TaxTMI 
TaxTMI 
2007 (8) TMI 385
X X X X Extracts X X X X
X X X X Extracts X X X X
....ellant in the status of AOP and not in the hands of the respective members of the joint venture. 2. That on the facts and circumstances of the case the learned CIT(A) also erred in fact and in law in confirming the finding of the AO that the tax should be levied at the maximum marginal rate. 3. That on the facts and circumstances of the case the learned CIT(A) also erred in fact and in law in confirming the finding of the AO even though the AO acted in contravention of the Board's instructions which are binding on him (the AO). Facts: 3. The assessee in the present case is an Association of Persons (AOP) constituted by joint venture agreement entered into by five different entities on 30th March, 2002. The constitution of the AOP is as under: Sl. No. Name of member Share in P&L of JV 1. Laxmi Traders (Regd. firm) 25% 2. Bijay Paper Trading Co. (Prop. Shri Bijay Kumar Pasai) 25% 3. Pradeep Agencies (Prop. Shri Pradeep Kumar Pasai) 25% 4. Biswanath Industries Ltd. 12.50% 5. Bishwanath Traders & Investment Ltd. 12.50% 4. A copy of joint venture (JV) agreement has been placed at pp. 1 to 6 of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch has been offered in their hands separately and has also been subjected to tax. The same cannot be taxed again in the hands of the AOP as in that case it will be a case of double taxation of the same income. Reliance was placed on the following decisions: (a) CIT vs. Murlidhar Jhawar & Purna Ginning & Pressing Factory (1966) 60 ITR 95 (SC); (b) CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC); (c) CIT vs. Chandrasekaran; SLP (Civil) Nos. 1782-1784/1988 reported at (1989) 178 ITR 73 (St); (d) Laxmichand Hirjibhai vs. CIT (1981) 21 CTR (Guj) 181 : (1981) 128 ITR 747 (Guj); (e) CIT vs. V.H. Sheth (1984) 41 CTR (Bom) 380 : (1984) 148 ITR 169 (Bom); (f) Narnauli Jewel Corporation vs. CIT (1987) 163 ITR 293 (Raj); (g) CIT vs. Taj Oil Traders (2003) 130 Taxman 585 (Raj). 8. Further reliance was placed on Board's Circular No. 75/19/191/62-ITJ, dt. 24th Aug., 1966 (for short "the circular"). It was pointed out that Section 86 and Section 167B of the Act have no relevance in the present context. It was contended that these sections come into play when the income is first assessed in the hands of AOP and not in those ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... profit has been computed accordingly. Commenting on the arguments of the assessee that since the income was offered in the hands of the members, the same income could not be taxed in the hands of the AOP, the learned CIT(A) observed that the said argument would nota stand in the eyes of law. He pointed out that various judicial decisions referred to by the assessee were delivered in the context of old Act. He observed that IT Act was amended so as to levy tax on "every person" who is having taxable income and, therefore, the decisions relied upon by the assessee cannot be applied in the present context of facts and in view of law as it stood on the relevant date. He held that since the income has accrued to the assessee it should be taxed in the hands of the AOP and the shares of members of such AOP will be subject to tax as per provisions of law. He observed that to examine the contention of the assessee that the income was offered to tax in the hands of members, therefore, the same cannot be again subjected to tax is required to be examined in view of relevant provisions of law. He referred to Section 4 of the 1961 Act which is charging section which enables the Department to le....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e was no prohibition in Section 4 of the 1961 Act to restrain the assessing authority to proceed against the firm which is a taxable entity irrespective of the fact that two of its partners had been assessed separately in respect of their shares of income from such partnership concern. A distinction was made in Section 3 of 1922 Act and Section 4 of 1961 Act. 12. He also referred to the decision of Hon'ble Supreme Court in the case of ITO v. Ch. Atchaiah (1996) 130 CTR (SC) 404 : (1996) 218 TTR 239 (SC) wherein it is held that under the 1961 Act, the ITO has no option like the one he had in 1922 Act but to tax 'right person' and the right person alone. It was held that by right person it means the person who is liable to be taxed according to law with respect to a particular income. It was held that merely because a wrong person is taxed with respect to a particular income, the AO is not precluded from taxing the right person with respect to that income and this is so irrespective of the fact that which course is more beneficial to the Revenue. It was held that under old provisions the option was available to assessing authority to take more advantage of the Revenue ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tute right from the beginning. This section corresponds to Section 14(2)(b) of 1922 Act wherein it was specified that income-tax shall not be payable by an assessee if he is a member of AOP, etc. in a case where income-tax has already been paid by the AOP/body of individuals (BOI). He contended that in Section 86 an amendment was brought w.e.f. 1st April, 1989 when new Clause (v) was inserted in place of earlier clause and there was no material change in the section which conveyed that where the assessee is a member of AOP, etc. his share of income in the said association will be computed in the manner provided in Section 67A. It provided further that when such association is chargeable to tax on its total income at maximum marginal rate or at any higher rate under the provisions of IT Act then the share of a member computed as aforesaid shall not be included in his total income and in any other case the share of the member computed as aforesaid shall form part of his total income. It also provides that where no income-tax was chargeable on the income of such association, the share of members as computed under Section 67A shall be chargeable to tax as part of its total income. 