United National Party v. Com. Oen. of Inland It event
1978Present : Malcolm Percra, J., Weeraratne, J.
and Sharvananda, J.
UNITED NATIONAL PARTY, Assessee-AppellantJand
COMMISSIONER-GENERAL OF INLAND REVENUE,Respondent.
S. C. 2/76—BRA. 361.
Inland. Revenue Act, No. 4 of 1963, sections 28 and 78—Exemption of apolitical party from wealth tax—Meaning of the expression ‘ clubor similar institution
An established political party represents a “similar institution"to a “club” within the meaning of section 78(1) of the Inland
306 SHARVANANDA, J.— United National Party v. Com. Gen. oj Inland Revenue
Revenue Act, No. 4 of 1963, and hence under section 28 of the Act,is exempt from liability for Wealth Tax.
Cases referred to : —
Inland Revenue Commissioner v. Eccentric Club Ltd. (1924) K B 396.Steele v. Courley & Davies (1887) 3 T-L.R. 118.
Graffe v. Evans (1882) 8 Q.B.D. 373 ; 46 L-T. 347.
Zebanog Club v. MacDonald (1940) 1 All E-R. 454.
Finch v. Oake (1896) 1 Chancery 409 ; 73 L-T. 716 ; 65. L.J. ch. 624.Hopkins v. Marquis of Exeter (1867) L-R. 5 Equity 63 ; 17 L.T. 368.
Wise v. Perpetual Trustee Co. (1903) A-C. 130 ; 87 L.T. 509 ; 19 T.L.R-12 5.
The Bohemian Chib of Melbourne (1819) 24 C.L R. 334.0
Fletcher v. Income Tax Commissioner (1971) 3 All E.R■ 1185 ;(1972) 2 W.L.R. 14; (1972) A.C. 414.
C ASE STATED to the Supreme Court under the InlandRevenue Act, No. 4 of 1963.
S. Ambalavanar, with Miss C■ Joseph, for the assessee-appellant.
G■ P. S. de Silva, Deputy Solicitor-General, for the respondent.
Cur. adv. vult.
April 3, 1978. Sharvananda, J.
Section 28 of the Inland Revenue Act, No. 28 of 1963, exempts“ any body of persons to which section 78 of the Act applies ”from the application of the provisions relating to the impositionof wealth tax.
Section 78 (1) applies to 11 a body of persons, corporate, or unin-corporate, carrying on a club or similar institution ”, and section78 (2) to “ a body of persons, whether, corporate or unincorpo-rate, carries on a trade association, chamber sof commerce, orsimilar institution.”
The question that arises on this reference is whether an esta-blished political party, such as the United National Party, is aninstitution falling within the ambit of section 78(1) of the InlandRevenue Act and hence exempt from liability to wealth tax.
The United National Party is admittedly a political party, itsobjective (according to section 4 of its Constitution) being to“organise and maintain in Parliament .and in the country aPolitical Party to put into effect the Policy and Programmeaccepted by the Party as contained in its Manifesto. ” The mem-bership of the Party is open to all its registered electors whoaccept the conditions of membership set out in Rule 3 of theConstitution. The following are its conditions : —
(a) to accept the Principles, Policy and Programme of theparty ;
ii HAS VAN AN13 A, J.—United National Party v. Com. Gen. oj Inland llevenue 307
i(i) to. conform to the constitution and Standing Orders ofthe party;
•(c) ’ to give all possible support to the candidate nominatedby the party and in no way to support any other person3 -• standing against such candidate ;
'-(d) not to take part in any political activities which conflictor might conflict with the above undertakings.
Membership is confined to :
direct members, being those who pay an annual feeof Rs. 1 to the Treasurer of the Party on or before theSlst day of January every year ;
(5) members of registered Branch Associations which havepaid their respective annual Association membershipfee of Rs. 10 to the Treasurer of the Party on or beforethe 31st day of January every year ;
(c) members of registered Women’s Branch Associationswhich have -paid their-respective annual Associationmembership fee of Rs. 5 to the Treasurer of the Partycm or before the 31st day of January every year;
<d) members of registered Youth Branch Associations whichhave paid their respective annual Association member-ship fee of Rs. 5 to the Treasurer of the Party on orbefore the 31st day of January every year.
The United National Party is not a mushroom political partythat surfaces when a Parliamentary Election is in the offing. Itis a well established party, having been founded years ago, andhas a political history.
Counsel for the United National Party, the assessee-appellant,submitted that the Party is an unincorporate body of personscarrying on an institution similar to a club within the meaningof section 78 (1) and is hence not liable to wealth tax in termsof section 28 of the Inland Revenue Act.
