High Court Of Karnataka
Commissioner Of Wealth Tax vs. Chikmagalur Club
Section WT 3, WT 18(1)(a), WT 21AA
Asst. Year 1980-81, 1981-82, 1982-83, 1983-84
H.L. Dattu & H.N. Nagamohan Das, JJ.
Tax Refd. Case Nos. 1, 2 & 120 of 1998
25th August, 2005
Counsel Appeared :
M.V. Seshachala & Aravind, for the Applicants : Smt. M.R. Vanaja, for the Respondent
JUDGMENT
H.L. Dattu, J. :
Since the parties in these reference proceedings are common, and since the issues involved are inter-related, both these cases are heard together and disposed of by this common order.
2. Facts in Income-tax Referred Case No. 120/1998 (Old TRC Nos. 120-123/1998) are as under : The assessee is a club registered under the provisions of Karnataka Societies Registration Act, 1960. For the asst. yrs. 1980-81, 1981-82, 1982-83 and 1983-84, the assessee-club had filed the return of wealth in the status of AOP declaring net wealth of Rs. ‘nil’. Rejecting the claim made in the returns filed, the WTO had assessed the wealth of the assessee in the status of individual and charged wealth-tax, under the provisions of the WT Act, 1957 (‘Act’ for short).
3. In the appeals filed against these assessment orders, it was the stand of the assessee-club, that it is an AOP and not liable for payment of wealth-tax. Reliance was placed on the decision of the Tribunal for the earlier assessment years in the assessee’s own case, wherein it was held that it was not liable to wealth-tax in view of the language employed in the charging provision, namely, s. 3 of the Act. The first appellate authority has allowed the assessee’s appeals for the asst. yr. 198081 and insofar as asst. yrs. 1981-82, 1982-83 and 1983-84 are concerned, keeping in view the provisions of s. 21AA of the Act, which has been inserted in WT Act by Finance Act, 1981, w.e.f. 1st April, 1981, has noticed in his order that : “
4. Asst. yrs. 1981-82 to 1983-84 : A new s. 21AA was inserted in the WT Act by the Finance Act, 1981, w.e.f. 1st April, 1981. Sub-s. (1) of s. 21AA provides that where assets chargeable to wealth-tax are held by an AOP (other than a company or co-operative society) and the individual shares of the members of the association in the income or assets or both are indeterminate or unknown, wealth-tax shall be levied and recovered from such association in the same manner and to the same extent as an individual, citizen and resident in India, at the rate prescribed.
5. Admittedly, the appellant is an AOP and the members are owners of the assets of the association and their shares are indeterminate as on the respective valuation dates. The provisions of s. 21AA are squarely applicable in the instant case. In this connection, it is worthwhile referring to the memorandum explaining the relevant provisions in the Finance Bill, 1981 : ‘Under the WT Act, 1957, individuals and HUF are taxable entities. An AOP is not charged to wealth-tax on its net wealth. Where an individual or an HUF is a member of the AOP, the value of the interest of such member is determined in accordance with the rules and included in the net wealth of the members. It has come to the notice of the Government that some taxpayers are increasingly resorting to the creation of AOPs without defining the shares of the members with a view to avoiding proper tax liability. The modus operandi in such cases is that a taxpayer with large assets creates a number of AOPs without specifying the shares of its members. In such cases, no part of the assets of the association is liable to be taxed in the hands of its members as their shares are indeterminate or unknown and, as a result, the taxpayers pay only a small fraction of the wealth-tax that would otherwise be due from him.
In order to counter such attempts at tax avoidance through the creation of multiple AOPs without defining the shares of members, the Bill proposes to make provision in the WT Act, in order to provide that such associations will be liable to tax in the like manner and to the same extent as an individual citizen of India and resident in India at the rates specified in Part I of Schedule I or at the rate of 3 per cent, whichever course would be more beneficial to the Revenue. For this purpose, the shares of the members of the AOP will be regarded as indeterminate or unknown if such shares are not ascertainable at the time of the formation of association or at any time thereafter.’
The decision of the Tribunal for the asst. yr. 1979-80 is not applicable for the asst. yr. 1981-82 onwards in view of the change in law. The Tribunal’s decision was rendered on the interpretation of the word ‘individual’ occurring in s. 3. There is, therefore, no doubt regarding the liability of the appellant for wealth-tax for the asst. yrs. 1981-82 to 1983-84.
