K. Raviraja Pandian, J.@mdashThe assessee, a members'' club, catering exclusively to the social and cultural needs of its members, registered itself during the year 1977 under the provisions of the Societies Registration Act, 1860. u/s 3 of the Wealth-tax Act, 1957, the three assessable entities are individual, Hindu undivided family and company. In the year 1960, by Section 13 of the Finance Act, 1960, the levy of wealth-tax on the wealth of companies came to be excluded with effect form the assessment year 1960-61. The assessee-club at its instance got it declared as a company by notification dated September 30, 1982, issued by the Central Board of Direct Taxes u/s 2(h)(iii) of the Wealth-tax Act with retrospective effect from the assessment year 1974-75 and thereby the assessee-club became inexigible to wealth-tax from the assessment year 1974-75 onwards. However, by Section 40 of the Finance Act, 1983, the levy of wealth-tax on closely held companies was revived. Hence, the assessee-club by its representation dated January 31, 1995, requested the Central Board of Direct Taxes to grant exemption from the levy of wealth-tax under Sub-section (6) of Section 40 of the Finance Act, 1983. The said request was rejected by the Board on March 21, 1986. Again another request was made for exemption u/s 40(6), since the assessee is a deemed company u/s 2(h)(iii) of the Wealth-tax Act and not a closely held company. An alternate request was made to declare the assessee-club as a company u/s 2(17)(iv) of the Income Tax Act and then issue an order u/s 2(18)(ab) of the Income Tax Act declaring the assessee-club as a company, in which the public are substantially interested so as to enable the assessee-club to continue to enjoy the benefit of exemption from wealth-tax as provided by Section 13 of the Finance Act, 1960. This request was also rejected by the Board by its reply dated January 13, 1987.
2. For the assessment year 1984-85, the assessee filed a return admitting a wealth of Rs. 28,90,000, however contended before the Wealth-tax Officer that the assessee, a member''s club being an association of persons not assessable u/s 3 of the Wealth-tax Act and as such its wealth is not exigible to wealth-tax. The Wealth-tax Officer rejected the contention by holding that the status of the assessee is a company, in view of the declaration made to that effect by the Central Board of Direct Taxes u/s 2(h)(iii) of the Wealth-tax Act and cannot be treated as an association of persons. The assessee was liable to wealth-tax as a company.
3. It is pertinent to state herein that the request of the assessee-club for denotifying the assessee as a company and allow it to revert back to its original status with retrospective effect from 1984-85 was also rejected by the Central Board of Direct Taxes by its letter dated September 27, 1989. Ultimately, the Wealth-tax Officer completed the assessment u/s 16(3) of the Act and assessed to a tax of Rs. 56,666.
4. On appeal, the Commissioner of Wealth-tax (Appeals) upheld the view of the Wealth-tax Officer that the assessee was liable to wealth-tax as a company u/s 40(1) of the Finance Act, 1983. The Commissioner of Wealth-tax further observed that even if the status of the assessee was to be taken as an association of persons, even then u/s 21AA of the Wealth-tax Act the assessee was liable to wealth-tax. However, the Commissioner of Wealth-tax (Appeals) taking into consideration, the largeness of the area of the land owned by the assessee and the restrictive covenants imposed on its user and alienation as well as its limited marketability, allowed a discount of 70 per cent. of the valuation of the property for the purpose of computation of net wealth of the assessee.
5. Aggrieved by the order of the Commissioner of Wealth-tax (Appeals) in holding that the assessee was liable to wealth-tax either as a company or as an association of persons, the assessee preferred the appeal in W. T. A. No. 1099/ Mds of 1990. The Revenue aggrieved by the order granting discount of 70 per cent. on the valuation of the property for computation of the net wealth, preferred an appeal in W. T. A. No. 1129/Mds of 1990. Both the appeals were heard together by the Income Tax Appellate Tribunal, which by its order dated June 24, 1992, allowed the appeal filed by the assessee in W. T. A No. 1099/ Mds. of 1990, consequently dismissed the appeal of the Revenue.
