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Not for profit clubs like the Bangalore Club not liable to pay wealth tax

In M/S BANGALORE CLUB vs THE COMMISSIONER OF WEALTH TAX & ANR., for assessment years 1981-82 and 1984-85 upto 1990-91, the Wealth Tax Officer, Bangalore, referred to the fact that Bangalore Club is not registered as a society, a trust or a company and 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 Bangalore 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. On appeal, the appellate authority ruled Section 21AA would not be attracted to the case of the Bangalore Club and as per Rule 35, 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). However, as the High Court again turned back the clock, the Club appealed before the Supreme Court.

The Supreme Court observed that only three types of persons can be assessed to wealth tax under Section 3 of the Wealth Tax Act 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. By the Finance Bill of 1981, Section 21AA was introduced into the Wealth Tax Act, 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 held that 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 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 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. Further, as on the date of liquidation there would be a fixed list of members belonging to the various classes mentioned in the rules, would again make the members ‘determinate’ as a result of which, Sec. 21AA would have no application.

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