Laxmichand Hirjibhai vs Commissioner of Income Tax, Gujarat-III

Divan, C.J.—In this case, at the instance of the assessee, the following two questions have been referred to us for our opinion :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that even after assessing the partner of the

firm, the firm could be taxed as unregistered firm under the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the circular was not binding on the Income Tax

Officer, and, therefore, the assessee was not entitled to the benefit thereof ?

The facts leading to this reference are as follows :

We are concerned with the assessment year 1968-69, the relevant previous year being Samvat year 2023. The assessee before us is a partnership

firm. The assessee-firm consisted of four partners, namely, Laxmichand Hirjibhai, Amratlal Mavjibhai, Ratilal Mavjibhai and Ramjibhai Mavjibhai.

All the four partners had equal shares. Up to the assessment year 1967-68, the assessee-firm was assessed tax in the status of a registered firm.

For the assessment year under reference, that is, assessment year 1968-69, the assessee-firm filed Form No. 12 required to be filed under s.

184(7) of the I.T. Act, 1961, for the grant of renewal of registration. This Form was signed by three partners, namely, Laxmichand, Ratilal and

Amratlal but Ramjibhai Mavjibhai did not sign the form for renewal, being Form No. 12. This was noticed by the ITO and he gave several

opportunities to the assessee-firm so that Ramjibhaii Mavjibhai could sign the form but due to disputes amongst the partners it was not possible for

the other three partners to get Ramjibhai Mavjibhai to sign Form No. 12. The ITO, therefore, declined to allow continuance of the registration to

the firm and assessed the firm in the status of an unregistered firm. The assessee-firm carried the matter in appeal to the AAC and there it was

pointed out on behalf of the assessee that assessment of the firm was completed on March 30, 1973, in the status of an unregistered firm.

However, the assessment of one of the partners, Ramjibhai Mavjibhai, had been completed by the ITO on 30th March, 1972, that is, one year

earlier, and it was also claimed that since the ITO had exercised the option of assessing the partners of the firm directly, no assessment could be

made in the hands of the firm, in the light of the decision of the Supreme Court in (1966) 60 ITR 95 (SC) . The AAC accepted this contention

urged on behalf of the assessee and he held that the assessment of the firm in the status of an unregistered firm was not sustainable as the

assessment in the case of the partner was completed earlier. The AAC also relied on Circular F.No. 75/19/191/62-II-J dated 24th August, 1966,

and he held that in view of that circular, the decision in (1966) 60 ITR 95 (SC) would be applicable to the assessment made under the I.T. Act,

1961. In other words, the AAC was of the view that, even according to the instruction of the Board, it was not open to the ITO to make an

assessment in the hands of the firm, after having made the assessment in the hands of the partner earlier.

Against the decision of the AAC, the revenue went in appeal before the Income Tax Appellate Tribunal. The Tribunal examined the legal

position and came to the conclusion that, in view of the difference in language between s. 3 of the Indian I.T. Act of the 1922 and s. 4 and s. 2(31)

of the I.T. Act of 1961, the circular issued by the Board and the decision in (1966) 60 ITR 95 (SC) , which was rendered in the context to the

1922 Act, would not apply in the context of the 1961 Act. As regards the circular dated August 24, 1966, referred to above, the Tribunal was of

the view that this circular merely stated the legal position and could not be construed as in the nature of directions as contemplated under s. 119 of

the new Act of 1961. The Tribunal, in the view that it took, allowed the appeal, set aside the order of the AAC and restored the matter to the file

of the AAC with a direction that he should dispose of the other grounds urged in the appeal in accordance with law.

Thereafter, at the instance of the assessee, the two questions herein-above set out have been referred to us for our opinion.

In (1966) 60 ITR 95 (SC) , what happened was that three partners who carried on business in groundnut, cotton and cotton seed, were each

assessed to tax on a third share in Rs. 51,280, computed as profits of the business for the assessment year 1954-55. Thereafter, the ITO assessed

them in the status of an unregistered firm computing the income of the joint venture at Rs. 80,925. The Tribunal held that the ITO had the option to

assess the individual parties to the joint venture and, he having exercised that option, it was not open to him thereafter to reassess the same income

collectively in the hands of the three parties to the joint venture in the status of an unregistered firm. It was held by the Supreme Court on these

facts that the partners of an unregistered firm might be assessed individually or they might be assessed collectively in the status of an unregistered

firm the ITO could not, however, seek to assess the same income twice-once in the hands of the partners and again in the hands of the

unregistered firm. Thus, this decision of the Supreme Court is based on the well-settled position in law that the same income cannot be subjected

to Income Tax twice. Income in that particular case was sought to be taxed, once in the hands of the partners and thereafter again in the hands of

the unregistered firm.