6. Having failed to get an order of referral to this court, the Revenue filed T. C. P. No. 562 of 1996 and obtained an order directing the Tribunal to state a case and refer the question of law for the opinion of this court relating to the assessment year 1984-85 and u/s 27(3) of the Wealth-tax Act. In obedience of the same, the Tribunal stated a case and referred the following question of law :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in overlooking Sub-section (7) of Section 40 of the Finance Act, 1983, and holding that the said section relating to levy of wealth-tax in the case of closely held companies does not apply to the assessee-club, which has been declared on its own request as a company u/s 2(h)(iii) of the Wealth-tax Act ?"
7. Mrs. Pushya Sitaraman, learned senior standing counsel appearing for the Revenue, submitted that the Tribunal went wrong in allowing the appeal notwithstanding the fact that the assessee, a members'' club obtained an order from the Central Board of Direct Taxes declaring it as a "company" u/s 2(h)(iii) of the Wealth-tax Act. The assessee-club cannot blow hot and cold in the sense taking advantage of the amendment under the Finance Act, 1960, got it declared as a company in order to avail of the benefit of exemption from wealth-tax, cannot wriggle out and now contend that the assessee could not be assessed as a company u/s 40(1) of the Finance Act, 1983. She further contended that as per Section 40(1) of the Finance Act, even an institution or association, which became a company by virtue of a declaration made by the Board u/s 2(h)(iii) and that inasmuch as the assessee cannot be treated as a company in which the public are substantially interested, the Tribunal erred in granting the benefit of exemption from wealth-tax.
8. On the contrary, Mr. Philip George, learned counsel appearing for the assessee, submitted that no exception could be taken to the order passed by the Tribunal inasmuch as the order is well considered order taking into consideration of the legislative intent for the introduction of Section 40(1) of the Finance Act, 1983.
9. We heard the arguments of learned counsel on either side and perused the materials on record.
10.There is no gain saying that originally the three assessable entities u/s 3 of the Wealth-tax Act were individual, Hindu undivided family and company. u/s 2(h) of the Wealth-tax Act, "company" means a company formed and registered under the Companies Act, 1956 (1 of 1956), and includes a company formed and registered under any law relating to companies formerly in force in any part of India ; a corporation established by or under a Central, State or Provincial Act; any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which the Board may, having regard to the nature and objects of such institution, association or body, declare by general or special order to be a company ; provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before April 1, 1975, or on or after that date) as may be specified in the declaration ; and any body corporate incorporated by or under the laws of a country outside India.
11. Obviously, the assessee-club got itself declared u/s 2(h)(iii) of the Wealth-tax Act a company by a declaration from the Central Board of Direct Taxes dated September 30, 1982, with retrospective effect from 1974-75. The reason for such a declaration was also obviously to get the benefit of exemption from the wealth-tax to the assessee-club. It is also not disputed that the assessee was run by the subscription of members and entrance fee of the new members. Members also did not share any profit except enjoying the recreation facilities provided to them by the club. It is also evident that it was registered under the Societies Registration Act, 1860. Thus the assessee was not a company in its true sense, since it was not registered under the provisions of the Companies Act, 1956, nor formed and registered under any law relating to companies formerly in force in any part of India. The assessee became a company by virtue of the declaration of the Central Board of Direct Taxes within the meaning of the inclusive definition of "company" contained u/s 2(h)(iii). By Section 40(1) of the Finance Act, 1983, the levy of tax on company, not being a company in which the public are substantially interested has been revived at the rate of two per cent. of such net wealth. Section 40(1) of the Finance Act, 1983, runs as follows :
"40. Revival of levy of wealth-tax in the case of closely held companies.--(1) Notwithsanding anything contained in Section 13 of the Finance Act, 1960 (13 of 1960), relating to exemption of companies from levy of wealth-tax under the Wealth-tax Act, 1957 (27 of 1957) (hereinafter referred to as the Wealth-tax Act), wealth-tax shall be charged under the Wealth-tax Act for every assessment year commencing on and from the 1st day of April, 1984, in respect of the net wealth on the corresponding valuation date of every company not being a company in which the public are substantially interested, at the rate of two per cent. of such net wealth."