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the present case the shares of members are determinate and known. 19. Section 167B(2) governs the chargeability of tax in the present case as it refers to a situation which is different from situation prescribed under Section 167B(1) and such situation includes a situation where the shares of the members of AOP/BOI are determinate and known. In such a situation it has been provided that if total income of any of the members of such AOP or BOI exceeds the maximum amount which is not chargeable to tax, in that situation tax shall be charged on the total income of AOP or BOI at the maximum marginal rate. It is also provided that in a case where any member or members of such AOP/BOI are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged on that portion or portions of the total income of the AOP or BOI which is or are relatable to the share or shares of such member or members at such higher rate or rates, as the case may be, and the balance of the total income of such AOP or BOI shall be taxed at maximum marginal rate. 20. Reading from these sections, learned Authorised Representative vehemently pleaded that even acco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the aforementioned circular dt. 24th Aug., 1966 issued by the CBDT in which it is clearly mentioned that under 1961 Act also the decision of the Hon'ble Supreme Court in the case of Murlidhar Jhawar & Puma Ginning & Pressing Factory (supra) was applicable. He contended that assessment framed by the AO on the members of AOP is valid assessment in accordance with the circular and the said circular being beneficial circular was binding on the IT authorities. In this respect he referred to the decision of Hon'ble Gujarat High Court in the case of Laxmichand Hirjibhai v. CIT (supra) wherein it has been held that CBDT circulars are binding on the IT authorities even if they deviate from the correct legal position. CBDT stating that provisions for assessments of partners and unregistered firm in 1961 Act were on the same lines as in 1922 Act, circular of Board dt. 24th Aug., 1966 must be followed and even a deviation from the legal position cannot be a ground to ignore the binding effect of a circular. 24. Learned Authorised Representative further referred to the decision of Hon'ble Bombay High Court in the case of CIT v. V.H. Sheth and Ors. (supra) wherein the abovemention....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions to assessing authorities laying down the principles to be applied in assessing foreign shipping companies. The said notification did not refer to any development rebate as there was no provision for development rebate at that time. It was held that the fact that the proviso to Section 10(2)(vib) of 1922 Act was incorporated into the Act after the Board issued its instructions cannot affect the force of the instructions issued by the Board of Revenue. (iii) K.P. Varghese v. ITO and Anr. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) wherein it is held that the CBDT circulars, apart from being binding on the Revenue authorities are clearly in the nature of contemporaneous exposition furnishing legitimate aid in the construction of Sub-section (2) of Section 52. The rule of construction by reference to contemporaneous exposition is a well-established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous. It is worth noting that circulars issued by the CBDT are legally binding on the Revenue and this binding character attaches to the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 151A of the Customs Act remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid or that it is contrary to the terms of the statute. Although a circular is not binding on a Court or an assessee, it is not open to the Revenue to raise a contention contrary to a binding circular. A show-cause notice and demand contrary to existing circulars of the CBEC are ab initio bad. Further, it is not open to the Revenue to advance an argument or file an appeal contrary to the circular. (vii) CCE v. Dhiren Chemical Industries (supra) wherein it has been held as under: Where the raw material is not liable to excise duty or such duty is nil, the exemption notification in question will not apply; however, if there are circulars which have been issued by the CBEC which place a different interpretation upon the said phrase, that interpretation will be binding upon the Revenue. (viii) ITO v. Bir Engg. Works (2005) 93 TTJ (Asr)(SB) 257: (2005) 94 ITD 164 (Asr)(SB) wherein it has been held as under: Instructions issued by the CBDT prescribing monetary limit for filing the appeals before the Tribunal, High Court or the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the provisions of the Act, the share of member computed as per main provisions of Section 86 shall not be included in his total income and in any other case the same will form part of member's total income. Thus he pleaded that it provides the manner in which the share of a member of AOP/BOI in the income of such AOP will be dealt with and thus the same also cannot be said to be a charging section. 