After this decision of the Supreme Court in (1966) 60 ITR 95 (SC) , the CBDT issued its circular referred to above on August 24, 1966. By

this circular the Board invited the attention to the above-mentioned decision of the Supreme Court in (1966) 60 ITR 95 (SC) and proceeded to

state :

The effect of this decision is that once the Income Tax Officer assesses directly an assessee''s share of income from an association of persons or

firm, it is not open to him to assess the same income again in the hands of the association of person or firm. In other words, once the assessment of

a partner or a member of an association has been made by taxing directly his proportionate share from the firm or association, the Income Tax

Officer is precluded from assessing the firm in the status of an unregistered firm or association of persons. Thus, all the partners of the firm or

members of the association will have have to be assessed as partners of a registered firm, even though while dealing with the assessment of the

Income Tax Officer comes to the conclusion that the firm is not entitled to registration. Although the Supreme Court''s decision is under the Indian

Income Tax Act, 1922, the Board is advised that it will equally apply to the assessments made under the Income Tax Act, 1961.

In view of the above decision, the Income Tax Officers assessing the partners of a firm should not normally complete the regular assessment of the

partners by including their share from the firm unless the assessment of the firm has already been made. The Income Tax Officers assessing the

firms must give priority to the disposal of the firm''s assessments. They should realise that if they delay the assessments of the firms, they would be

responsible for the assessments of all the partners being help up. In an exceptional case if the Income Tax Officer assessing the firm feels that the

assessment of the firm is likely to be delayed so that there would be unnecessary delay in the assessment of the partners, he may consider the

firm''s claim for registration and pass a suitable order u/s 26A/184-185 even before passing the order of assessment. After an order on the firm''s

claim for registration has been passe by the Income Tax Officer, the Income Tax Officer assessing the partners can proceed with their assessments

and include their share in the firm, accordingly. The share so included can later be modified by the Income Tax Officer u/s 155 after the firm''s

assessment or reassessment has been made.

It must be pointed out that the directions given by this circular were regarding the steps to the taken by the ITO when dealing with the

assessment of a firm and also the assessment of the individual cases of the partners of the firm. But the reasoning which went into this circular and

the directions of the Board was that the provisions of the 1922 Act were on the same lines as the provisions of the I.T. Act, 1961. At the time

when the Board issued this circular, the 1961 Act was already on the statute book and had been in force since 1st April, 1962. It was in the

context of the I.T. Act, 1961, that the Board directed the ITOs to follow the particular procedure mentioned in the Board''s circular so as to avoid

any complications and so as to see to it that an unregistered firm would not escape assessment as an unregistered firm because one of the partners

of the unregistered firm had been assessed in hid individual capacity because of the inclusion in his assessable income of the share from the profits

of that unregistered firm. The position regarding the effect of the circular of the CBDT has been considered by several decisions of the Supreme

Court and of this High Court and in Rajan Ramkrishna Vs. Commissioner of Wealth-tax, Gujarat-I, , the decisions of the Supreme Court in

Navnitlal C. Javeri Vs. K.K. Sen, Appellate Assistant Commissioner of Income Tax, ''D'' Range, Bombay, and in Ellerman Lines Ltd. Vs.

Commissioner of Income Tax, West Bengal, Calcutta, , along with decisions of other High Courts were considered and it was pointed out that

according to the Supreme Court''s decision in Ellerman Lines Ltd. Vs. Commissioner of Income Tax, West Bengal, Calcutta, , even if there was

deviation from the provisions of law in force and the circulars deviated from the legal position, the circulars were required to be followed by ITOs

since the circulars were benevolent circulars which would go to the assistance of the assessee.

Applying the principles laid down by the Supreme Court in Ellerman Lines Ltd. Vs. Commissioner of Income Tax, West Bengal, Calcutta, , it is

clear that even if in the case of the circular of August 24, 1966, referred to above, there was a deviation from the correct legal position on the part

of the CBDT in stating that the provisions of the ACT of 1961 were on the same lines as the provisions of the Act of 1922 and even if that

deviation from the law was there when it was stated that the decision of the Supreme Court in (1966) 60 ITR 95 (SC) would apply equally to

assessments made under the I.T. Act, 1961, that statement in the Board''s circular would be binding on all officers functioning under the Act.

