ORDER
G.S. Pannu, Accountant Member
1. The three appeals by the revenue and the three cross objections by the assessee arise out of a common order of the C1T(A), dated 10-11-1995, pertaining to the asst. years 1985-86,1986-87 and 1987-88. Since common issues are involved, all the above proceedings have been clubbed together and a consolidated order is being passed for the sake of convenience and brevity.
2. At the time of hearing before us, Shri K.R. Prasad, Advocate and Shri Amilabh Kumar, DR, represented the assessee and the revenue respectively. Their submissions have been considered while disposing the impugned proceedings.
3. The brief background and facts giving rise to the present dispute in the impugned proceedings are summarised in the following manner. For the assessment years under consideration, the assessee filed its return by declaring nil wealth. The assessment was originally completed under Section 16(3) wherein net wealth of the assessee was taxed at the maximum marginal rate by applying the provisions of Section 21A of the WT Act. The said assessment was carried in appeal before the first appellate authority by the assessee. The then CWT(A) vide orders dated 12-2-1993 took the view that the Assessing Officer erred in invoking the provisions of Section 21A of the WT Act and in this manner he set aside the assessment for all the assessment years under consideration, with a direction to the Assessing Officer to consider the applicability of Section 21AA of the WT Act to the facts of the assessee’s case. Consequently, the Assessing Officer invoking the provisions of Section 21AA completed the assessment by bringing to tax the net wealth of the assessee at the rate of 5%. The assessee being aggrieved with the aforesaid carried the mailer in appeal before the CWT(A), who held that the assessee being a charitable trust was entitled to the exemption under Sections 11 & 12 of the IT Act and, therefore, was entitled to the exemption under Section 5(1) of the WT Act, 1957. The CWT(A) relied upon the order of the Tribunal in ITA 2754/ Bang./1991, dated 11-3-1993 in the assessee’s own case, in coming to such conclusions. The CWT(A) did not agree with the alternative contention of the assessee that WT was not leviable on the assessee as it could not be treated as an AOP for the purposes of wealth-tax. In view of the aforesaid factual matrix, the department preferred appeals before the Tribunal and on the other hand, the assessee moved cross objections on the same. The grievance of the revenue before the Tribunal is to the effect that the CWT(A) ought to have considered the fact that the assessee could not be considered to be a charitable body and hence, the exemption under Sections 11 & 12 was not available and exemption under Section 5(1) was not allowable under Section 21A of the WT Act.
4. In the cross objections preferred by the assessee, the order of the first appellate authority was challenged on the following grounds :
(i) That the learned CWT ought to have held that necessary conditions under Section 17 not having been fulfilled, the assessment proceedings were invalid.
(ii) That the learned CWT ought to have held that the assessee is not an AOP liable to WT.
5. It would be pertinent to mention here that the aforesaid rival grievances came up before the Tribunal on an earlier occasion. The Tribunal vide its order dated 21-8-2000 allowed the appeals of the department and dismissed the cross objections filed by the assessee. Subsequently, the Hon’ble High Court of Karnataka, vide its orders in WTA60 to 62 of 2000, dated 9-3-2001, set aside the order passed by the Tribunal arising out of the cross objections and remanded the same to the Tribunal for fresh consideration of the question as to whether the assessee could be categorised as AOP for WT purposes. Hence, the present proceedings before us.
6. Before we proceed to deal with the grievance of the assessee in the cross objections, it would be appropriate to mention that the factum of the assessee not been eligible for exemption benefits under Sections 11 & 12 of IT Act, 1961 has been approved by the Hon’ble High Court of Karnataka in the assessee’s own case in CIT v. BEL Employees Death Relief Fund & Service Benefit Fund Association [1997] 225 ITR 270. Therefore, the decision of the CWT(A) in holding that the assessee is a charitable trust, within the meaning of Section 11/12 of IT Act, and thus qualifies for exemption under Section 5(1)(i) of WT Act, 1957, has to be reversed. The assessee no longer remains eligible for exemption under Section 5(1)(i) of the Act. On this issue, the department succeeds.
