA of the Wealth Tax Act, the Tribunal then

referred to this Court’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 assets of the Club on winding-up after paying all

debts and liabilities, the shares so fixed are determinate also making it

clear that Section 21AA would have no application to the facts of the

present case. As a result, the Appellate Tribunal allowed the appeal and

set aside the orders of the Assessing Officer and the CIT (Appeals).
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6. Against this order, by a cryptic order of the High Court, the decision in

CWT v. Club 197 ITR Karnataka 609 was stated to cover the facts of

the present case, as a result of which the question raised was decided

in favour of the revenue by the impugned order dated 23rd January,

2007. A Review Petition filed against the aforesaid order was dismissed

on 19th April, 2007.

7. Shri Nikhil Nayyar, learned counsel appearing on behalf of the appellant,

referred to the object for the enactment of Section 21AA of the

Wealth Tax Act and then took us through the provisions of Section

21AA. According to him, it is settled law by several judgments of this

Court that “association of persons” in the context of a taxing statute

would only refer to persons who band together with a common object in

mind – the common object being to create income and make a profit. As

it is clear that the present Club is a social club where the members do

not band together for any commercial or business purpose of making

income or profits, the section does not get attracted at all. Further, in

any case, as a without prejudice argument, it is clear that the individual

shares of the members of the said association in income or assets of

the association must be indeterminate or unknown to attract the

provision of Sec. 21AA. He took us to the Appellate Tribunal judgment

and to Rule 35, in particular, to argue that since on winding-up all

members get an equal share in the surplus that remains after all debts

5
and liabilities are dealt with, their shares cannot be said to be

indeterminate or unknown. For this purpose, he cited a number of

judgments of the High Courts. He then adverted to an explanation that

was added to the definition of “person” contained in Section 2(31) of the

Income Tax Act, which made it clear that on and from 1st April, 2002, an

association of persons need not be persons who band together for the

object of deriving income or profits. This explanation does not apply to

the Wealth Tax Act, and, in any case, given the fact that the assessment

years 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

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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 correct and

therefore, even on this ground it is clear that the High Court judgment

can be supported.

9. Having heard learned counsel for both sides, it is important to first advert

to Section 3, which is the charging section in the Wealth Tax Act.

Section 3(1) states as follows:

“3. Charge of wealth-tax — (1) 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 but before the first day of April, 1993, 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 specified in Schedule I.”

10. It will be noticed that only three types of persons can be assessed to

wealth tax under Section 3 i.e. individuals, Hindu undivided families and

companies. It is clear that if Section 3(1) alone were to be looked at,

the Bangalore Club neither being an individual, nor a HUF, nor a

company cannot possibly be brought into the wealth tax net under this

provision.

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11. By the Finance Bill of 1981, Section 21AA was introduced into the

Wealth Tax Act. The explanatory notes on the introduction of Section

21AA were as follows:

“21.1 Under the Wealth Tax Act, 1957, individuals and
Hindu Undivided Families are taxable entities but an
association of persons is not charged to wealth tax on its
net wealth. Where an individual or a Hindu Undivided
Family is a member of an association of persons, the
value of the interest of such member in the association of
persons is determined in accordance with the provisions
of the rules and is includible in the net wealth of the
member.

21.2 Instances had come to the notice of the Government
where certain assessees had resorted to the creation of a
large number of associations of persons without
specifically defining the shares of the members therein
with a view to avoiding proper tax liability. Under the
existing provisions, only the value of the interest of the
member in the association which is ascertainable is
includible in his net wealth. Accordingly, to the extent the
value of the interest of the member in the association
cannot be ascertained or is 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

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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 association
of persons, other than a company or cooperative society
or society registered under the Societies Registration Act,
1860 (21 of 1860) or under any law corresponding to that
Act in force in any part of India, and the individual shares
of the members of the said association in the income or
assets or both of the said association on the date of its
formation or at any time thereafter are indeterminate or
unknown, the wealth-tax shall be levied upon and
recovered from such association in the like manner and to
the same extent as it would be leviable upon and
recoverable from an individual who is a citizen of India and
resident in India for the purposes of this Act.

(2) Where any business or profession carried on by an
association of persons referred to in subsection (1) has
been discontinued or where such association of persons
is dissolved, the Assessing Officer shall make an
assessment of the net wealth of the association of
persons as if no such discontinuance or dissolution had
taken place and all the provisions of this Act, including the
provisions relating to the levy of penalty or any other sum
chargeable under any provisions of this Act, so far as may
be, shall apply to such assessment.

