Supreme Court: Holding that Bangalore Club is not liable to pay wealth tax under the Wealth Tax Act, 1957, the3-judge bench of RF Nariman, Navin Sinha and Indira Banerjee, JJ has said,
“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.”
The Court noticed that only three types of persons can be assessed to wealth tax under Section 3 i.e. individuals, Hindu undivided families and companies. Hence, 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.
Association of Persons vis-à-vis Body of individuals
The Court held that it cannot be held that being taxed as an association of persons under the Income Tax Act, 1961 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.
It explained that the definition of “person” in Section 2(31) of the Income Tax Act, 1961 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.
Interpretation of Section 21AA of the Wealth Tax Act
Section 21AA was enacted w.e.f. 1 st April, 1981 and 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.
The Court noticed that Section 21AA was introduced in order to prevent tax evasion and that it 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.
“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.”
The Court explained:
- 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.
- 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 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.
Noticing the aforementioned aspects of Section 21AA of the Wealth Tax Act, the Court said,
“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.”
It said 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 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.”
Object of Bangalore Club founded in 1868 by a group of British officers
- To provide for its Members, social, cultural, sporting, recreational and other facilities;
- To promote camaraderie and fellowship among its members.
- To run the Club for the benefit of its Members from out of the subscriptions and contributions of its member.
- 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
- To undertake measures for social service consequent on natural calamities or disasters, national or local.
- To enter into affiliation and reciprocal arrangements with other Clubs of similar standing both in India and abroad.
- To do all other acts and things as are conducive or incidental to the attainment of the above objects.
Conclusion
Noticing the objects of the Club and applying the aforementioned principles, the Court, hence, concluded that Bangalore Club is a social and the persons who are banded together do not band together for any business purpose or commercial purpose in order to make income or profits and hence, do not attract Section 21 AA of the Wealth Tax Act.
[Bangalore Club v. Commissioner of Wealth Tax, 2020 SCC OnLine SC 721, decided on 08.09.2020]