Liability of Bangalore Club to pay wealth tax and Sir Winston Churchill's unpaid Rs 13 bill: What the Supreme Court held

The Supreme Court on Tuesday held that the Bangalore Club is not liable to pay wealth tax under the Wealth Tax Act, thereby setting aside the decision of the Karnataka High Court (Bangalore Club v. Commissioner of Wealth Tax & Anr)..The Bench of Justices Rohinton Nariman, Navin Sinha and Indira Banerjee passed the judgment..This judgment penned by Justice Nariman opens with an interesting fact of Sir Winston Churchill, long before his knighthood or his becoming the Prime Minister of Great Britain, being one of the people to feature on the list of defaulters at the Bangalore Club. The judgment narrates the instance of the year 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.".The case emanates from the Club's liability to pay wealth tax from the assessment years of 1981-82 and 1984-85 upto 1990-91. The Wealth Tax Officer of Bangalore in 2000 recorded in his order that the Bangalore Club was "not registered as a society, a trust or a company.".On the basis of Section167A inserted into the Income Tax Act, 1961, and Rule 35 of the Club Rules, the Tax Officer had concluded that the Club was liable to taxed under the Wealth Tax Act. While the CIT (Appeals) dismissed appeals against this order, the Income Tax Appellate Tribunal, Bangalore (ITAT), in a detailed order, allowed the appeal and set aside the orders of the Assessing Officer and the CIT (Appeals)..The ITAT had referred to the Objects of the Bangalore Club; Rule 35 of the Club Rules, which deals with the appointment of liquidators; Section 21AA of the Wealth Tax Act, which deals with the assessment to be done when assets are held by certain associations of persons; and Section 167A of the Income Tax Act which deals with the charge of tax when shares of members of association or firm is unknown..The ITAT had held that on reading of 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 would not get attracted in the case. An appeal against this order of the ITAT was filed before the Karnataka High Court, which ruled in favour of the Revenue. A review petition against this "cryptic order of the High Court" was dismissed in 2007..In its judgment, the Supreme Court delved into the scope of Section 3 of the Wealth Tax Act, which touches upon who can be taxed under the Act. The judgment observes,."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.".After Section 21AA was inserted in the Wealth Tax Act, an association of persons whose share is indeterminate was also brought under the wealth tax net, the Court observes. This led to the Court examining the scope and definition of the terms "association of persons"..After placing reliance on the various judgments of the Court as well as considering the language attached to this term in the Income Tax Act, the Court concluded that it is evident that for Section 21AA of the Wealth Tax Act to be attracted, the group of people should have come together with a common purpose of doing buisness and making profits. This common piurpose of doing business is absent from the object behind the creation of the Bangalore Club, the Court noted.."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.".The purpose of inserting Section 21AA, the Court says, was to prevent tax evasion wherein assessees would be prevented from evading tax by forming an association of persons..On these grounds, the Court set aside the High Court's decision and its review judgment, and allowed the appeal filed by the Bangalore Club..Bangalore Club was represented by Senior Advocate Nikhil Nayyar while the assessing authority was represented by Additional Solicitor General Vikramjit Banerjee..Read Judgment: