SC on interpretation of “association of persons” under Section 21AA of Wealth Tax Act

The Hon’ble Supreme Court, on 8th September 2020, in the matter of M/s Bangalore Club v. The Commissioner of Wealth Tax & Anr. pronounced 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.

Question before the Hon’ble Supreme Court:

What is the meaning of the expression “association of persons” which occurs in Section 21AA in the Wealth Tax Act?

Hon’ble Supreme Court’s observations:

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. (Para 19)

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. (Para 24)

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. (Para 26)

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. (Para 33)

Copy of judgement: Judgement_08-Sep-2020

-Adv. Tushar Kaushik

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