(3) Without prejudice to the generality of the provisions of
sub-section (2), if the Assessing Officer or the Deputy
Commissioner (Appeals) or the Commissioner (Appeals)
in the course of any proceedings under this Act in respect
of any such association of persons as is referred to in sub-

section (1) is satisfied that the association of persons was
guilty of any of the acts specified in section 18 or section

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18A, he may impose or direct the imposition of a penalty
in accordance with the provisions of the said sections.

(4) Every person who was at the time of such
discontinuance or dissolution a member of the association
of persons, and the legal representative of any such
person who is deceased, shall be jointly and severally
liable for the amount of tax, penalty or other sum payable,
and all the provisions of this Act, so far as may be, shall
apply to any such assessment or imposition of penalty or
other sum.

(5) Where such discontinuance or dissolution 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,

10
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 in law?”

15. After referring to the amendments made in the Income Tax Act speaking

of “association of persons” and “association of individuals”, this Court

went on to hold:

“8…In the absence of any definition as to what constitutes
an association of persons, we must construe the words in
their plain ordinary meaning and we must also bear in
mind that the words occur in a section which imposes a
tax on the total income of each one of the units of
assessment mentioned therein including an association of
persons. The meaning to be assigned to the words must
take colour from the context in which they occur…

9. It is enough for our purpose to refer to three
decisions: In re, B.N. Elias [(1935) 3 ITR
408]; CIT v. Laxmidas Devidas [(1937) 5 ITR 584]; and In
re. Dwaraknath Harishchandra Pitale [(1937) 5 ITR 716].
In B.N. Elias Derbyshire, C.J. rightly pointed out that the
word “associate” means, according to the Oxford
dictionary, “to join in common purpose, or to join in an
action”. Therefore, an association of persons must be one
in which two or more persons join in a common purpose
or common action, and as the words occur in a section
which imposes a tax on income, the association must be
one the object of which is to produce income profits or
gains. This was the view expressed by Beaumont, C.J.
in CIT v. Laxmidas Devidas at p. 589 and also in Re.
Dwaraknath Harishchandra Pitale. In re. B.N.

Elias [(1935) III ITR 408] Costello, J. put the test in more
forceful language. He said: “It may well be that the
intention of the legislature was to hit combinations of

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individuals who were engaged together in some joint
enterprise but did not in law constitute partnership….
When we find …. that there is a combination of persons
formed for the promotion of a joint enterprise …. then I
think no difficulty arise in the way of saying that these
persons did constitute an association….”

10. We think that the aforesaid decisions correctly lay
down the crucial test for determining what is an
association of persons within the meaning of Section 3 of
the Income Tax Act, and they have been accepted and
followed in a number of later 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 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

12
those circumstances do not by themselves go to show that
they acted as an “Association of Persons”. “

17. These judgments have since been referred to with approval in Meera

and Co. v. CIT (1997) 4 SCC 677 (see paras 19 and 20) and Ramanlal

Bhailal Patel v. State of Gujarat (2008) 5 SCC 449 (see paragraph

28). It may be mentioned in passing at this stage that under the Income

Tax Act an explanation has been added to the definition of “person”

contained in Section 2(31), sub-clause (v) of which includes “an

association of persons or a body of individuals, whether incorporated or

not”. The explanation inserted by amendment, which is w.e.f. 1st April,

2002, is as follows:

“Explanation.—For the purposes of this clause, an
association of persons or a body of individuals or a local
authority or an artificial juridical person shall be deemed
to be a person, whether or not such person or body or
authority or juridical person was formed or established or
incorporated with the object of deriving income, profits or
gains;”

18. Obviously, therefore, after 1st April, 2002, the ratio of the aforesaid

judgments has been undone by this explanation insofar as income tax

is concerned.

19. 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

13
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. This presumption is felicitously referred to in the following

judgments.

20. In P. Vajravelu Mudaliar v. Special Deputy Collector for Land

Acquisition (1965) 1 SCR 614, this Court had to decide whether the

4th Amendment to the Constitution of India, which amended Article 31(2)

of the Constitution, made any change in whether compensation being a

just equivalent in money to be paid for acquisition continued to be a just

equivalent or something less. This Court held that since the expression

“compensation”, as interpreted in State of W.B. 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

14
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, ‘that
where the legislature used 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.”

The said two expressions in Article 31(2) before the
Constitution (Fourth Amendment) Act, have received an
authoritative interpretation by the highest court in the land
and it must be presumed that Parliament did not intend to
depart from the meaning given by this Court to the said
expressions.”

