| SooperKanoon Citation | sooperkanoon.com/68435 |
| Court | Income Tax Appellate Tribunal ITAT Ahmedabad |
| Decided On | Mar-18-1996 |
| Reported in | (1996)56TTJ(Ahd.)407 |
| Appellant | Lodge Hamilton 26 |
| Respondent | income Tax Officer. |
2. The assessee is a club named "Free Mesaonary" i.e., to advance the spiritual interest. It is a society which teaches through its ceremonies, mans duty to his family, neighbour, himself. It propounds system of morality founded upon holy law, and inspires man with the feeling of charity, goodwill, teaches truth and justice, fraternity and philanthrophy. The Grand Lodge of India was formed in 1961 with the Grand Lodges of England, Ireland and Scotland. The Lodge is governed by a Master who is assisted by Wardens, Secretary to keep books and Treasurer to dispense funds. In nutshell, it is an organised society of men dedicated to high principles of character building. It has its own bye-laws, and the prescribed scale of fees. Its accounts are made up every six months i.e., January 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 under s. 237 was made by the AO on 16th July, 1987, determining the total income at Re. nil. The amount of TDS was refunded to the assessee.
4. The CIT thereafter passed an order under s. 263 of the Act on 29th March, 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 AO 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 India. He also directed the AO to withdraw the refund of Rs. 22,545 granted to the assessee at the time of framing the assessment. The present appeal is directed against the said order of the CIT.5. Before us the learned counsel for the assessee submitted that so far as the assessees contention that the club is not liable to be taxed in respect of dividend income on the ground of mutuality is concerned, he would not like to press that ground. The only dispute therefore relates to the findings given by the CIT directing the AO to levy tax at maximum marginal rate under s. 167A of the Act. The learned counsel for the assessee invited our attention towards Circular No. 320 [F. No.131(31)/81-TP (Pt.)], dt. 11th Jan., 1982, in which it was clarified by the Board that in cases of registered societies, trade and professional associations, social and sports clubs, charitable or religious trusts, etc. where the members or trustees are not entitled to any share in the income of the AOPs the provisions of s. 167A will not be attracted and, accordingly, tax will be payable in such cases at the rate ordinarily applicable to the total income of an AOP and not at the maximum marginal rate. He, therefore, submitted that the assessees case is clearly covered by the aforesaid circular issued by the Board.
Therefore, the direction given by the CIT to charge income-tax at maximum marginal rate is invalid and clearly contrary to the aforesaid beneficial circular issued by the Board.
5.1 The learned counsel for the assessee also relied upon the judgment of the Gujarat High Court in the case of Sports Club of Gujarat Ltd. vs. CIT (1988) 171 ITR 504 (Guj). It was submitted that the said judgment relates to a period prior to issue of the above referred circular on 11th Jan., 1982. The learned counsel for the assessee also pointed out that the amendment by the Finance Act, 1985, in the provisions of s. 167A will not in any manner affect the applicability of the aforesaid Circular No. 320, dt. 11th Jan., 1982, on the facts and circumstances of the present case. He, therefore, urged that the AO should be directed to charge tax at normal rate and not maximum marginal rate.
6. Shri M. P. Lohia, the learned Senior Departmental Representative, submitted that plain language of s. 167A substituted by the Finance Act, 1985, w.e.f. 1st April, 1985, clearly provides that where the individual shares of the members of an AOP 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 AOP at the maximum marginal rate.
The CIT was, therefore, justified in directing the AO 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 cannot override the provisions of law.
6.1. Shri M. P. Lohia, the learned Senior Departmental Representative, submitted a detailed note on the question as to whether Board circulars which deviate from the provisions of the Act are binding upon IT authorities or not. He submitted that the issue regarding the binding nature of Board circulars has been adjudicated upon 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. vs. CIT (1994) 210 ITR 129 (SC) he submitted that the circular cannot override or detract from the Act as that would be destructive of all the known principles of law. If such circulars which in effect deviate from the law or override the express provisions of law are followed by the departmental authorities, the same would really amount to giving power to a delegated authority to even amend the provision of law enacted by Parliament. Such contention was repelled by the apex Court.
6.2. Shri Lohia, the learned Senior Departmental Representative, further relied upon another judgment of the Supreme Court in the case of Shri Subhlaxmi Mills Ltd. vs. Addl. CIT (1989) 177 ITR 193 (SC). In that judgment also it was held that in order to claim development rebate, it was necessary for the assessee to create reserve fund in the year of profits in spite of the fact that there was a beneficial circular of the Board allowing the assessee to create reserve in the year of profits. The Honble Supreme Court held that the Board circulars do not affect the true position of law.
6.3. The learned Senior Departmental Representative also placed reliance on the judgment of the Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC). It was held in that case that the circulars being executive in character cannot alter the provisions of the Act and cannot detract from the Act. It was pointed out by him that such judgment was delivered by three Honble Judges of the Supreme Court.
