TMI Blog1996 (3) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... ary and June. 3. The present assessee Lodge Hamilton 26, is a Private Club where no business activity is carried on. The said club was in possession of a property bearing No. 1/1449, since 1926. In the year 1983, this property was sold to one Suchit Co-op. Housing Society for an amount of Rs. 2,97,202. The sale consideration was invested by the assessee in units of Unit Trust of India. From the Unit Trust of India, the assessee club used to receive dividend income. The tax deducted at source was refunded to the assessee. The original order section 237 was made by the Assessing Officer an 16-7-1987 determining the total income at Re. NIL. The amount of T.D.S. was refunded to the assessee. 4. The CIT thereafter passed an order under section 263 of the Act on 29-3-1990. After providing an opportunity to the assessee and after considering the explanation submitted on behalf of the assessee, the CIT set aside the said assessment order with the direction to the Assessing Officer to make an assessment of the assessee as per law in the status of AOP and charge income-tax at the maximum marginal rate on dividend income of Rs. 1,12,725 received by the assessee from the Unit Trust of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .f. 1-4-1985 clearly provides that where the individual shares of the members of an association of persons in the whole or any part of the income of such association are indeterminate or unknown, tax shall be charged on the total income of the association of persons at the maximum marginal rate. The CIT was therefore justified in directing the Assessing Officer to charge tax at maximum marginal rate. The circular relied upon by the learned counsel for the assessee pertained to the period prior to amendment made in the year 1985. Moreover, the beneficial circulars can not over-ride the provisions of law. 6.1 Shri M.P. Lohia, the learned Senior D.R. submitted a detailed note on the question as to whether Board circulars which deviates from the provisions of the Act are binding upon Income-tax Authorities or not. He submitted that the issue regarding the binding nature of Board circulars has been adjudicated up on by various Courts including Apex Court in various cases. Placing reliance on the judgment of the Supreme Court in the case of Kerala Financial Corpn. v. CIT [1994] 210 ITR 129 he submitted that the Circular cannot over-ride or detract from the Act as that would be destruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Court observed as under: "The directions given in that circular clearly deviated from the provisions of the Act, yet the court held that the circular was binding on the Income-tax Officer." The learned D.R. further argued that the above referred judgment of the Supreme Court came to be examined by the Hon'ble Andhra Pradesh High Court in the case of CIT v. Sahney Steel Press Works Ltd. [1985] 152 ITR 391/[1984] 17 Taxman 403 where the Hon'ble High Court observed as under:- "The decision cannot be understood to mean that even though a circular of the Central Board runs counter to the provisions of the Act, still it has to be followed and applied...." 6.6 On the strength of the aforesaid judgments the learned Senior D.R. submitted that it can safely be concluded that the Constitutional Bench of five Hon'ble Judges of the Supreme Court in the case of Navnitlal C Javeri has in no way laid down the sweeping and broad proposition that Board circulars shall be binding even if they deviate/detract from law, as against what has been later held in clear and uncertain terms by the Hon'ble Supreme Court itself in very recent judgment of Kerala Financial Corpn.'s case and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes since the shares of the members are left unspecified and care is taken to ensure that the members do not receive any income during the life of the association of persons. Accordingly, income-tax is payable only by the association of persons in its income which may or may not be liable to tax since it is, in the generality of cases, below the exemption limit. The net result of this arrangement is that the assessee who is in fact entitled to receive such income and who diverts such income to the association of persons as a whole pays only a very small fraction of the tax that is due from him. 15.4 In order to counteract such attempts at tax avoidance through the creation of multiple associations of persons without defining the shares of the members, the Finance Act, 1981, has inserted a new section 167A in the Income-tax Act to provide that where the shares of the members of an association of persons (not being a company or a co-operative society) in the income of such association are indeterminate or unknown, tax shall be charged on the total income of such association at the maximum marginal rate.....' "For this purpose, it has been laid down that the shares of the mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or any part of the income of such association are indeterminate or unknown, income tax will be charged on the whole of the total income of the association of persons at the maximum marginal rate. This was also a measure adopted with a view to countering tax avoidance through the loopholes which remained in the amendments made from assessment year 1981-82. 