The appeal for asst. yr. 1980-81 is allowed and the appeals for the asst. yrs. 1981-82, 1982-83 and 1983-84 are accordingly dismissed.”
4. On further appeals by the assessee-club against the aforesaid order passed by the first appellate authority, the Tribunal has allowed the appeals, on the ground, that the assessee is an entity not susceptible to be assessed for its wealth, relying on the decision of the Karnataka High Court in the case of CWT vs. Bowring Institute (1991) 100 CTR (Kar) 83 : (1992) 194 ITR 287 (Kar).
5. The Tribunal, pursuant to the directions issued by this Court in C.P. Nos. 406 to 409/1993, dt. 14th Feb., 1994 has referred the following question of law arising out of the orders passed in WTA Nos. 498 to 500/1998 and WTA No. 553/1988, dt. 29th Nov., 1991 pertaining to asst. yrs. 198081, 1981-82, 1982-83 and 1983-84 for our consideration and opinion. The question of law is as under : “Whether, in the facts and circumstances of the case, the Tribunal is right in law in confirming the order of the CWT(A) who held that the assessee cannot be treated as an ‘entity’ assessable to wealth-tax ?”
6. The facts in TRC Nos. 1/1998 and 2/1998 are as under : The assessee-club had not filed the return of wealth under the provisions of WT Act, 1957, within the time provided for filing of such return. Subsequently, a notice came to be issued by the WTO, inter alia, directing the assessee to file its wealth-tax returns for the accounting periods 31st Dec., 1980 and 31st Dec., 1981. Pursuant to the notice so issued, the assessee-club filed its wealth-tax returns only on 31st March, 1980. The WTO, after passing the assessment orders for the period in question, had issued a show-cause notice to the assessee-club under s. 18(1)(a) of the Act, inter alia, directing the assessee-club to show cause, why penalty should not be levied for filing wealth-tax returns belatedly. In reply to the said show- cause notice, the assessee-club had pleaded that it was under a bona fide impression that the wealth-tax was not payable by a club registered under the provisions of Karnataka Societies of Registration Act, 1960, in view of several decisions of the High Courts and the orders passed by the Tribunal in assessee’s own case for the previous years. The WTO rejecting the cause shown by the assessee-club for filing the returns belatedly, had levied penalties in a sum of Rs. 58,503 and Rs. 56,592 for the asst. yrs. 1981-82 and 1982-83, respectively.
7. The assessee-club aggrieved by the orders so passed, had filed appeals before the first appellate authority. In the appeals, it was not disputed regarding belated filing of wealth-tax returns, but it was its specific stand that it had sufficient cause for filing the wealth-tax returns belatedly, i.e., only after issuance of a notice by the WTO, as it was under a bona fide belief that the returns under WT Act need not be filed, as it is a club registered under the Karnataka Societies Registration Act, 1960, and the provisions of WT Act would not apply to a club. The first appellate authority while allowing the appeals filed by the assessee, in its order has observed that the cause shown by the assessee is not only reasonable but also sufficient and, therefore, the WTO was not justified in levying penalty, on the ground that the returns under WT Act was filed belatedly. The findings and the conclusion reached by the first appellate authority is as under : “4. The only question for determination here would be whether the appellant had sufficient or reasonable cause to believe that it was under any obligation to file the returns of wealth. Prior to 1st April, 1981, there were several decisions that clubs, which were AOPs, could not be treated as a taxable units; Gujarat High Court in Orient Club vs. WTO (1979) 12 CTR (Guj) 166 : (1980) 123 ITR 395 (Guj), Bombay High Court in Orient Club vs. CWT (1982) 29 CTR (Bom) 117 : (1982) 136 ITR 697 (Bom) and Willingdon Sports Club vs. C.B. Patil, Addl. WTO & Anr. (1982) 30 CTR (Bom) 226 : (1982) 137 ITR 83 (Bom). The Bangalore Bench of the Tribunal had also held similarly in the appellant’s own case as well as in the case of other clubs, etc. W.e.f. 1st April, 1981, s. 21AA was introduced, but there is some doubt as to whether the provisions of s. 21AA would apply to a members club where the members have a right to enjoy and use the club assets, but little else. For example, there would be no right to alienation. This view is also supported by the Tribunal, Hyderabad Bench, in Rajendra Prasad Memorial Club vs. WTO (1989) 43 Taxman 153 (Hyd)(Mag). In these circumstances, it cannot be said that the appellant club did not have any sufficient cause to believe that it was liable to wealth-tax. The omission to file the returns of wealth voluntarily and the filing of the returns belatedly after issue of notice is, therefore, with sufficient cause.