A club is generally understood to mean a group of personsorganised for social, literary, athletic, political or other pur-poses. In Halsbury’s Laws of England (4th Ed. Vol. VI at p. 56),a club is defined as “ a society of persons associated together notfor the -purpose of trade, but for social reasons, promotion ofpolitics, sport, art, science, or literature, or for any other lawfulpurpose. " But trading activities will not destroy the nature ofa clufe tf they are merely incidental to the club’s purposes. A
308 8HARVANANDA, J.—United National Party v. Com. Oen. of Inland Retanme
members’ club is not ordinarily carried on with a view to profitand is not liable to income tax on the result of mutual transac-tions with its members. (See Inland Revenue Commissioner v.Eccentric Club Ltd., (1924) K. B. 396). The association must beprivate and have some element of permanance. An unincorpo-rated members’ club is a society of persons, each of whomcontributes to the funds out of which the expenses of the societyare paid. The contribution is generally made by means of anentrance fee. or subscription fee, or both. The society is not apartnership, because the members are not associated with a viewto profit. It does not have a legal existence apart from themembers of which it is composed (Steele v. Gourley & Davies,(1886) 3 T.L.R. 118 at 119 per Day, J.). Subject to any rules to thecontrary, the property and funds of a club belong to the membersfor the time being, jointly and in equal shares, and if provisionsare supplied to a member at a given price, this does not constitutea sale as a member is a parj-owner of the goods of the club, butis in effect a release by the other members of their interests inthe goods supplied. In Graffe v. Evans, (1882) 8 Q.B.D. 373 at378, Field, J. clarified the principle as follows :—
“ I think the true construction of the rule (Rule 7: Allproperty acquired by the club shall be vested in the trustees),is that the members were the joint owners of the generalproperty in all the goods of the club and that the trusteeswere their agents with respect to the general property inthe goods, ”
In a club, the members for the time being are jointly entitledto all the property and funds, but it is only upon a dissolutionthat the individual interests of the members become capable ofrealisation. The property and^ assets of a club are usually Vtagtedin the trustees who are appointed in pursuance of the provisionsin the rules. The holding of the property by the trustees is aholding for and on behalf of and not a holding antagonistic tothe members of the club, Zebanog Club v. MacDonald, (1940)1 A.E.R. 454. The management of the affairs of a club is gene-rally entrusted to a committee of the members elected in accord-ance with the provisions of the rules.
It is fundamental to the concept of a club that the organisationis open only to individuals sharing a mutual interest. Every clubis governed by rules which generally specify the purpose forwhich it is established and make provisions as to the admissionof members, the payment of entrance fees and subscriptions,
SjIAKVAJNAXOA. A .—United .Wtnonnl t*mty o. Com. (Jen. oj Inland U avenue 309
resignation and expulsion of members, the management of theaffairs of the club and holdings of meetings of members. Therules spell the contract between the members. The members areentitled to privileges of the club in accordance with the rules,so long as they duly pay their subscriptions and continue to bemembers. Clubs arc societies, the members of which are conti-nually changing and no member as such becomes liable, in theabsence of a rule which impose that liability, to pay to the fundsof the society any sum beyond the subscription which the rulesrequire him to pay so long as he remains its member. Subject toany provisions in the rules to the contrary, a member of an un-incorporated members1 club may from time to time terminate hismembership on advising the secretary of his intention to resign,Finch v. Oake, (1896) 1 Chancery 409. A, member may beexpelled if the rules of the club so provide. A member may beexpelled under a rule which so provides if his conduct in theopinon of the committee is injurious to the character andinterests of the club. In the case of g. political club, pledgingoneself to vote for a candidate of another party may reasonablybe considered injurious to the interests to the club and mayjustify expulsion (see Hopkins v. Marquis oj Exeter, (1867) L. It.
5 Equity 63).
Lord Lindley, in his judgment in Wise v. Perpetual TrusteeCo.; (1903) A. C. .130 at 149, referred to the fundamentalelements of a club :
“'Clubs are societies, the members of which are
perpetually changing. They are not partnerships, they arenot associations of gain, and the feature which distinguishesthem from other societies is that no member as such becomesliable to pay to the funds of the society or to anyone elseany money beyond the subscriptions required by the rulesof the club to be paid so long as he remains a member. Itis upon this fundamental condition, not usually expressedbut understood by everyone, that clubs are formed, and thisdistinguishing feature has been often judicially recognised. ”
Griffith, C. J. in The Bohemian Club of Melbourne, (1819) 24C.L.R. 334 at 337, described a club as a voluntary association ofpersons who agree to maintain for their common personal bene-fit and not for profit an establishment the expenses of which areto be defrayed by equal contributions of an amount estimated tobe sufficient to repay their expenses. Lord Wilberforce, deliver-ing the judgment of the Privy Council in Fletcher v. Income Tax'Commissioner, (1971) 3 A.E.R. 1185 at 1190, while quoting
310 SHARYANA2sTDA, J.— United National Party v. Cam. Gen. of Inland Revenue
with approval Griffith, C.J.’s description of a club, observed thatthough the Chief Justice referred to equal contributions, it wasnot an essential feature. ^
A club differs fundamentally from a partnership. For a partner-ship to exist, there must be two or more principals carrying onbusiness with a view to profit. On the other hand, the object of aclub, is not acquisition of profit, and its members, as such, arenot liable for one another’s acts.
