A bench of the apex court consisting Justice R. F Nariman, Justice Navin Sinha and Justice Indira Banerjee held that Bangalore club one of the oldest club in Bangalore, cannot be held liable to pay wealth tax under wealth tax act.

Justice Nariman disclosed the interesting information about the connection between Bangalore Club and former Prime Minster of Great Britain, Winston Churchill,“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.”

Appellant’s Contention

The Wealth Tax Officer, Bangalore passed an order of statement on 3rd March, 2000 and referred that the Bangalore club is not registered as a society, a trust or a company. The assessing company came to the conclusion that came to the conclusion that the rights of the members are not restricted only to user or possession, but as persons to whom the assets of the Club belong. A Referring to Section 167A, inserted into the Income Tax Act, 1961, and 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 an order dated 25th October, 2000, the CIT dismissed the appeal against the aforesaid order.

Income Tax Appellate Tribunal, Bangalore judgement

The ITAT in a detailed order passed on 7th May,2002 allowed the appeal and set aside the orders of the assessing officer and the CIT. It referred to the Objects of the Bangalore Club, Rule 35 of the Club’s rule which deals with the appointment of liquidators, Section 21AA of the Wealth Tax Act, dealing with the assessment to be done when assets are held by certain associations of persons, Section 167A of the Income Tax Act, dealing with the charge of tax when shares of members of association or firm is unknown and referred to the case of CIT v Balkrishna, dealing with the body of individuals.

It held that with the reference to Rule 35 of the Club Rules, it is clear that the members of the club would be entitled to equal share after winding up, and as such, Section 21AA of the Wealth Tax Act could not get attracted in the case.

An appeal was filed in the Karnataka HC, against the order of ITAT, which ruled in favour of the Revenue.  A review petition against this order of the HC was dismissed on April 19th, 2007.

Supreme Court’s Judgement

Supreme Court stated,

“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.”[1]

The Supreme Court looked into the scope of Section 3(1) of the Wealth Tax Act, and noted that it’s not applicable as the Bangalore Club as it’s neither an individual, nor a Hindu Undivided Family, nor a company.

Furthermore, the Court noted that the Section 21AA was inserted in the Wealth Tax Act on 1st April, 1984 and therefore a an association of persons whose share is indeterminate was also brought under the Wealth Tax net. This resulted the Court in examining the definition and scope and definition of the term ‘association of persons’. The Court concluded that in order to Section 21AA of the Wealth Tax to be attracted, the group of people should have come together with a common purpose of doing business and making profits. However, this purpose is absent from the object of establishing the Bangalore Club. It even explained the ‘association of persons’ occurring in Section 21 AA as follows:

In order to be an association of persons attracting Section 21AA of the Wealth Tax Act, it is necessary that persons band together with some business or commercial object in view in order to make income or profits.

The presumption gets strengthened by the language of Sec. 21AA (2), which speaks of a business or profession carried on by an association of persons which then gets discontinued or dissolved. The thrust of the provision therefore, is to rope in associations of persons whose common object is a business or professional object, namely, to earn income or profits. Bangalore Club being a social club whose objects have been referred to by the Appellate Tribunal in this case make it clear that persons who are banded together do not band together for any business purpose or commercial purpose in order to make income or profits.

Section 21AA has been introduced in order to prevent tax evasion. The reason why it was enacted was The object was to rope in certain assessees who have resorted to the creation of a large number of association of persons without specifically defining the shares of the members of such associations of persons so as to evade tax. In construing Section 21AA, it is important to have regard to this object.”

On the basis of these grounds, the Court allowed the appeal of Bangalore Club, setting aside the decision of the High Court and it’s review judgement.

Key Highlights

  • Case no. CIVIL APPEAL NOS. 3964-71 of 2007.
  • Bangalore Club was represented by Senior Advocate Nikhil Nayyar while the assessing authority was represented by Additional Solicitor General Vikramjit Banerjee.

Discuss the following provisions:

  • Explain section 167A of Income Tax Act, 1961.
  • Explain Section 21AA of the Wealth Tax Act.
  • Explain section 3 of the Wealth Tax Act.


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