6.4. Shri M. P. Lohia, learned Senior Departmental Representative, further pointed out that the view taken by the Supreme Court in the case of Navnitlal C. Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 (SC) which was delivered by five Honble Judges of the Supreme Court does not in any manner lay down the law in a different manner. He submitted that in the case of N. C. Javeri (supra) the Honble Supreme Court had merely observed as under : "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." According to Shri Lohia, the learned Departmental Representative, the Honble Supreme Court merely observed that about binding nature of the Board circulars without actually specifying whether they would be so binding even if they clearly deviated and detracted from the provisions of the statute.
6.5. The learned Departmental Representative then pointed out another judgment of Supreme Court in the case of Ellerman Lines Ltd. vs. CIT (1971) 82 ITR 913 (SC). At page 921 of ITR interpreting the observations of the Supreme Court in N. C. Javeri (supra), the Honble 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 ITO." The learned Departmental Representative further argued that the above referred judgment of the Supreme Court came to be examined by the Honble Andhra Pradesh High Court in the case of CIT vs. Sahney Steel & Press Works Ltd. (1985) 152 ITR 39 (AP), where the Honble 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 Departmental Representative submitted that it can safely be concluded that the Constitutional Bench of five Honble Judges of the Supreme Court in the case of N. C. Javeri (supra) 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 Honble Supreme Court itself in very recent judgment of Kerala Financial Corpn. (supra) and other cases discussed above. He submitted that the interpretation placed by the Division Bench constituting of two Judges in Ellerman Lines Ltd. (supra), the three Judges Bench of the Supreme Court in State Bank of Travancores case (supra) has clearly held that the circulars are executive in character and cannot alter the provisions of the Act.
6.7. The learned Departmental Representative thus strongly objected to the assessees contention that the circular issued by the Board vide No.320, dt. 11th Jan., 1982 (1982) 29 CTR (TLT) 43 should be applied on the facts and circumstances of the present case which is clearly contrary to the plain language of s. 167A of the Act. He, therefore, strongly supported the order of the CIT under s. 263.
7. We have carefully considered the rival submissions made by the learned representative of the parties and have also gone through the orders of the learned departmental authorities as well as all the judgments cited by the learned representatives.
7.1. The learned counsel for the assessee at the time of hearing clearly stated that the ground relating to non-taxability of the entire income of the assessee on the plea of mutuality is not being pressed.
Therefore, the only point which requires our consideration is as to whether the CIT had rightly directed the Assessing Officer (AO) to levy tax at maximum marginal rate or whether tax at normal rates should be applied in the case of the assessee.
7.2. The provisions of s. 167A were amended w.e.f. asst. yr. 1981-82.
The scope and effect of s. 167A which was operative for asst. yrs.
1981-82 to 1984-85 was explained in the departmental Circular No. 308, dt. 29th June, 1981 [(1981) 25 CTR (TLT) 14]. Paras 15.3 and 15.4 of the said circular are reproduced hereunder with a view to understand the true meaning and the scope of the said provisions : "15.3. It has been found that the existing provisions relating to assessment of the AOP have been misused by certain persons by forming AOP without specifying the shares of members constituting it. The modus operandi in such cases is that an assessee with a high income creates a large number of AOPs with each of them declaring a small part of what in reality is the income of the assessee. Under this device, no part of the income of the AOP is liable to be included in the assessment of its members even for rate 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 AOP. Accordingly, income-tax is payable only by the AOP 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 AOP 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 AOPs without defining the shares of the members, the Finance Act, 1981, has inserted a new s. 167A in the IT Act to provide that where the shares of the members of an AOP (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 members in the income shall be regarded as indeterminate or unknown if such shares are not ascertainable on the date of the formation of the association or at any time thereafter." Thereafter a new s. 167A was substituted which remained operative for asst. yrs. 1985-86 to 1988-89. The scope and effect of the newly substituted s. 167A substituted by the Finance Act, 1985, has been elaborated in the following portion of the Board Circular No. 421, dt.
12th June, 1985 [ "38.1. Sec. 167A(2) of the IT Act provides that where the individual shares of the members of an AOP in any part of the income of such association are indeterminate or unknown, the income-tax payable shall be the aggregate of the amount of income-tax on such part of the total income at the maximum marginal rate and the amount of income-tax which would have been chargeable if the remaining part of the total income were its total income.
38.2. The existing provisions are being misused by some taxpayers for tax avoidance. A large number of AOPs are formed without specifying the shares of members in a small part of the income, with the result that such part gets taxed at the maximum marginal rate while the major portion of the income gets taxed at low rates of tax depending upon the size of the income. With a view to countering tax avoidance, through this method, the Finance Act, 1985, has amended s. 167A to secure that, where the individual shares of the members of an AOP in the whole or any part of the income of such association are indeterminate or unknown, income-tax shall be charged on the whole of the total income of the association at the maximum marginal rate." 7.3. It is evident from the aforesaid amendments made from the year 1981 and again from the year 1985 that these amendments were made in order to counteract the tax avoidance through the creation of multiple AOPs without specifying the shares of the members either in whole or any part of the income. The Finance Act, 1985, substituted a new s.