(at page. 626)

21. In Sakal Deep Sahai Srivastava v. Union of India (1974) 1 SCC 338,

in the context of the Limitation Act, this Court held:

“8. The only question of some difficulty raised before us is
whether Article 102 or Article 120 of the Limitation Act of
1908 would apply to the case. After having heard the
attractive arguments of Mr Yogeshwar Prasad, we have
no doubt that a good deal can be said in favour of the
contention that a claim for arrears of salary is
distinguishable from a claim for wages. But, our difficulty
is that the question appears to us to be no longer open for
consideration afresh by us, or, at any rate, it is not
advisable to review the authorities of this Court, after such
a lapse of time when, despite the view taken by this Court
that Article 102 of the Limitation Act of 1908 was
applicable to such cases, the Limitation Act of 1963 had
been passed repeating the law, contained in Articles 102
and 120 of the Limitation Act of 1908, in identical terms
without any modification. The Legislature must be

15
presumed to be cognizant of the view of this Court that a
claim of the nature before us, for arrears of salary, falls
within the purview of Article 102 of the Limitation Act of
1908. If Parliament, which is deemed to be aware of the
declarations of law by this Court, did not alter the law, it
must be deemed to have accepted the interpretation of
this Court even though the correctness of it may be open
to doubt. If doubts had arisen, it was for the Legislature to
clear these doubts. When the Legislature has not done so,
despite the repeal 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
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:

16

“It has long been a well-established principle to be applied
in the consideration of Acts of Parliament that where a
word of doubtful meaning has received a clear judicial
interpretation, the subsequent statute which incorporates
the same word or the same phrase in a similar context
must be construed so that the word or phrase is
interpreted according to the meaning that has previously
been ascribed to it.”

Craies further points out that the rule as to words judicially
interpreted applies also to words with well-known legal
meanings, even though they have not been the subject of
judicial interpretation. Thus applying these principles in
the instant case it would appear that when the Court Fees
Act
uses the word “decree” which had a well-known legal
significance or meaning, then the Legislature must be
presumed to have used this term in the sense in which it
has been understood, namely, as defined in the Code of
Civil Procedure even if there has been no express judicial
interpretation on this point.”

23. A recent judgment of this Court namely, Shree Bhagwati Steel Rolling

Mills v. CCE (2016) 3 SCC 643, refers to the same presumption as

follows:

“21. It is settled law that Parliament is presumed to know
the law when it enacts a particular piece of legislation. The
Prevention of Corruption Act
was passed in the year 1988,
that is long after 1969 when the Constitution Bench
decision in Rayala Corpn. [Rayala Corpn. (P) Ltd. v.

Director of Enforcement, (1969) 2 SCC 412] had been
delivered. It is, therefore, presumed that Parliament
enacted Section 31 knowing that the decision in Rayala
Corpn. [Rayala Corpn. (P) Ltd. v. Director of Enforcement
,
(1969) 2 SCC 412] had stated that an omission would not
amount to a repeal and it is for this reason that Section 31
was enacted. This again does not take us further as this
statement of the law in Rayala Corpn. [Rayala Corpn. (P)
Ltd. v. Director of Enforcement
, (1969) 2 SCC 412] is no
longer the law declared by the Supreme Court after the
decision in Fibre Board case [Fibre Boards (P) Ltd. v. CIT,

17
(2015) 10 SCC 333]. This reason therefore again cannot
avail the appellant.”

24. This being the case, it is clear that 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 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 provision for expulsion of a

18
Member under certain circumstances which feature never
exists in the case of a shareholder holding shares in a
Limited Company. The membership is fluid. A person
retains rights as long as he continues as a Member and
gets nothing at all when he ceases to be a Member, even
though he may have paid a large amount as admission
fee. He even loses his rights on expulsion. In these
circumstances, it is clear that the Club cannot be treated
as a separate legal entity of the nature of a Limited
Company carrying on business. The Club, in fact,
continues to be a Members’ Club without any
shareholders and, consequently, all services provided in
the Club for Members have to be treated as activities of a
self-serving institution.”
(at page. 614)

This judgment has been referred to with approval recently in State of

West Bengal v. Calcutta Club Limited (2019) 13 SCALE 474 at

paragraph 28.

25. At this stage, it is important to refer to CWT v. Ellis Bridge Gymkhana,

(supra). In this case, the Ellis Bridge Gymkhana, like the Bangalore

Club, is an unincorporated club. The assessment years involved in this

case are from 1970-71 to 1977-78 i.e. prior to Section 21AA coming into

force. Despite the fact that Section 21AA did not apply, this Court

referred to Section 21AA as follows:

“15. All these provisions go to show that the Wealth Tax
Act
has been drafted on the same lines as the Indian
Income Tax Act
, 1922. There is great similarity of wording
between the various provisions of the Wealth Tax Act and
corresponding provisions of the Indian Income Tax Act,
1922. But in the case of the charging Section 3 of the
Wealth Tax Act, the phraseology of the charging Section
3
of the Indian Income Tax Act, 1922 has not been
adopted. Unlike Section 3 of the Income Tax Act, Section

19
3 of the Wealth Tax Act does not mention a firm or an
association of persons or a body of individuals as taxable
units of assessment.