6A. This leaves us to address the issues raised by the respondent assessee in its cross objections. The first ground preferred by the assessee in relation to the reopening has not been pressed before us, and is hence dismissed as not pressed. The short point of controversy before vis relates to as to whether the assessee-socicty can be understood as AOP for the purpose of Section 21AA so as to bring it within the ambit of the Wealth-tax as envisaged in the said section.
7. The stand of the assessee is that it cannot be termed as an AOP as understood for the purposes of Section 21A A of the WT Act, on the reason that the aspect of having constituted an AOP for the purpose of owning, holding or acquiring of wealth was missing. It is submitted that the essential ingredients required to be recognised as an AOP, as laid clown by the various courts, were missing in the instant case. Reliance was placed on the decision of the Supreme Court in CIT v. Indira Balkrishna [I960] 39 ITR 546; CWT v. Vasudeva V. Dempo [1981] 131 ITR 291 (Bom.): CWT v. George Club [1991] 191 ITR 368 (AP) as also the decision of the Kerala High Court in CWT v. Rama Varma Club [1997] 226 ITR 898. The counsel for the assessee referred to the paper book wherein is placed a copy of the Rules and Regulations of the assessee society etc., to demonstrate that the objectives and activities of the assessee could not be construed as having any clement of profit making or any intentions of owning, acquiring or holding wealth so as to be understood as an AOP for the purpose of Section 21AA.
Mr. K.R. Prasad that the intention of the Legislature to introduce Section 21AA was to check such AOPs which were formed with the primary objective of lax avoidance by holding wealth in the character of AOPs, whereas it is not so in the instant case.
8. On the other hand, the learned DR submitted that the rigors of Section 21AA would apply to the assessee and is required to be understood as on AOP for the purpose of the said section. It is also argued by the learned DR that even if it is assumed that the assessee was not created with an object of tax avoidance, but it would still fall within the ambit of (he provisions of Section 21AA so as to invite the charging of WT in terms of the said section.
9. We have heard the rival submissions, perused the material on record and proceed to dispose of the issue in the following lines. The present controversy revolves around the applicability or otherwise of the provisions of Section 21AA as it stood for the assessment years under consideration which is extracted below :
21’AA: (1) Where assets chargeable to tax under this Act are held by the association of persons, other than a company or co-operative society, 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 Sub-section (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 DC (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 ISA, 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 of 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.
10. The relevant clauses of the Rules and Regulations of the assessee are extracted hereinafter:
1(a): AIMS and objects:
(i) To give prompt financial assistance to the bereaved family.
(ii) To render some financial assistance to a member who has been regular in subscribing to the fund for a continuous period of not less than seven years, in the event of his termination from the services of BEL, either on grounds of superannuation of medical disability.
(iii) To render some financial assistance to a member who has been regular in subscribing to the fund for a continuous period of seven years, in the event of his termination from the services of BEL on grounds of superannuation/medical disability.
6. The subscription shall be Rs. 10 per member per month which will be recovered from the salary of the employee….
14.(6) Financial Assistance and Limit thereon:
The voluntary financial assistance shall be limited to a sum of Rs. 10,000 from the association, or as may be fixed by the General Body from time to time. Company’s contribution will be Rs. 2,500 per death.
23. Dissolution:
The dissolution shall be in accordance with the provisions contained in the Societies Registration Act.
11. The WT Act contains Section 3, which is the charging section. The said section docs not mention an AOP as a taxable unit of assessment. The Finance Act, 1981, inserted Section 21AA w.e.f. 1-4-1981, which has been extracted in the earlier paragraphs. Further, the said section was amended w.e.f. 1-4-1989 by the Finance Act, 1989 to specifically exclude a society registered under the Societies Registration Act, 1860 from the scope of Section 21AA. The said insertion is intended to be prospective in nature and is therefore not attracted for the earlier assessment years before us. The assessee is a society registered under the Karnataka Societies Registration Act, 1960.