5. In these circumstances, I hold that the penalties are not leviable and the penalties levied are, therefore, cancelled.” The appeals filed by the Revenue against the orders passed by the first appellate authority is rejected by the Tribunal, on the sole ground that in the quantum appeals filed by the assessee for the same assessment years, the Tribunal has held that the provisions of s. 21AA of the Act would not apply to a mutual club like the assessee and therefore, the assessment orders are not sustainable as the assessee is not an entity susceptible for wealth-tax under the Act, and therefore, no penalty for belated filing of the returns can be imposed on such assessee. To arrive at the aforesaid conclusion, it has placed reliance on the decision of the Andhra Pradesh High Court in the case of CWT vs. George Club (1991) 191 ITR 368 (AP) and the decision of the Karnataka High Court in the case of CWT vs. Bowring Institute (supra). At the instance of the Revenue, the Tribunal has referred the following question of law for our consideration and opinion arising out of the orders passed by the Tribunal in WTA Nos. 500 and 501/1990, dt. 9th May, 1996. The question is as under : “Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that when the assessee is not an entity for assessment, it cannot be an entity for levy of penalty, though legally notice have been issued to call for the return and there was delay in filing the return ?” Re—issues in TRC No. 120/1998 (Old TRC Nos. 120-123/1998) : 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 WT Act, but in our view, for the present, the issue is now settled by the pronouncement of the Supreme Court in the case of CWT vs. Ellis Bridge Gymkhana, Etc. Etc. (1997) 143 CTR (SC) 138 : (1998) 229 ITR 1 (SC), wherein it is held that ‘club is not assessable to wealth-tax in asst. yrs. 1970-71 to 1977-78 as an AOPs, and while saying so, the Court has observed that ‘the position has been placed beyond doubt by the insertion of s. 21AA in the WT Act itself’. The facts in the aforesaid decision was that, the assessee was a club and the assessment years involved were 1970- 71 to 1977-78. Pursuant to a notice issued by the WTO, the assessee-club had filed its return of wealth-tax for the aforesaid assessment years, but had contended that it was not liable to be assessed under the WT Act, 1957. The WTO had rejected the claim of the assessee. The assessee was successful before all the forums, including before the High Court, where the Court has confirmed the orders passed by the Tribunal in holding that the assessee is not liable to wealth-tax under the WT Act, 1957, for the assessment years in question. The apex Court while affirming the view expressed by the Gujarat High Court has observed : “All these provisions go to show that the WT Act has been drafted on the same lines as the Indian IT Act, 1922. There is great similarity of wording between the various provisions of the WT Act and the corresponding provisions of the Indian IT Act, 1922. But in the case of the charging s. 3 of the WT Act, the phraseology of the charging s. 3 of the Indian IT Act, 1922, has not been adopted. Unlike s. 3 of the IT Act, s. 3 of the WT Act does not mention a firm or an AOP or a BOI as taxable units of assessment.The position has been placed beyond doubt by the insertion of s. 21AA in the WT Act itself. This amendment was effected by the Finance Act, 1981, w.e.f. 1st April, 1981. It provides for assessment of AOP in certain special cases and not otherwise.”
12. The apex Court after concluding that the club is not assessable to wealth-tax in asst. yrs. 1970-71 to 1977-78 as an AOP, has made reference to insertion of s. 21AA in the WT Act by the Finance Act, 1981, w.e.f. 1st April, 1981, which provides for assessment of AOP in certain specified cases and not otherwise. While saying so, the Court has observed that “an AOP cannot be taxed at all under s. 3 of the Act. That is why an amendment is made by the Finance Act, 1981, whereby s. 21AA of the Act was inserted to bring to tax the net wealth of an AOP where individual shares of the members of the association were unknown or indeterminate”. In this regard, the Court has observed : “It will be seen that assessment as an AOP can be made only when the individual shares of the members of the association in the income or assets or both 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 AOP, otherwise not. Sub-s. (2) of s. 21AA deals with cases of such associations as mentioned in sub-s. (1). That means only AOP in which individual shares of the members were unknown or indeterminate can be subjected to wealth-tax. Sub-s. (3) also deals with AOP referred to in sub-s. (1). Sub-ss. (4) and (5) deal with some consequences which will follow the members of an AOP spoken of in sub-s. (1) in the case of discontinuance or dissolution.”