11. As seen from Section 40(1) of the Finance Act, 1983, it is evident that the said provision was applicable to a company registered under the provisions of the Companies Act, in which the public are not substantially interested. The revival of wealth-tax by the Finance Act, 1983, was also in a limited way to tax unproductive assets in closely held companies, which is manifestly clear from the speech of the Finance Minister, while moving the Finance Bill, 1983, with reference to Section 40 of the Finance Act, which is as follows (see [1983] 140 ITR 25) :
"It has come to my notice that some persons have been trying to avoid personal wealth-tax liability by forming closely-held companies to which they transfer many items of their wealth, particularly jewellery, bullion and real estate. As companies are not chargeable to wealth-tax, and the value of the shares of such companies does not also reflect the real worth of the assets of the company, those who hold such unproductive assets in closely-held companies are able to successfully reduce their wealth-tax liability to a substantial extent. With a view to circumventing tax avoidance by such persons, I propose in revive the levy of wealth-tax in a limited way in the case of closely-held companies."
12. The mischief sought to be prevented by the Finance Act, 1983, was to prevent the directors of companies from transferring their personal unproductive wealth such as jewels, real estate, etc., to closely-held companies formed by them and thereby avoid personal wealth-tax liability. Thus the rationale underlying the revival of wealth-tax on companies was to check the tendency of avoidance of personal wealth-tax liability by certain persons by forming closely-held companies and transferring unproductive assets like jewellery, real estate, etc., to such companies. The said provision, which was revived was only intended to curb such a mischief and cannot be used against the assessee-club, because of the simple reason that it got itself declared as a company u/s 2(h)(iii) for the purpose of claiming exemption from wealth-tax. The assessee is a members'' club. There is no question of any of its members transferring his personal wealth or assets such as jewellery, bullion or real estate in favour of the club. The assets such as land and building of the club belonged to the club itself and no member of the club can claim any share or right of ownership over any portion of that property.
13. Further under Article 6 of the memorandum of association of the assessee-club upon the winding up or dissolution of the club the property remaining after the satisfaction of all its debts could not be paid or distributed among the members of the club but should be given or transferred to some other institution or institutions having objects similar to the object of the assessee-club to be determined by the members of the club. No member can claim any proprietary right in the property of the club. As such there is no question of any member transferring his personal wealth to the club to avoid wealth-tax.
14. Further the assessee-club by no stretch of imagination could be treated as a "closely-held company". The legislative intent in reviving the levy of wealth-tax in a limited way on the wealth of closely held companies shall not be regarded as taking away the benefit of exemption from wealth-tax granted to a deemed company like the assessee-club, which was merely declared as a company u/s 2(h)(iii) of the Wealth-tax Act so as to enable it to enjoy the benefit of exemption from wealth-tax and not a closely-held company. Any interpretation of Section 40(1) by fastening the exigibility of wealth-tax not the assessee-club, which is not a closely-held company would lead to a manifestly absurd and unjust result, which was never intended by the Legislature, while reviving the levy of wealth-tax by Section 40(1) of the Finance Act, 1983. It is the submission of Mrs. Pushya Sitharaman, learned senior standing counsel for the Revenue, that the language employed in Sub-section (1) of Section 40 of the Finance Act, 1983, is fairly wide and it will rope in every company, whether a company registered under the Companies Act or not and also an entity recognised as a company by the Board. Her submission is that only companies in which the public are substantially interested are carved out from the scope and ambit of levy of the Wealth-tax Act. Though the submission of learned senior standing counsel for the Revenue is attractive, however, considering the object behind Section 40 of the Finance Act, 1983, and the purpose for which Section 40 was introduced reintroducing levy of wealth-tax in a limited way and in a limited manner and taking note of the marginal heading of Section 40 of the Finance Act and subsequent amendments made in 1992, the intention behind the section and the language employed in the section, we are of the view that the section should be so interpreted to achieve the object behind the Section 40 of the Wealth-tax Act and considered in the above view, we hold that Section 40 of the Finance Act does not apply to an entity declared as a company by the Board. The obvious intention of the Legislature is to restore the levy of wealth-tax in a limited way on specified assets held by private companies and closely-held companies, which were used as a medium of tax avoidance, by transfer of personal properties by the director or other persons interested in such companies to such companies. We are of the view that though the language employed in Section 40 of the Finance Act, 1983, is wide, yet, considering the object of Section 40 of the Finance Act it does not encompass entities which are not really companies, but recognised as companies by the Board. We are of the view that the following ratio laid down by the Supreme Court in the case of
"A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction.