12. In our view, two issues arise for our determination in the present proceedings. Firstly, whether the assessee is an association of persons within the meaning of the Wealth-tax Act, 1957. Secondly, even if it is held to be an association of persons, can it be said that “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” so as to fall within the ambit of Section 21AAof the WT Act, 1957.
13. Therefore, we proceed to address ourselves to the first issue before us. Undoubtedly, the WT Act docs not provide any definition of the term ‘AOP’. It would be relevant to refer to the celebrated decision of the Hon’ble Supreme Court in the case of Indira Balkrishna (supra), to understand the meaning of AOP. According to the Apex Court, the word AOP as used in IT Act would mean an association in which two or more persons join for a common purpose with an object of producing incomes, profits or gains. The following extract of the judgment is worthy of notice:
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.
The Apex Court further referred to the observations of Costello, J., in B.N. Elias, In re [1935] 3 ITR 408 (Cal.) to the effect:-
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 partnerships… when we find… that there is a combination of persons formed for the promotion of a joint enterprise… then I think no difficulty arises whatever in the way of saying that… these persons did constitute an association….
The aforesaid lays down the tests for determining what is an AOP within the meaning of IT Act. However, the Hon’ble Apex Court has further opined in the said decision that there can be 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 Income-tax Act. In other words, the Apex Court cautioned that the particular facts and circumstances of each case were to be analysed and considered so as to draw proper conclusions on the matter.
14. The decision of the Hon’ble Bombay High Court in Vasudeva V. Dempo’s case (supra) is also worthy of notice. The Hon’ble Bombay High Court was dealing with the character of a communion formed as a result of a marriage under the Portuguese Civil Code for the purposes of evaluating whether the same was an AOP for the purposes of exigibility to WT. It is opined by the Hon’ble High Court that in order to constitute an AOP, there must be, for the purposes of WT Act, an association or coming together for the purpose of owning, holding or acquiring wealth. According to the court, although the joint rights in the properties of the spouse come into being as a result of the marriage under the provisions of the Portuguese Civil Code in the absence of ante-nuptial agreement providing for the separate holdings of the respective property, yet, the respective husband and wife cannot be deemed to be coming together with the purpose or object or the motive of constituting themselves as the joint holders of the property. In other words, it was recognized by the Hon’ble High Court that in terms of the provisions of Portuguese Civil Code, the communion of the property was only an incidence of marriage and could not be regarded as the object for the purposes of marriage. Hence, the High Court held that no AOP for the purposes of wealth-tax could have come into existence as a result of the marriage of husband and his wife.
15. Now coming back to the facts of the instant case. The aim and objects of the association as extracted above are primarily to give financial assistance to the bereaved family in case of a death of the employee of the BEL and to any member who has been regular in subscribing to the fund for a continuous period of not less than 7 years, in the event of termination of his services by BEL or on grounds of superannuation, medical disability or other grounds. The funds for the association consists of subscription from the employee members at Rs. 10 per month, interest on deposits, donations or some temporary loans that may be arranged by the managing committee. The moot question is as whether with such objects and ability to raise funds, could it be said that the assessee was an AOP coming together or associating together, in a concerted, way, for the purposes of owning, holding or acquiring wealth? The answer, in our view, is no. While it may be possible to say that the assessee-association is an association of persons formed for deriving mutual benefit but to say that the assessee is an association of persons formed with the purpose and object of owning, holding or acquiring wealth would neither be prudent nor feasible, having regard to the facts of the case. The factum of the assessee coming to hold certain assets exigible to wealth-tax can at best be termed as an incidence of associating and not the purpose of associating. In our view, before; an AOP can be held liable to be falling under Section 21AA, it is a pre-requisite that such AOPs should concertedly acquire assets, chargeable to WT, by reason of their associating and not merely, acquire assets as an incidence of their associating, notwithstanding the fact that such assets may otherwise be chargeable to WT. In our view, the case of the department rests on the factum of the assessee possessing certain assets chargeable to WT alone. The clauses of the Rules and Regulations extracted in earlier paragraphs clearly indicate that the purpose of the individuals comprising the AOP was not to acquire wealth, but to merely allow the members or their nominees to enjoy the benefit on the happening of certain event subject to the condition that the member beneficiaries even subscribe to the fund also. In our view, the assessee could not be regarded as an association of persons for the purposes of the WT Act, 1957.