13. In reference proceedings, namely, TRC No. 120/1998 (Old TRC Nos. 120-123/1998), we are primarily concerned with assessment years, namely, 1981-82, 1982-83 and 1983-84. In fact, for the asst. yr. 1980-81, the first appellate authority has given the relief to the assessee by cancelling the assessment order passed by the WTO under s. 16(3) of the WT Act, treating the status of the assessee as an ‘individual’. However, he has confirmed the orders of assessment passed for the asst. yrs. 1981-82 to 1983-84, keeping in view the amendment effected to WT Act by the Finance Act, 1981, by which amendment s. 21AA is inserted w.e.f. 1st April, 1981, which is applicable for and from the asst. yr. 1981-82. Now that the scope of s. 21AA of the Act has been explained by the apex Court in Ellis Bridge Gymkhana Club’s case (supra), we need not dilate much on the scope and interpretation of the said section. It would be suffice to notice that assessment as an AOP 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 susceptible to the provision of WT Act, since it is only an AOP 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 AOP and the members are 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 are indeterminate or unknown and accordingly, has subjected the assessee to wealth-tax. The findings and the conclusion reached both by the assessing authority and the first appellate authority is in consonance with the observations made by the apex Court in the case of Ellis Bridge Gymkhana’s case (supra), though the said decision was not available, when they passed their orders of assessments and its confirmation by the first appellate authority in the appeals filed by the assessee. In our opinion, the contrary view expressed by the Tribunal cannot be accepted for the asst. yrs. 1981-82 to 1983-84. Accordingly, we answer the question of law referred to us for our opinion that the assessee is not exigible to wealth-tax for the asst. yr. 1980- 81 and is exigible for wealth-tax for and from the asst. yrs. 1981-82 to 1983-84. Re—issues in TRC Nos. 1/1998 and 2/1998 :
14. Now coming to the question of law referred to in TRC Nos. 1/1998 and 2/1998, firstly, the provisions of s. 18(1)(a) as it existed during the relevant assessment years requires to be noticed. Omitting what is not necessary for the purpose of this case, the said provision is extracted and it reads as under : “Sec. 18. Penalty for concealment—(1) If the WTO, AAC, CWT or Tribunal in the course of any proceedings under this Act, is satisfied that any person— (a) has without reasonable cause failed to furnish the return of his net wealth which is required to furnish under sub-s. (1) or sub-s. (2) of s. 14 or s. 17 or has without reasonable cause failed to furnish it within the time allowed and in the manner required or (b) xxxxxxxx (c) xxxxxxxx he or it may, by order in writing, direct that such person shall pay by way of penalty— (i) in the case referred to cl. (a), in addition to the amount of wealth-tax payable by him, a sum not exceeding one and a half times the amount of such tax, and ii) xxxxxxxx (2) No order shall be made under sub-s. (1) unless the person concerned has been given a reasonable opportunity of being heard.”
15. The Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, apart from others, made the following amendments w.e.f. 10th Sept., 1986 : “(1) The words ‘without reasonable clause’ wherever they occurred, were omitted.”
16. The Direct Tax Laws (Amendment) Act, 1987, apart from making changes in the designations w.e.f. 1st April, 1988, substituted this section by a new section w.e.f. 1st April, 1989, but that substitution was deleted and instead, certain amendments were made by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989 and thereby cls. (a) and (i) of the original section were omitted.
