# M/S BANGALORE CLUB v. THE COMMISSIONER OF WEALTH TAX & ANR

- **Citation:** [2020] 13 S.C.R. 488
- **Court:** Supreme Court of India
- **Decided:** 2020-09-08
- **Case number:** Civil Appeal Nos. 3964-71 of 2007
- **Bench:** R. F. Nariman, Navin Sinha, Indira Banerjee
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-bangalore-club-v-the-commissioner-of-wealth-tax-anr-34364
- **Pages:** 29

## Headnote

Wealth Tax Act, 1957 - ss.3, 21AA - Liability of Bangalore
Club to pay wealth tax - Assessing Officer held that Club was liable
to be taxed under 1957 Act - Appeal dismissed by CIT (Appeals) -
Appellate Tribunal set aside the orders of the Assessing Officer and
CIT (Appeals) - High Court decided in favour of revenue - Review
Petition dismissed - Held: s.21AA was introduced in order to prevent
tax evasion - It was enacted not to rope in association of persons
per se as "one more taxable person" to whom the Act would apply
- 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 - In order to be an
association of persons attracting s.21AA it is necessary that persons
band together with some business or commercial object in view in
order to make income or profits - Bangalore Club is a social club -
Persons who are banded together do not band together for any
business purpose or commercial purpose in order to make income
or profits - s.21AA does not get attracted to the facts of the present
case -Impugned judgment and review judgment set aside -Income
Tax Act, 1961 - s.2(31), 167A.
Allowing the appeals, the Court
HELD: 1.1 Section 3 is the charging section in the Wealth
Tax Act. Only three types of persons can be assessed to wealth
tax under Section 3 i.e. individuals, Hindu undivided families and
companies. 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
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this provision. By the Finance Bill of 1981, Section 21AA was
introduced into the Wealth Tax Act. Section 21AA was enacted
w.e.f 1st April, 1981.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. [Paras
9-13][497-C, E-F; 499-H; 500-A-B]
1.2 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. A perusal of judgment in Ellis Bridge Gymkhana 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
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR.
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## Text