16. The position has been placed beyond doubt by
insertion of Section 21-AA in the Wealth Tax Act itself.

This 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 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 were unknown or
indeterminate.”

20
After referring to the explanatory notes introducing Section 21AA in

paragraph 32, the Court then went on to hold:

“33. It will appear from this notification that the Central
Board of Direct Taxes clearly recognised that the charge
of wealth tax was on individuals and Hindu Undivided
Families and not on any other body of individuals or
association of persons. Section 21-AA has been
introduced to prevent evasion of tax. In a normal case, in
assessment of an individual, his wealth from every source
will be added up and computed in accordance with
provisions of the Wealth Tax Act to arrive at the net wealth
which has to be taxed. So, if an individual has any interest
in a firm or any other non-corporate body, then his interest
in those bodies or associations will be added up in his
wealth. It is only where such addition is not possible
because the shares of the individual in a body holding
property is unknown or indeterminate, resort will be taken
to Section 21-AA and association of individuals will be
taxed as association of persons.”

26. A perusal of this judgment 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.

27. In K P Varghese v. ITO, 1982 (1) SCR 629, what arose for interpretation

before the Supreme Court was in the context of capital gains – as to

21
whether, to attract the applicability of Sec. 52(2) of the Income Tax Act,

understatement of consideration is a prerequisite. On a purely literal

reading of Sec. 52(2), it would be clear that no such condition has been

mentioned. However, 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 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.

22

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 Societies Registration

Act, 1960. After referring copiously to the Appellate Authority’s orders

on facts in this case, the Court went on to hold:

“10. … Several High Courts and the Tribunals have taken
different view on the question whether a club registered
under the provisions of Karnataka Societies Registration
Act is exigible to tax under the provisions of the Wealth
Tax Act
, but in our view, for the present, the issue is now
settled by the pronouncement of the Supreme Court in the
case of the Commissioner of Wealth Tax v. Ellis Bridge
Gymkhana
[ 229 ITR 1.] — wherein it is held that ‘club is
not assessable to wealth tax in assessment years 1970-

1971 to 1977-1978 as an Association of Persons’ and
while saying so, the Court has observed that’ the position
has been placed beyond doubt by the insertion of Section
21AA
in the Wealth Tax Act itself.”

For this purpose, paragraph 17 already extracted in the Ellis Bridge

Gymkhana case (supra) was referred to by the said judgment. After

referring to paragraph 17, the Court then concluded:

“13. … Now that the scope of Section 21AA of the Act has
been explained by the Apex Court in Ellies Bridge
Gymkhana Club’s case-229 ITR 1, we need not dilate
much on the scope and interpretation of the said Section.

It would be suffice to notice that assessment as an
association of persons can be made only, when the
individual shares of the 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 can be subjected to wealth tax. In the present
case, the assessee is a club registered under the
provisions of the Karnataka Societies Registration Act and
had declared ‘nil’ wealth and had claimed that it is not

23
susceptible to the provision of wealth Tax Act, since it is
only an association of persons providing recreation
facilities to its members. This claim, in our view, is rightly
rejected by both the assessing authority 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 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 –

24
and, in the context of a taxation statute, common object being a

business object being to earn income or profits. This judgment does not

refer to Indira Balakrishna (supra) and the judgments following it at all.

For all these reasons, the judgment in CWT v. Chikmagalur Club

(supra) not being correctly decided, is overruled. Equally, the High

Court judgment which rests solely upon the decision in Chikmagalur

Club’s case (supra) has no legs to stand.

31. We now come to some of the points raised by the learned Additional

Solicitor General, Shri Banerjee. The submission that Section 21AA (2)

which deals with dissolution of an association of persons and the fact

that on dissolution under Rule 35 of the Bangalore Club, members get

an equal share would show first, that the Bangalore Club is an

association of persons; and second, that the member’s share in its

income and assets are indeterminate or unknown, is an argument which

has to be stated to be rejected. First and foremost, sub-section (2)

begins with the words “any business or profession carried on” by an

association of persons. No business or profession is carried on by a

social members club. Further, the association of persons mentioned in

sub-section (1) must be persons who have banded together for a

business objective – to earn profits – and if this itself is not the case,

then sub-section (2) cannot possibly apply. Insofar as Rule 35 is

concerned, again what is clear is that on liquidation, any surplus assets

25
remaining after all debts and liabilities of the club has been discharged,

shall be divided equally amongst all categories of members of the club.

