The Supreme Court has held that 'Bangalore Club', one of the oldest club in Bangalore, is not liable to pay Wealth tax under the Wealth Tax Act.
The bench comprising Justices RF Nariman, Indira Banerjee and Navin Sinha set aside the Karnataka High Court judgment which had held otherwise.
"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.", the Court held.
In this case, the Income Tax Appellate Tribunal, setting aside the order of assessment by the revenue authority, had held that Section 21AA of the Wealth Tax Act would have no application to Bangalore Club. The Karnataka High Court had set aside the order of ITAT.
While considering the appeal filed by the Club, Justice RF Nariman noted the history of the club thus:
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 mundane existence, the only excitement being when the tax collector knocks at the door to extract his pound of flesh.
Referring to the provisions of the Wealth Tax Act, the Court noted that Section 3(1) [Charging Section] is not applicable at all since the Bangalore Club is neither an individual, nor a HUF, nor a company. The Court further noted that Section 21AA was introduced w.e.f 1st April, 1981, and therefore 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.
The court said that "association of persons" must mean persons who are banded together with a common object – and, in the context of a taxation statute, common object being a business object being to earn income or profits. The bench, referring to earlier judgments, explained the meaning of the expression "association of persons" which occurs in Section 21AA as follows:
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.
Section 21AA has been introduced in order to prevent tax evasion. The reason why it was enacted was 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 court also rejected the 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.
Case no.: CIVIL APPEAL NOS. 3964-71 OF 2007
Case name: M/S BANGALORE CLUB vs. THE COMMISSIONER OF WEALTH TAX
Coram: Justices RF Nariman, Indira Banerjee and Navin Sinha
Counsel: Advocate Nikhil Nayyar and ASG Vikramjit Banerjee