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Tuesday, September 8, 2020

whether Bangalore Club is liable to pay wealth tax under the Wealth Tax Act.? 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.- Tribunal - 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). - High court set aside the order of tribunal - Apex court held that.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 - 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..- 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. -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-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.- 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..- For all these reasons, the impugned judgment and the review judgment are set aside. The appeals are allowed with no order as to costs.

 whether Bangalore Club is liable to pay wealth tax under the Wealth Tax Act.?

 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.- Tribunal - 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). - High court set aside the order of tribunal - Apex court held that.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 - 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..- 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. -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-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.- 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..- For all these reasons, the impugned judgment and the review judgment are set aside. The appeals are allowed with no order as to costs.

1

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

J U D G M E N T

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. 

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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

7

th 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

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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 

9

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. 1

st 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 subsection (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, 

11

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 

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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 

14

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

4

th 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 

15

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 

16

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 wellsettled 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:

17

“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, 

18

(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 

19

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 

20

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). Subsections (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.”

21

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 

22

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 subsection (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.

23

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 

24

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 –

25

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 

26

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 

27

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 

28

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.”

29

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 subsection (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 

30

be the beneficiaries and on what determinate shares, subsection (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.”

31

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. 

32

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.