7. A brief analysis of the section as it existed during the relevant assessment year would indicate, that a WTO, AAC, CWT or Tribunal, in the course of proceedings under the WT Act, may impose a penalty for delayed filing or non-filing of return (till 31st March, 1989) on any person, who has without reasonable cause has committed any of the following defaults, namely : (a) failure to furnish return required to be furnished under s. 14(1) or by a notice under s. 14(2) or s. 17; (b) failure to furnish return within the time allowed and in the manner required by s. 14(1) or by notice under s. 14(2) or s. 17. A careful reading of the section would amply demonstrate that penalty could not be imposed, if there existed a sufficient cause that an assessee has failed to furnish return within the time stipulated under s. 14 of the Act. If sufficient and reasonable cause is pleaded by any person, the concerned authority under the Act is required to consider the same and pass a speaking order.
The reference proceedings in TRC Nos. 1/1998 and 2/1998 pertains to the asst. yrs. 1981-82 and 1982-83. The assessee is a club registered under the provisions of the Karnataka Societies Registration Act. It had not filed the return of wealth under the WT Act, 1957, within the time stipulated for filing of such return. Subsequently, a notice had been issued by the WTO inter alia directing the assessee to file its wealth-tax returns for the accounting period 31st Dec., 1980 and 31st Dec., 1981. Pursuant to the notice so issued, the assessee had filed its wealth-tax return. The WTO after completing the assessments for the aforesaid period, had issued a show-cause notice to the assessee, inter alia, directing the assessee to show cause why penalty should not be levied for filing wealth-tax returns belatedly. In the reply filed to the show-cause notice, the assessee had brought to the notice of the WTO that it was under a bona fide impression that wealth-tax was not payable by a club, which is a society registered under the Karnataka Societies Registration Act, in view of the law declared by several High Courts and also the orders passed by the Tribunal in the assessee’s own case for the earlier assessment years. This explanation is rejected by the WTO while passing the order levying penalty. However, the assessee has succeeded in persuading both the first appellate authority and the Tribunal to accept its explanation for belated filing of the return under the Act. The question now before us is, whether the Tribunal is justified in setting aside the orders passed by the WTO in levying penalty under s. 18(1)(a) of the Act for belated filing of the wealth-tax returns for the asst. yrs. 1981-82 and 1982-83 ?
The omission to file returns within the time stipulated in the Act would attract penalty, but the assessee could still prove that because of various factors and reasons, there was failure on his/its part for non-filing of the returns within the time prescribed under the Act. A “cause” could be said a reasonable cause, if it is not actuated by bad faith, or false grounds.
In the present case, the assessee’s explanation in the reply filed to the show-cause notice issued under s. 18(1)(a) of the Act by the WTO is that, a club registered under the provision of the Karnataka Societies Registration Act is an AOP and, therefore, not susceptible to the wealth-tax. This is the bona fide belief of the assessee. This belief was not without any reason. Various High Courts have held since club is an AOP, they are not taxable under the provisions of the WT Act in view of the language employed in the charging provisions of WT Act, 1957. Yet another reason is, in the assessee’s own case, the Tribunal for the previous assessment years had taken the view that the assessee is not exigible to wealth-tax. These circumstances, in our view, is sufficient for any person to have a bona fide impression that wealth-tax was not payable by a club under the provisions of the WT Act, in spite of insertion of s. 21AA in the Act w.e.f. 1st April, 1981. The explanation for belated filing of returns is not only reasonable but also wholly satisfactory.
The Tribunal while rejecting the Revenue’s appeals against the orders passed by the CIT(A), Bangalore, has observed that when the assessee is not an entity for assessment, it cannot be an entity for levy of penalty. The conclusion of the Tribunal cannot be said either erroneous or perverse, for the reason, for the purpose of levy of penalty, an assessee must be an entity for assessment, otherwise no penalty proceedings are permissible under law. It is now well-settled legal position in law that it is only after completion of the assessment proceedings, penalty proceedings could be initiated by an authority under the Act.
In IT Referred Case No. 120/1998 (Old TRC Nos. 120-123/1998), we have taken the view, that, in view of s. 21AA of the Act, the assessee-club is exigible to WT Act. Therefore, the reasoning of the Tribunal to cancel the order passed by the WTO in levying penalty may not be justified. However, for the reasons stated by us, we are of the view that the order passed by the WTO in levying penalty for belated filing of the wealth-tax returns for the asst. yrs. 1981-82 and 1982-83 cannot be sustained. Accordingly, we answer the question of law referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue.
With these observations, these reference proceedings are disposed of. Ordered accordingly.
[Decision in favour of Revenue (partly)]
[Citation : 290 ITR 522]