16. Now, we proceed to discuss the second issue, namely, assuming that the assessee was to be understood as an association of persons, can it be said that “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” so as to fall within the meaning of Section 21AA of the WT Act, 1957. We have observed earlier that the insertion of Section 21AA docs not permit to include in its purview all association of persons. A reading of Sub-section (1) of Section 21AA would show that it is not all associations of persons which would come under the purview of Section 21AA. It is only such AOPs where the individual shares of the members in the income or assets on the dale of its formation or any time thereafter, are indeterminate or unknown that are liable for wealth-tax in terms of Section 21 AA. In other words, not every AOP is taxable as per the said section. The aforesaid is clear from a reading of Sub-sections (1) to (5) of Section 21 AA.
17. A reference may be made to the decision of the Hon’ble AP High Court in George Club’s case (supra) in this regard, wherein the Hon’ble High Court was dealing with the exigibility to WT of a club which was registered under the Societies Registration Act, 1860. According to the High Court, the club-society was not engaged in any income producing activity and, therefore, was not an AOP. Further, according to the Hon’ble court, even assuming that it was to be understood as an AOP, it could not fall within Section 21AA of the Act as no individual member could hold a share in the assets or income of such a club. The Hon’ble court noticed that having regard to Section 14 of the Societies Registration Act, 1860, which deals with dissolution, the assets remaining after satisfying its debts and liabilities on the dissolution of the society under the said Act, were not liable to be paid or distributed among the members of the society or to any one of them, but were to be given over to some other society. According to the Hon’ble High Court, in this view of the matter, it could not be said that any member of the club had a share in the income or assets of the club. Reverting back to the facts of the present case, it is observed that according to Clause 23 of the Rules and Regulations, the dissolution of the society is to be carried out in accordance with the provisions of Section 23 of the Karnataka Societies Registration Act, 1960. As the assessee before us has been registered under the Karnataka Societies Registration Act, 1960, Section 23 of the Karnataka Societies Registration Act, 1960, is as under:
23: Upon dissolution, no member to receive profits:
(1) If upon dissolution of any society registered under this Act, there shall remain, after the satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members of the said society or any of them, but shall be given to some other society, to be determined by the votes of not less than three-fifths of the members present personally or where proxies are allowed, by proxy, at the time of the dissolution, or in default thereof, by the principal civil court of original jurisdiction.
(2) Notwithstanding any thing contained in Sub-section (1), it shall be lawful for the members of any society dissolved, to determine by a majority of the votes of the members present personally or where proxies are allowed, by proxy at the time of dissolution of such society that any properly whatsoever remaining after the satisfaction of all debts and liabilities shall be given to the State Government to be utilised for any of the purpose referred to in Section 3.