7.4 The circular issued by the Board dated 11-1-1982 in relation to interpretation of section 167A will have to be read in the light of the aforesaid objective so sought to be achieved by the provisions contained in section 167A. It was essentially meant for curbing tax avoidance through the device of creating multiple or large number of such association of persons. The provisions of section 167A apply where the individual shares of the members in the income of such association of persons are indeterminate or unknown. However such levy at maximum marginal rate of tax was not intended to be charged in relation to income receivable by the trustees on behalf Provident Fund, Superannuation Funds, Gratuity Funds, Pension Funds, etc. created bona fide by the persons carrying on business or profession exclusively for the benefit of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of mutuality. The benefit of mutuality has been denied to the assessee on the ground that the income and assets of the institution cannot be distributed amongst the members. In the event of dissolution of the club the entire assets and funds will have to be transferred to a Grand Lodge only. It is therefore a case of bona fide and genuine social club where no member has any right to receive any share in the income or assets of the club at any point of time. Even on the basis of interpretation of the plain language of section 167A it could be held that the assessee's case would not attract levy of tax at maximum marginal rate prescribed in section 167A as it is not a case of members having indeterminate or unknown shares in the income or corpus of the club, but it is a case where the members do not at all have any share in the income or assets of the club but it is a club meant for advancing spiritual interest in the society. 7.6 The circular issued by the Board has to be viewed in the light of the aforesaid object which is being sought to be achieved by issuance of that circular. The circular was issued with a view to clarify the position and in order to obviate a wasteful and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Navnitlal C Javeri and the nature of the circular referred to and adjudicated upon by the Supreme Court in that case. 7.8 In the case of Navnitlal C Javeri the ITO computed the assessee's income at Rs. 3,58,460. The amount included a sum of Rs. 2,83,126 representing the accumulated profits of the company. The ITO took the view that under section 2(6A)(e) of 1922 Act read with stringent provisions of section 12(1B) as introduced in 1955 the said amount must be deemed to be dividend received by the appellant. The provisions contained in section 2(6A) of the 1922 Act defined "income" as including dividend. Section 2(6A) defined 'dividend' in an inclusive manner, which inter alia takes in the payments to which clause (e) of section 2(6A) refers and makes them dividend for the purpose of the Act. The combined effect of these two provisions was that three kinds of payments made to the share holders of the company to which such provisions applied, are treated as taxable dividend to the extent of accumulated profits held by the company. These three kinds of payments are; (1) payments made to the share holder by way of advance or loan; (2) payments made on his behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such transactions and not to bring them within the mischief of the new provision." The directions given in that circular clearly deviated from the provisions of the Act, yet this court held that-the circular was binding on the Income-tax Officer." 7.9 The Hon'ble Patna High Court in the case of CIT v. Sriram Agrawal [1986] 161 ITR 302/28 Taxman 81 considered the question relating to binding nature of beneficial circulars in the light of the judgment of the Supreme Court in the case of Navnitlal C Javeri as well as after taking into consideration various other judgments including the judgment of the Supreme Court in the case of State Bank of Travancore. The following observations made by the Hon'ble Patna High Court, in our view resolve the present controversy before us: "Learned counsel for the assessee, on the other hand, relied upon the case of Navnitlal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC), where Gajendragadkar C.J. observed as follows (at p. 203): "It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under section 5(8) of the Act. This circular pointed out to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The observations in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) made by Sabyasachi Mukharji J. to the effect that the circulars being executive in character cannot alter the provisions of the Act run counter to the observations of Gajendragadkar. C.J. in the case of Navnitlal C. Javeri [1965] 56 ITR 189 (SC) The latter being judgment of live Judges and the former of three Judges, I am bound to follow the case of Navnitlal C. Javeri [1965] 56 ITR 189 (SC). It is thus obvious that in terms of the circular of the Central Board of Direct Taxes quoted above, no penalty could have been levied. The assessee was certainly in default, but the Central Board of Direct Taxes Circular being binding on the officers employed in execution of the Act under section 5(8), they were bound to give effect to the circular." 8. In view of the aforesaid judgment of the Hon'ble Patna High Court we are of the considered opinion that Circular No. 320, dated 11-1-1982 issued by the Board in relation to interpretation of section 167A is clearly applicable on the facts and circumstances of the present case. The provisions of section 167A will not be attracted in the case of the assessee and tax wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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