31. Learned Departmental Representative further contended that option to assess either the members of an AOP or AOP itself was under the 1922 Act. He contended that with the introduction of Section 167B no such option was available with the AO. He contended that circular also cannot be said to be applicable as there was an amendment in the Act after the issue of circular. He contended that in view of introduction of Section 167B to the statute by the Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1st April, 1989, the circular of 24th Aug., 1966 had lost its effect. He contended that when base is removed superstructure cannot stand. He contended that substantial provisions are to be applied rather than the circular. Reading from the circular of 1966, he contended that it was only....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... language of sections is clear and unambiguous, there is no scope for importing into the statute words which are not there. Such importation would be not to construe, but to amend, the statute. Even if there be a casus omissus the defect can be remedied only by legislation and not by judicial interpretation. Once it is shown that the case of assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. (v) Orissa State Warehousing Corporation v. CIT (1999) 153 CTR (SC) 177 : (1999) 237 ITR 589 (SC) wherein it has been held that a fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation. The Court is to ascribe the natural and ordinary meaning to the words used by the legislature and the Court ought not, under any circumstances, substitute its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions. Learned Departmental Representative furthe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....upreme Court in the case of CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory (supra). Some High Courts had held that position under 1961 Act was the same and some High Courts had held that the position under 1961 Act is different as under 1961 Act no such option was available to the AO. The legal position in this regard has been set at rest by the Hon'ble Supreme Court in the case of ITO v. Ch. Atchaiah (supra). In this respect, to correctly appreciate the legal position it will be necessary to discuss in detail the said decision of Hon'ble Supreme Court. 34. In the said case their Lordships have referred to the provisions of 1922 Act and also the provisions of 1961 Act. The controversy in the said case related to asst. yrs. 1965-66 and 1968-69. In the said case Shri Ch. Atchaiah and another person namely, Shri Kondal Reddy purchased land measuring 454.11 acres in a village in Medak District in Andhra Pradesh from Shri Ikramuddin and Smt. Azizunnisa Begum under a sale deed dt. 20th Oct., 1962, for a consideration of Rs. 75,000. Prior to the execution of the sale deed, the said land had been notified for acquisition under the Land Acquisition Act. One of the purc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 1961 Act. The High Court found that the position under the present Act is no different from the position under the 1922 Act notwithstanding the difference in the language employed in the relevant provisions of 1961 Act. It was opined that even under the present Act, the ITO has an option to assess either the AOP as a unit or the members thereof individually and that having exercised the option to assess the members of AOP as individuals and he cannot seek to tax the AOP with respect to the very same income. It is against such decision of Andhra Pradesh High Court, an appeal was filed by the Revenue before the Hon'ble Supreme Court. 36. It was urged before the Supreme Court that the High Court was clearly in error in holding that under 1961 Act, the ITO has an option to tax either the AOP or its members individually. It was pleaded that though there was an option with the Revenue to do so under 1922 Act but the said option is not available under 1961 Act. It was pleaded on behalf of the Revenue that the right person has to be taxed and merely because a wrong person is taxed, it does not operate as a bar to tax the right person. The contention of the Revenue was that if in l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is a charging section which describes chargeability of income-tax in respect of total income of previous year of "every individual, HUF, company and local authority, and of every firm and other AOP or the partners of the firm or members of association individually". Further they referred to the definition of person as given in Clause (9) of Section 2 of 1922 Act which reads as under: (9) 'person' includes an HUF and a local authority As against the above provisions, they referred to Section 4 of the 1961 Act [before it was amended by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989] which reads thus: 4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year or previous years, as the case may be, of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charge....