Speeches made by the Members of the Legislature on the floor of the House when the Bill is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for its introduction can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This is in accord with the recent trend in juristic thought not only in western countries but also in India, that the interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible."
15. Hence, we are of the considered view that Section 40 of the Finance Act, 1983, does not apply to the assessee-club, which is deemed to be a company u/s 2(h)(iii) of the Wealth-tax Act by virtue of a declaration so made by the Central Board of Direct Taxes.
16. Though the Explanation to Section 40(1) of the Finance Act, 1983, declares that for the purpose of Section 40(1), a company in which the public are substantially interested shall have the meaning assigned in Section 2(18) of the Income Tax Act, 1961, a reading of Section 2(18) of the Income Tax Act shows that the said sub-section applies to a company, but the definition, "company" found either in Section 2(17) of the Income Tax Act or in Section 2(h) of the Wealth-tax Act, which is pari materia to Section 2(17) of the Income Tax Act, by which the assessee is treated as a company, is not incorporated in Section 40 of the Finance Act, 1983, nor is it a part of the definition of the company in Section 2(18) of the Income Tax Act. Though for the purpose of the Income Tax Act, all entities which are regarded as companies u/s 2(17) of the Act would be regarded as companies u/s 2(18) of the Income Tax Act, unless Section 2(17) of the Act is also referred to in Section 40 of the Finance Act, the expression, "company" should be construed as one referred to under the Companies Act and not all associations which are deemed to be companies for the purposes of the Income Tax Act. We are of the view that Section 40 of the Finance Act, 1983, is a charging section and it should be strictly construed and there is nothing in that section to include an association which is not actually a company.
17. We are of the considered view that there is absolutely no substance in contending that the Tribunal has overlooked Sub-section (7) of Section 40 of the Finance Act, 1983. Sub-section (7) of Section 40 of the Finance Act, 1983, provided that subject to the provisions of Sub-section (5), this section shall be construed as one within the Wealth-tax Act. Sub-section (5) of Section 40 provided that for the purposes of the levy of wealth-tax under the Wealth-tax Act, in pursuance of the provisions of this section, Section 5 and Clause (d) of Section 45 of that Act and Part II of Schedule I to that Act shall not apply and shall have no effect. The remaining provisions of that Act shall be construed so as to be in conformity with the provisions of this section. We directed Mrs, Pushya Sitharaman, learned senior standing counsel for the Income Tax Department to produce the copy of any notification issued by the Central Government granting exemption in exercise of the powers u/s 40(7) of the Finance Act, 1983. Learned counsel submitted that in spite of her best efforts she could not trace out any such notification. We are of the view that if the assessee does not come within the ambit of Section 40(1) of the Finance Act, it is not possible to enlarge the scope of Sub-section (1) of Section 40 of the Finance Act by reading Section 40(7) of the Finance Act, 1983, in an expansive manner. 5 of the Wealth-tax Act provides for exemptions in respect of certain assets. We fail to understand how this section is applicable to the facts of the present case. Section 45 of the Wealth-tax Act provides that the Act shall not apply in certain cases. Clause (d) provided that any company established with the object of carrying on an industrial undertaking in India in any case where the company is not formed by the splitting up, or the reconstruction, of a business already in existence or by the transfer to a new business of any building, machinery or plant used in a business which was being previously carried on :
Provided that the exemption granted by Clause (d) shall apply to any such company as is referred to therein only for a period of five successive assessment years commencing with the assessment year next following the date on which the company is established, which period shall, in the case of a company established before the commencement of this Act, be computed in accordance with this Act from the date of its establishment as if this Act had been in force on and from the date of its establishment.
Explanation.--For the purposes of Clause (d), "industrial undertaking" means an undertaking engaged in the manufacture, production or processing of goods or articles or in mining or in the generation or distribution of electricity or any other form of power. The said provisions have no relevance to the point in issue to be called upon and decided.
19. In that view of the matter, we are of the view that the Tribunal has come to a clear and correct conclusion and no irregularity could be attributed to the order of the Tribunal. We are also not expressing any opinion on the question whether the assessee is assessable to tax u/s 21AA of the Wealth-tax Act as the said question is not before us. Hence, we answer the question in favour of the assessee and against the Revenue.