Under s. 119(1) of the I.T. Act, 1961 :

The Board may, from time to time, issue such orders, instructions and directions to other Income Tax authorities as it may deem fit for the proper

administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follows such orders,

instructions and directions of the Board.

The proviso to s. 119, sub-s. (1), is not material for the purpose of this judgment. It is, therefore, clear that whatever directions and whatever

instructions are given, those directions and instructions are binding on all those who are employed in the execution of the I.T. Act, 1961. The

instructions are given by the Board in the circular of August 24, 1966, were that the decision in (1966) 60 ITR 95 (SC) would apply to

assessments made under the Act of 1961, and on the basis of that instruction, the Board issued directions as to how the ITOs should proceed with

the assessments of firms so that the situation which arose in (1966) 60 ITR 95 (SC) would not arise in a case dealt with under the Act of 1961.

In State of Uttar Pradesh and Another Vs. Raza Buland Sugar Co. Ltd., Rampur, , the Supreme Court held that the principal that was

applicable in tax statutes was that income was subject to tax in the hands of the same person only once. Thus, if an association or a firm was taxed

in respect of its income the same income could not be charged again in the hands of the members individually and vice versa. Trust income could

not be taxed in the hands of the settlor and also in the hands of the trustee or beneficiary or in the hands of both the trustees as well as the

beneficiary. These principles were of course subject to any special provision enabling double taxation in the statute. In this case, the Supreme

Court followed the earlier decision in (1966) 60 ITR 95 (SC) and the words ""vice versa"" used in the second sentence of this passage from the

decision of the Supreme Court make it clear that once the partners of the firm or any partner of the firm has been individually assessed so far as his

income in the shape of share from the profits of the firm is concerned, the unregistered firm cannot be taxed in respect of that income over again.

This decision of the Supreme Court emphasizes that the principle that there should not be double taxation of the same income can be departed

from by the Legislature by enacting a special provision in that behalf. However, learned counsel for the revenue, Mr. Raval, has not been able to

draw our attention to any special provision enabling double taxation, both in the hands of the unregistered partnerships firm and in the hands of the

individual partner at one and the same time.

In view of the decision in State of Uttar Pradesh and Another Vs. Raza Buland Sugar Co. Ltd., Rampur, and applying the principle laid down

by the Supreme Court in that decision, it must be held that the circular of the Board of August 24, 1966, must be followed and even a deviation

from the legal position is not possible to be attacked under this circular of August 24, 1966, (a) in the light of the principle laid down in State of

Uttar Pradesh and Another Vs. Raza Buland Sugar Co. Ltd., Rampur, , and (b) in the light of the fact that there is no special provision enabling

double taxation of this kind in the hands of the unregistered firm and its partners, both.

In view of this clear position emerging from the decision of the Supreme Court in (1966) 60 ITR 95 (SC) and in State of Uttar Pradesh and

Another Vs. Raza Buland Sugar Co. Ltd., Rampur, and the effect of the circular of August 24, 1966, which is the sub substratum of the directions

given in the circular and the decision that the provisions of the Act of 1961 are on the same lines as the provisions of the Act of 1922, and the

decision in (1966) 60 ITR 95 (SC) being applicable to proceedings under the Act of 1961, the question of considering the difference between the

language of the 1922 Act and the language of the 1961 Act, so far as the charging section was concerned and the scheme of s. 3 of the 1922 Act,

as against s. 4 of the 1961 Act, read with s. 2(31) of the 1961 Act, in our opinion, would be an exercise in futility.

Prior to the decision State of Uttar Pradesh and Another Vs. Raza Buland Sugar Co. Ltd., Rampur, , it might have been possible to argue, as

was argued before the Tribunal in the instant case on behalf of the revenue-which argument was accepted by the Tribunal-that [proceedings under

the 1961 Act could not be governed by the principles laid down in (1966) 60 ITR 95 (SC) . But that argument is no longer available. Under these

circumstances, we answer the questions referred to us as follows :

Question No. 1. - In the negative, that is, in favour of the assessee and against the revenue.

Question No. 2. - In the negative, that is, in favour of the assessee and against the revenue.

The Commissioner will pay the costs of this reference to the assessee.