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... referred to Section 183, where an option has been given to AO to assess either the unregistered firm or its partners in a case where it is beneficial to the Revenue. They also mentioned that Section 183 corresponds to Section 23(5)(b) of 1922 Act. Thus they observed that where such option was intended to be given by the legislature, it has so been given and the same has not been extended to the AOP and its members. Their Lordships referred to various decisions rendered under 1961 Act holding therein that such option was available to the ITO even under 1961 Act and also to the decisions which have taken the view that no such option was available under 1961 Act. They observed that in the decisions where the view has been taken by various High Courts that such option is available even under 1961 Act appeared to have been influenced largely by the decisions of Supreme Court in the cases of CIT v. Kanpur Coal Syndicate (supra) and CIT v. Murlidhar Jhawar & Purna Ginning & Pressing Factory (supra) and observed that these decisions were rendered under 1922 Act and no due weight was given in those decisions to the marked difference in the language of relevant provisions in the two enactme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f its members will make it a case of double taxation and therefore also assessment on the AOP is bad in law is also liable to be rejected since as held by Hon'ble Supreme Court in the case of ITO v. Ch. Atchaiah (supra), merely because a 'wrong person' has been assessed, the AO is not precluded from taxing the 'right person' and 'wrong person' can seek remedy as available under law. So on the ground of double taxation also, assessment on AOP (which is the right person to be assessed under the 1961 Act) cannot be held to be invalid and the argument raised by the assessee in this regard is also liable to be rejected and is rejected. 41. Now we have to consider the arguments of the learned Authorised Representative of the assessee regarding applicability of the circular dt. 24th Aug., 1966 relying on which it is pleaded that it is a beneficial circular and therefore the same was binding on AO and CIT(A) and thus assessment made on AOP subsequent to the assessment of its members could not be validly made by AO, and CIT(A) has wrongly upheld the same. To examine such contention, it will be relevant to reproduce the text of the circular: 33. Share ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fied by the ITO under Section 155 after the firm's assessment or reassessment has been made. Letter: F. No. 75/19/191/62-ITJ, dt. 24th Aug., 1966. 42. As pointed out earlier, the abovementioned circular was issued on 24th Aug., 1966. It is also important to note that after the date of issue of abovementioned circular two important events happened. Firstly, subsequent to the date of issue of above circular, the judgment of Hon'ble Supreme Court in the case of ITO v. Ch. Atchaiah (supra) came to be delivered on 11th Dec, 1995 propounding that the position of law regarding chargeability of tax on the AOP and its member is different under 1961 Act as compared to the provisions of 1922 Act. As already discussed, Hon'ble Supreme Court has interpreted the law in this regard by comparing the provisions of Sections 3, 2(9) of 1922 Act and the provisions of Section 2(31) and Section 4 of 1961 Act. Further their Lordships have also observed that earlier decision of apex Court in the case of CIT v. Murlidhar Jhawar & Puma Ginning & Pressing Factory (supra) (based upon which the circular has been issued by CBDT) was rendered under 1922 Act and the same, therefore, could not be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r members at such higher rate or rates, as the case may be, and the balance of the total income of the association or body shall be taxed at the maximum marginal rate. Explanation--For the purposes of this section, the individual shares of the members of an AOP or BOI in the whole or any part of the income of such association or body shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of such income) are indeterminate or unknown on the date of formation of such association or body or at any time thereafter. 