The basic feature of a business activity is that it has as itsof a members’ club. Since the primary purpose of making a profitof a members’ club. Since the primary purpose of making a profitis wanting, such a club is not a form of business organisation.But where the club is a proprietary one, that is to say it maybe owned and operated by one or more persons who, in consid-eration of the payment of subscriptions, permit the members ofthe club to enjoy the facilities which they provide, in such aninstance the proprietor is carrying on a business for profit. Aproprietary club is of an entirely different nature from a mem-bers’ club. It is a misnomer to describe such an institution as aclub. The norm is a members’ club. The concept of £ club ’ in itsproper significance, embraces only a members’ club. A proprie-tor’s club is a contradiction in terms, and section 78 (3) of theInland Revenue Act very properly excludes the application ofsection 78 (1) to proprietary clubs.
The above are the basic rules relating to a club. They areequally applicable to the constitution, management, membershipand property of a political party. Thus the institutions of a cluband of a political ‘party, though their orientations may differ,have in law, a number of similar basic features. They are bothassociations of persons, combining for purposes other than carry-ing on a business, and acquisition of gain is quite alien to theirobject. The membership of a club is generally confined to personssharing a common social interest, while membership of a politicalparty is limited to those who accept the political principles, policyand programme of the party. The rights and duties of themembers of a club depend upon its rules- Similarly, the cons-titution of a political party determines the rights and dutiesof its members, and the legal incidents relating to membershipof a club apply equally to the members of a political party. Themembers for the time being of a political party are jointly en-titled, as members of a club, to all the property and funds ofthat institution.
RH.YR.VANANDA, J.—United National Party v. Com. (ten. of lnlaiut Reveune 311
On the application of the above criteria to the circumstancesof the United National Party, it would appear that it carries on aninstitution similar to a club within the meaning of section 78 (1)of the Inland Revenue Act and hence is exempt by section 28from liability to wealth tax.
The Board of Review has held that the United National Partyis not a club falling under section 78 (1), on the ground that aclub represents an association of persons meeting together mainlyfor a social purpose (this could include sport or other commoninterest, such as gardening), and since the main objective ofthe United National Party is “to organise and maintain inParliament and in the country a Political Party… . ’ such a party,“ which formed the country’s Government, or which intendsto do so when in power, is too important an entity to be includedby the Legislature under the connotation of * club ” The Boardhas misconceived the contention of the assessee. What is claimedfor the party is that, for the purposes of section 78 (1), not thatit is a ‘ club ’, but that it is a ‘ similar institution This miscon-ception vitiates the Board’s conclusion Further, the Board hasunduly highlighted the difference in objectives for the purposeof determining the similarity in nature of the comparable institu-tions. The Board has failed to consider the similarities in charac-ter, constitution and structure of both the entities and has notaddressed to itself the correct question. As stated earlier, thepersons composing, a club or a political party are not commer-cially organised, and their activities are not profit oriented. Theymay incidentally carry on a trading activity to offset the expensesof their venture, but such activity is subordinated to their mainpurpose. Members are not entitled to any dividends and liabilityof a member is limited to his subscription. Though the membersare jointly entitled to the property and funds of these organisa-tions, it is only on their dissolution that the current membersbecome entitled to the distribution of the assets. These commonfeatures tend to identify a political party as a “ similar institu-tion ” akin to the legal status of a club. The fact that a politicalparty’s perspective or horizon is of national dimensions doesnot, in principle, make a difference to the argument.
The Deputy Solicitor-General, in the last resort, submittedthat section 51 of the original Income Tax Ordinance anticipatedthe provisions of section 78 (1) of the Inland Revenue Act of 1963and referred to a body of persons carrying on a club or similarinstitution and that since in 1932 there were no establishedpolitical parties in Ceylon, it would not have been the intention
312 SHARVANA2CDA. .T. I'nitul Xa/inual Parly r. Com. Gen. of Inland Hr.vrn nc.
of the Legislature, when section 51 was first enacted in 1932, toinclude within the ambit of the section political parties. Theassumption underlying this argument is questionable. It cannotbe imagined that the legislators of 1932 could not have anti-cipated the evolution of political parties in Ceylon. Even if theinstitution of political parties was a subsequent developmentand is a new phenomenon in Ceylon politics, that fact does notdebar it from claiming to be an institution similar to a club ifit has attributes comparable to those of a club. The relevantquestion is: ‘Does the nature, quality and status of a politicalparty correspond to those of a club so as to be included in thesame category of institutions for the purpose of the applicationof section 78 (1) ? ’ In the premises, this question admits only ofan affirmative answer.
In my -view, the question of law on which the opinion of thisCourt is sought has to be answered in favour of the assessec-appellant. The United National Party, as a political party,represents a ‘ similar institution ’ as a club within the meaningof section 78 (1) of the Inland Revenue Act and hence, undersection 23 pf the Act, is exempt from liability for wealth tax.
The appeal is allowed- The respondent shall pay the assessee-appellant costs fixed at Rs. 525. The appellant will also beentitled to a refund of the sum Rs. 50 paid under section 102 (1).
Malcolm Per era. J.—I agree.
Weeraratne, J.—1 agree.