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SUPREME COURT REPORTS
[2020] 13 S.C.R.
 [2020] 13 S.C.R. 488
M/S BANGALORE CLUB
v.
THE COMMISSIONER OF WEALTH TAX & ANR.
(Civil Appeal Nos. 3964-71 of 2007)
SEPTEMBER 08, 2020
[R. F. NARIMAN, NAVIN SINHA AND
INDIRA BANERJEE, JJ.]
Wealth Tax Act, 1957 - ss.3, 21AA - Liability of Bangalore
Club to pay wealth tax - Assessing Officer held that Club was liable
to be taxed under 1957 Act - Appeal dismissed by CIT (Appeals) -
Appellate Tribunal set aside the orders of the Assessing Officer and
CIT (Appeals) - High Court decided in favour of revenue - Review
Petition dismissed - Held: s.21AA was introduced in order to prevent
tax evasion - It was enacted not to rope in association of persons
per se as "one more taxable person" to whom the Act would apply
- 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 - In order to be an
association of persons attracting s.21AA it is necessary that persons
band together with some business or commercial object in view in
order to make income or profits - Bangalore Club is a social club -
Persons who are banded together do not band together for any
business purpose or commercial purpose in order to make income
or profits - s.21AA does not get attracted to the facts of the present
case -Impugned judgment and review judgment set aside -Income
Tax Act, 1961 - s.2(31), 167A.
Allowing the appeals, the Court
HELD: 1.1 Section 3 is the charging section in the Wealth
Tax Act. Only three types of persons can be assessed to wealth
tax under Section 3 i.e. individuals, Hindu undivided families and
companies. 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
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this provision. By the Finance Bill of 1981, Section 21AA was
introduced into the Wealth Tax Act. Section 21AA was enacted
w.e.f 1st April, 1981.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. [Paras
9-13][497-C, E-F; 499-H; 500-A-B]
1.2 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. A perusal of judgment in Ellis Bridge Gymkhana 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
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR.
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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. [Paras 19, 24 & 26][502-E-F; 506-A-D; 508-G-H]
Cricket Club of India Ltd v. Bombay Labour Union
[1969] 1 SCR 600 - relied on.
1.3 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. Section
21AA of the Wealth Tax Act does not get attracted to the facts of
the present case. 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. The judgment in CWT v. Chikmagalur
Club not being correctly decided, is overruled. Equally, the High
Court judgment which rests solely upon the decision in
Chikmagalur Club's case has no legs to stand. 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 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. Under
Rule 35 the members of the Bangalore Club are entitled to
receive surplus assets in the circumstances stated in Rule 35equally on liquidation. However, the result remains the same -
viz., that even if it be held that the Bangalore Club is an association
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of persons, the members' shares being determinate do not attract
Section 21AA. [Paras 28, 30-32][509-E-F; 511-A-B, C-D, E-G;
512-B-C]
CWT v. ChikmagalurClub 197 ITR Karnataka 609 -
overruled.
CIT v. Indira Balkrishna (1960) 39 ITR 546 - relied
on.
1.4 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. To be taxed as an association of persons under
the Income Tax Act is to be taxed as an association of persons
per se. 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. [Para 33][512-D-F]
1.5 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.
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, 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. The impugned judgment and the review
judgment are set aside. [Paras 35, 36][515-G-H; 516-A-B]
CWT v. Trustees of H.E.H. Nizam's Family 108 ITR 555
(1977); P. Vajravelu Mudaliar v. Special Deputy
Collector for Land Acquisition [1965] 1 SCR 614; Sakal
Deep Sahai Srivastava v. Union of India (1974) 1 SCC
338 : [1974] 2 SCR 485; Shree Bhagwati Steel Rolling
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Mills v. CCE (2016) 3 SCC 643 : [2015] 12 SCR 332;
Diwan Bros. v. Central Bank of India (1976) 3 SCC
800 : [1976] Suppl. SCR 664 - relied on.
CWT v. Ellis Bridge Gymkhana (1998) 1 SCC 384 :
[1997] 4 Suppl. SCR 626; Bangalore Club v. CIT
(2013) 5 SCC 509 : [ 2013] 1 SCR 267; G.Murugesan
& Brothers v. CIT 88 ITR 432 (1973); Meera and Co.
v. CIT (1997) 4 SCC 677 : [1997] 2 SCR 991; Ramanlal
Bhailal Patel v. State of Gujarat (2008) 5 SCC 449 :
[2008] 2 SCR 468; State of W.B. v. Bela Banerjee [1954]
SCR 558; State of West Bengal v. Calcutta Club Limited
(2019) 13 SCALE 474; K P Varghese v. ITO [1982] 1
SCR 629 - referred to.
CWT v. Rama Varma Club 226 ITR 898; CWT v. George
Club 191 ITR 368 - distinguished.
Deccan Wine and General Stores v. CIT106 ITR 111 -
referred to.
Barras v. Aberdeen Steam Trawling and Fishing
Company 1933 AC 402 - referred to.
Case Law Reference
(1960) 39 ITR 546
relied on
Para 4
[2013] 1 SCR 267
referred to
Para 8
[1997] 4 Suppl. SCR 626
referred to
Para 8
88 ITR 432 (1973)
referred to
Para 16
[1997] 2 SCR 991
referred to
Para 17
[2008] 2 SCR 468
referred to
Para 17
[1965] 1 SCR 614
relied on
Para 20
[1954] SCR 558
referred to
Para 20
[1974] 2 SCR 485
relied on
Para 21
[1976] Suppl. SCR 664
relied on
Para 22
[2015] 12 SCR 332
relied on
Para 23
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[1969] 1 SCR 600
relied on
Para 24
(2019) 13 SCALE 474
referred to
Para 24
[1982] 1 SCR 629
referred to
Para 27
108 ITR 555 (1977)
relied on
Para 33
CIVIL APPELLATE JURISDICTION : Civil appeal nos. 39643971 of 2007.
From the Judgment and Order dated 23.01.2007 of the High Court
of Karnataka at Bangalore in Wealth Tax Appeal Nos. 31, 32, 33, 34, 35,
36 and 37 of 2002.
Vikramjit Banerjee, ASG, Nikhil Nayyar, K. Radhakrishnan, Sr.
Advs., Gautam Narayan, Ms. Asmita Singh, Divyanshu Rai, Adithya
Nair, Ms. Gargi Khanna, Ms. Niranjana Singh, Mrs. Anil Katiyar, Advs.
for the appearing parties.
The judgment of the Court was delivered by
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 mundane existence, the 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
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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;
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:
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"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
thelaws governing voluntary liquidation under the Companies Act
orany statutory modifications thereto and any surplus
assetsremaining after all debts and liabilities of the Club have
beendischarged shall be divided equally amongst the Members of
theClub 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
objectsof the club.The members themselves are contributing to
the receipts of the club. Themembers themselves are contributing
to the receipts of the club (sic) and whatis the difference between
the Income and Expenditurecan be said to beonly surplus and not
income of the assessee-club. It is an acceptedprinciple that principle
of mutuality is applicable to the assessee club andhence 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
earnincome."
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).
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
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
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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 debtsand 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 explanationdoes 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, subsection (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.
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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). 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.
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.
M/S BANGALORE CLUB v. THE COMMISSIONER OF
WEALTH TAX & ANR. [R.F. NARIMAN, J.]
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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 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,
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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 subsection (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 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
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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 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. LaxmidasDevidas at p. 589 and also
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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 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 those
circumstances do not by themselves go to show that they acted
as an "Association of Persons". "
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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 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. VajraveluMudaliar 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:
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"... 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 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
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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 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 ofLord
Buckmaster in Barras v. Aberdeen Steam Trawling and Fishing
Company1933 AC 402and 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."
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23. In Barras v. Aberdeen Steam Trawling and Fishing
Company [1933 AC 402, 411] Lord Buckmaster pointed out as
follows:
"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 RayalaCorpn.
[RayalaCorpn. (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
RayalaCorpn. [RayalaCorpn. (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.