18. A perusal of the Rules and Regulations of the Society and especially the provisions relating to the dissolution leads to an irresistible conclusions that no individual member can be said to be holding a share in the association and neither can a member be said to have a share in the income nor in the assess of the association. On a parity of reasoning as enunciated by the Hon’ble Andhra Pradesh High Court in George Club’s case (supra), the assessee, being a society registered under the Karnataka Societies Registration Act, cannot be said to be falling under Section 2 ] AA. We are also fortified by the decision of the Hon’ble Kerala High Court in Rama Varma Club’s case (supra). The following observations of the Hon’ble Court are relevant, which are extracted below:
“Even after the dissolution or winding up of the club, no amount or property shall be paid or distributed among the members of the club. Any amount or property remaining after satisfaction of debts and liabilities of the club shall be transferred to some other institution having similar objects. It is, therefore, clear that no individual member of the assessee-club has a share in the income or assets of the club. Sub-section (4) of Section 21AA makes every member of-the association of persons jointly and severally liable for the amount of tax, penalty or other sum payable on the discontinuance or dissolution of the association of persons. From the wording of the rules governing the assessee-club, it is clear that no such liability can be fastened on its members as they do not have a share in its income or assets. If that be so, the assessee-club would not come within the net of Section 21AA(1) so as to be assessed under the Wealth-tax Act, 1957.”
Therefore, even if it is assumed that the assessee was an association of persons, yet it docs not fall within the purview of Section 21AA because its members do not have a share in the income or assets of the association on the date of its formation or any time thereafter.
19. We may also look at the controversy from another angle. The idea behind the introduction of Section 21AA has been explained by the explanatory notes on the Finance Bill, 1981 in the circular issued by the CBDT, dated 29-6-1981 [131 ITR (St.) 119, 147], which amplifies the intention of the Legislature, Clauses 21.2 and 21.3 are worthy of notice and are extracted below:
“27.2. Instances had come to the notice of the Government where certain assessees had resorted to the creation of a large number of association 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-lax 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 21AA in the Wealth-tax Act to provide for assessment in the case of association of persons which do not define the shares of the members in the assets thereof. Sub-section (1) of new Section 21AA provides that where assets chargeable to wealth-tax are held by an association of persons (other than a company or a co-operative society) and the individual shares of the members of the said association is income or the assets of the association on the date of its formation or at any time thereafter, are indeterminate or unknown, wealth-lax 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.”
20. A perusal of the aforesaid leads to the conclusion that the section has been introduced to present evasion of tax which may be perpetuated by means of an assessee resorting to creation of association of persons without specifically defining the shares of the members therein with a view to avoid tax liability. It has been passionately canvassed by the learned AR on behalf of the assessee that the objectives and purposes of the assessee are not with motives of tax avoidance at all and it has been set up with the objects as can be deciphered from its Rules and Regulations.
21. The learned DR while appreciating that the assessee-society was not created with the object of tax avoidance, nevertheless, canvassed that the rigors of Section 21AA are applicable inasmuch as that the members had come together with a common purpose and in a voluntary manner.
22. We are in agreement with the stand of the assessee that the coming together of the association of persons in the instant case for the purposes, which we have already discussed earlier, cannot be said to be with an objective of tax avoidance. Although, the tests of associating for common purpose and voluntarily are fulfilled in the instant case, but the third test, namely, presence of an objective of earning income or owning, holding or acquiring wealth is also equally relevant to consider as to whether there exists an AOP for the purposes of Section 21AA of the WT Act. The third test, in our view, is not fulfilled by the assessee before us. Therefore, in the absence of the third leg of the test being fulfilled by the assessee, we do not find any merit in the stand of the learned DR on this count also.
23. It this manner, it would not be right to conclude that the intentions of the Legislature by inserting Section 21AA was to bring to tax, the AOP of the type before us, which have been formed not with a purpose of owning, holding or acquiring wealth, but albeit for enjoying the mutual protection and benefits.
24. In view of the aforesaid discussions, the assessee could not be said to be an Association of Persons which is constituted for the purpose of owning, holding or acquiring of wealth and, therefore, was not liable to be treated as an AOP for the purposes of applying the provisions of Section 21AA, as it stood for the years under consideration.
25. To conclude, in the departmental appeals, the issue of allowing exemption to the assessee under Section 5(1)(i) of the Act is decided against the assessee. However, having regard to our decision in relation to the cross objections preferred by the assessee, which are decided in favour of the assessee, the impugned assessment framed docs not stand. In this manner, the assessee succeeds in the present proceedings.