44. Section 167B regulates chargeability of tax on AOP and BOI. This section has given a clear mandate that the tax is chargeable in the hands of AOP alone and it has been brought in the statute subsequent to the issue of abovementioned circular of the CBDT. 45. In the light of the abovementioned factual aspects, we shall proceed to examine the contention of the learned Authorised Representative as to whether the benefit as sought under the said circular can be extended to the AOP. 46. There cannot be any dispute to the proposition that IT authorities are bound to follow the circulars issued by CBDT under Section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Sen AAC (1965) 56 ITR 198 (SC) : TC 69R.265, Ellerman Lines Ltd. v. CIT 1972 CTR (SC) 71 : (1972) 82 ITR 913 (SC) : TC 69R.265 and K.P. Varghese v. ITO (1980) 24 CTR (SC) 358 : (1980) 131 ITR 597 (SC): TC 69R.266, to contend that the circular issued by the Board under Section 119 of the Act is binding on the CIT in terms of which he was bound to examine the revision of the appellant on merits and the order of the learned single Judge merely gives effect to such a course. Dr. Gauri Shankar, learned senior advocate for the Revenue, however, pointed out by referring to several decisions of this Court to the effect that the circulars or instructions given by the Board are no doubt binding in law on the authorities under the Act but when the Supreme Court or the High Court has declared the law on the question arising for consideration it will not be open to a Court to direct that a circular should be given effect to and not the view expressed in a decision of the Supreme Court or the High Court. We find great force in this submission made by the learned senior advocate for the Revenue and find absolutely no merit in this appeal and the same stands dismissed, but in the circumstances o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Supreme Court in the cases of CCE v. Dhiren Chemical Industries (supra) and Commr. of Customs Etc. Etc. v. Indian Oil Corporation Ltd. and Anr. (supra) to plead that despite the law declared by Supreme Court in the case of Ch. Atchaiah (supra), the circular issued by the Board will be binding on the Revenue. In Commr. of Customs, Etc. v. Indian Oil Corporation Ltd. and Anr. (supra) apex Court has followed its earlier decision in the case of CCE v. Dhiren Chemical Industries (supra). We find that the decision in the case of CCE v. Dhiren Chemical Industries (supra) was later on considered by Hon'ble Supreme Court in the case of Kalyani Packing Industry v. Union of India and Anr. 2004 (6) SCC 719 and the abovementioned decision was explained by their Lordships as under: We have noticed that para 9 (para 11 in SCC) of Dhiren Chemical's case (2002) 172 CTR (SC) 670 : 2004 (6) SCC 722 is being misunderstood. It therefore, becomes necessary to clarify para 9 (para 11 in SCC) of Dhiren Chemical's case (supra). One of us (Variava, J.) was a party to the judgment of Dhiren Chemical case (supra) and knows what was the intention in incorporating para 9 (para 11 in SCC). ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on'ble Supreme Court in the case of ITO v. Atchaiah (supra). On the contrary, he was bound to follow the proposition as propounded by Hon'ble apex Court in the case of ITO v. Atchaiah (supra) which was directly applicable in the present case. Thus, in our opinion, the AO did not commit any mistake in not following the said circular and rather he was right in framing the assessment on the AOP applying the law as declared by the Hon'ble Supreme Court in the case of ITO v. Atchaiah (supra) on the point in issue. 55. The other aspect of the matter is that whether a circular is binding on the AO even if it is contrary to the provisions of the Act. The law in this regard has been explained by Hon'ble Supreme Court in the case of Keshavji Ravji & Co. Etc. Etc. v. CIT (supra). In the said decision it was held by Hon'ble Supreme Court that the Tribunal is not an IT authority under the Act, therefore, circulars do not bind it. Though the benefits of such circulars to the assessee have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provisions and mitigate the rigour of law. But that is not the same thing ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... reproduce the following observations of their Lordships from the said decision: The said circulars under Section 119 of the IT Act were not placed before the Court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provisions of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. It is further held as under: We do not see any inconsistency or contradiction between the circular so issued and Section 145 of the IT Act. In fact, the circular clarifies the way in which these amounts are to be treated ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed in print, ours) 58. Thus it is clear from the above position of law as described in the aforementioned decisions that powers of CBDT exercised under Section 119 are not wide enough to travel beyond the scope of the Act. Its powers are same as are the powers of the rule making authority. Moreover, it has already been pointed out that in any case the circular had lost its validity as per law declared by the apex Court by way of the decision in the case of ITO v. Atchaiah (supra) when the controversy prevailing on the issue was resolved and it was interpreted that under 1961 Act no option was vested with the ITO to either assess the AOP or its members. Such option though was available under 1922 Act but was not provided in 1961 Act as there was a difference in the language of both the Acts. It has also been pointed out in this order that there was subsequent change in the legislation when Section 167B was introduced. Thus relying on the circular it cannot be held that AO had no jurisdiction to assess the AOP (assessee) as he had already assessed its members. 59. In view of the above discussion our answer to the question referred to the Special Bench is that assessment made b....