This would show that “at any time thereafter” within the meaning of

Section 21AA (1), the members’ shares are determinate in that on

liquidation each member of whatsoever category gets an equal share.

32. The judgments cited by Shri Nikhil Nayyar in so far as this aspect is

concerned, have no direct relevance. The judgment in CWT v. Rama

Varma Club 226 ITR 898 and CWT v. George Club 191 ITR 368 are

both judgments in which no part of the assets is to be distributed even

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

26
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 association of

persons per se. We have already seen that Section 21AA does not

enlarge the field of tax payers but only plugs evasion as the association

of persons must be formed with members who have indeterminate

shares in its income or assets. For all these 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. One last argument of Shri Banerjee

needs to be addressed. According to the learned ASG, the fact that the

membership of the club is a fluctuating body of individuals would

27
necessarily lead to the conclusion that the shares of the members in the

assets or the income of the club would be indeterminate. In CWT v.

Trustees of H.E.H. Nizam’s Family 108 ITR 555 (1977), this court had

to construe Sec. 21 of the Wealth Tax Act. Sec. 21 (1) & (4) which are

relevant for our purpose are set out hereinbelow:

“21. (1) In the case of assets chargeable to tax under this
Act, which are held by a court of wards or an
administrator-general or an official trustee or any receiver
or manager or any other person, by whatever name
called, appointed under any order of a court to manage
property on behalf of another, or any trustee appointed
under a trust declared by a duly executed instrument in
writing, whether testamentary or otherwise (including a
trustee under a valid deed of wakf), the wealth-tax shall
be levied upon and recoverable from the court of wards,
administrator-general, official trustee, receiver, manager
or trustee, as the case may be, in the like manner and to
the same extent as it would be leviable upon and
recoverable from the person on whose behalf or for whose
benefit the assets are held, and the provisions of this Act
shall apply accordingly.

xxx xxx xxx

(4) Notwithstanding 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.”

28

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 beneficiaries may change in
subsequent years before the date of distribution,
depending upon contingencies which may come to pass
in future. So long as it is possible to say on the relevant
valuation date that the beneficiaries are known and their
shares are determinate, the possibility that the
beneficiaries may change by reason of subsequent
events such as birth or death would not take the case out
of the ambit of sub-section (1) of Section 21. It is no
answer to the applicability of sub-section (1) of Section 21
to say that the beneficiaries are indeterminate and
unknown because it cannot be predicated who would be
the beneficiaries in respect of the remainder on the death
of the owner of the life interest. The position has to be
seen on the relevant valuation date as if the preceding life
interest had come to an end on that date and if, on that
hypothesis, it is possible to determine who precisely would

29
be the beneficiaries and on what determinate shares, sub-
section (1) of Section 21 must apply and it would be a
matter of no consequence that the number of beneficiaries
may vary in the future either by reason of some
beneficiaries ceasing to exist or some new beneficiaries
coming into being. Not only does this appear to us to be
the correct approach in the application of sub-section (1)
of Section 21, but we find that this has also been the
general consensus of judicial opinion in this country in
various High Courts during the last about thirty years. The
first decision in which this view was taken was rendered
as far back as 1945 by the Patna High Court in Khan
Bahadur M. Habibur Rahman v.CIT
[(1945) 13 ITR 189
(Pat)] and since then, this view has been followed by the
Calcutta High Court in Suhashini Karuri v. WTO [(1962)
46 ITR 953 (Cal)] the Bombay High Court in Trustees of
Putlibai R.F. Mulla Trust v. CWT [(1967) 66 ITR 653, 657-
8 (Bom)] and CWT v. Trustees of Mrs Hansabai Tribhu
wandas Trust [(1967) 69 ITR 527 (Bom)] and the 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.”

30
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 valuation date, it is
possible to say with certainty and definiteness as to who
would be the beneficiaries and whether their shares would
be determinate and specific, if the event on the happening
of which the distribution is to take place occurred on that
date. If it is, sub-section (1) of Section 21 would apply: if
not, the case will be governed by sub-section (4) of
Section 21.”

35. It is thus clear 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 (supra), 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.

31

36. For all these reasons, the impugned judgment and the review judgment

are set aside. The appeals are allowed with no order as to costs.

……………..………………J.

(R. F. Nariman)

………..……………………J.

(Navin Sinha)

………..……………………J.

(Indira Banerjee)
New Delhi.

September 08, 2020.

32



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