1996 (3) TMI 153 - AT - Income Tax

Tribunal rules on tax rate for AOP, not maximum marginal rate. Board Circulars binding on Income-tax Officers.

The tribunal partly allowed the appeal, ruling that Section 167A of the Income-tax Act, 1961, was not applicable to the assessee. The tax would be payable ... Association Of Persons Issues Involved:1. Applicability of Section 167A of the Income-tax Act, 1961.2. Binding nature of Board Circulars on Income-tax Authorities.Issue-wise Detailed Analysis:1. Applicability of Section 167A of the Income-tax Act, 1961:The core issue in this appeal is whether the CIT rightly directed the Assessing Officer to levy tax at the maximum marginal rate under Section 167A of the Income-tax Act, 1961. The assessee, a private club named 'Free Masonry,' sold a property and invested the sale proceeds in units of Unit Trust of India, receiving dividend income. The CIT, in an order under Section 263, directed the Assessing Officer to assess the club as an AOP and charge income-tax at the maximum marginal rate on the dividend income.The learned counsel for the assessee argued that the club should not be taxed at the maximum marginal rate as per Circular No. 320, dated 11-1-1982, which clarifies that in cases of registered societies, trade and professional associations, social and sports clubs, etc., where members or trustees are not entitled to any share in the income, the provisions of Section 167A will not be attracted.The learned Senior D.R. countered that the plain language of Section 167A, as substituted by the Finance Act, 1985, mandates that where the individual shares of the members of an AOP in the income are indeterminate or unknown, tax shall be charged at the maximum marginal rate. He argued that the circular relied upon by the assessee pertained to the period before the 1985 amendment and cannot override the statutory provisions.The tribunal noted that the amendments to Section 167A were aimed at counteracting tax avoidance through the creation of multiple AOPs without specifying the shares of members. The Finance Act, 1985, made the law more stringent to plug loopholes but did not intend to levy maximum marginal rate on genuine social clubs where members do not have any share in the income or assets. The tribunal concluded that the assessee's case did not attract the maximum marginal rate as the members were not entitled to any share in the income or assets of the club.2. Binding Nature of Board Circulars on Income-tax Authorities:The learned Senior D.R. argued that Board Circulars cannot override or detract from the provisions of the Act, citing several Supreme Court judgments, including Kerala Financial Corpn. v. CIT, Shubhlaxmi Mills Ltd. v. Addl. CIT, and State Bank of Travancore v. CIT. He contended that the beneficial circular relied upon by the assessee deviates from the statutory provisions and should not be binding.The tribunal, however, referred to the Supreme Court judgment in Navnitlal C Javeri v. K.K. Sen AAC, which held that a circular issued by the Board is binding on all officers and persons employed in the execution of the Act. The tribunal also cited the Patna High Court judgment in CIT v. Sriram Agrawal, which emphasized that beneficial circulars issued by the Board, even if deviating from the provisions of the Act, are binding on the Income-tax Officers.The tribunal concluded that Circular No. 320, dated 11-1-1982, is applicable to the assessee's case, and the provisions of Section 167A will not be attracted. Therefore, the tax should be payable at the rate ordinarily applicable to the total income of an AOP and not at the maximum marginal rate.Conclusion:The appeal was partly allowed. The tribunal directed that the provisions of Section 167A will not be attracted in the case of the assessee, and tax will be payable at the rate ordinarily applicable to the total income of an AOP, not at the maximum marginal rate. The tribunal expressed appreciation for the learned Senior D.R.'s efforts and impartial representation of the legal points involved.