167A with the obvious purpose of plugging loopholes which existed in the earlier amended provisions introduced w.e.f. asst. yr. 1981-82. It was provided the asst. yr. 1985-86 that where the individual shares of the members of an AOP in the whole 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 AOP 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 asst.
yr. 1981-82.
7.4. The circular issued by the Board dt. 11th Jan., 1982, in relation to interpretation of s. 167A will have to be read in the light of the aforesaid objective so sought to be achieved by the provisions contained in s. 167A. It was essentially meant for curbing tax avoidance through the device of creating multiple or large number of such AOP. The provisions of s. 167A apply where the individual shares of the members in the income of such AOP 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 of 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 the persons employed in such business. The Board, therefore, issued a circular that cases where the income received by the trustees on behalf of a recognised provident fund, approved superannuation fund and approved gratuity funds, etc., governed by s. 10(25) of the Act, the question of their being charged to tax does not arise. The income receivable by the trustees on behalf of an unrecognised provident fund, or an unapproved superannuation funds, etc., created bona fide by a person carrying on business or profession exclusively for the benefit of persons employed in such business or profession are concerned, they will continue to be charged to tax in the manner prescribed by s. 164(1)(iv) of the Act, i.e., at the normal rates applicable to AOPs. The Board, therefore, clarified that in the cases of registered societies, trade and professional associations, social and sports clubs, charitable or religious trusts, etc., where the members or trustees are not entitled to any share in the income of the AOP, the provisions of new s. 167A will not be attracted and accordingly tax will be payable in such cases at the rate ordinarily applicable to the total income of an AOP and not at the maximum marginal rate.
7.5. Sec. 167A as it existed in the relevant year was applicable only where the individual shares of the members of an AOP are indeterminate or unknown. It would not apply to those cases where the members are not at all entitled to any share in the income of the AOP. It is apparent from the order passed by the CIT that no member of the assessee-club can claim any right in the funds or assets of the lodge at any time. In case of dissolution of the lodge, the assets and funds should be transferred to a Grand Lodge only. The CIT in para 8 of the order has observed that in the case of the assessee-club one of the conditions of Bye-laws is that no member has right over the assets of the club. The amount of capital gain earned by the assessee-club by sale of property, dividend earned is purely accumulated and is not at all used for its members. On that ground he arrived at the conclusion that the profit arising to the club in the form of dividend is liable to tax because the mutuality as comprehended by law is absent and the association cannot lay any claim for exemption on the ground 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 s. 167A it could be held that the assessees case would not attract levy of tax at maximum marginal rate prescribed in s. 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 wasteful and unnecessary litigation.
We, therefore, cannot agree with the submissions made by the learned Departmental Representative that the Circular No. 320, dt. 11th Jan., 1982 (supra) issued by the Board deviates from the provisions of law or in any manner overrides the provisions of s. 167A of the Act. We do not also find any reason for holding that the circular issued by the Board, dt. 11th Jan., 1982, will not apply after substitution of new s. 167A by the Finance Act, 1985. The Finance Act, 1985, merely makes the law more stringent for providing and checking the tax avoidance by creation of multiple AOPs. The tax planning made through such loopholes was stopped by the amendment made in 1985. But for all other purposes the provisions contained in s. 167A remained the same and the circular issued by the Board on 11th Jan., 1982, will continue to apply particularly in view of the fact that the Board has not withdrawn the said circular dt. 11th Jan., 1982. In view of the aforesaid findings given by us it may perhaps not be necessary to deal with the question raised by the learned Senior Departmental Representative that beneficial circulars which deviate from the provisions of law are not binding upon the departmental authorities. However, since elaborate arguments have been made by Shri M. P. Lohia, the learned Senior Departmental Representative, we would like to deal with that point also; so that even if the above referred circular is found to be in deviation from the provisions contained in s. 167A, further finding in relation to that point will also stand decided by this order.
7.7. It is true that the recent judgments of the Supreme Court in the case of Kerala Financial Corpn. (supra), Shri Subhlaxmi Mills Ltd. (supra) and State Bank of Travancore (supra) have held that the circulars being executive in character cannot deviate from the provisions of law and cannot alter or override the provisions of the Act. However, the contention of the learned Senior Departmental Representative that the Supreme Court in the case of N. C. Javeri (supra) has merely observed that a circular of the kind which was issued by the Board as referred to in that judgment, would be binding on all officers and persons employed in the execution of the Act, and it does not in any manner specify whether a circular would be so binding even if it clearly deviates or detracts from the provisions of the statute. It will be, therefore, necessary to go through the facts of the case decided by the Supreme Court in the case of N. C. Javeri (supra) and the nature of the circular referred to and adjudicated upon by the Supreme Court in that case.
7.8. In the case of N. C. Javeri (supra) the ITO computed the assessees 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 s. 2(6A)(e) of 1922 Act read with stringent provisions of s. 12(1B) as introduced in 1955 the said amount must be deemed to be dividend received by the appellant. The provisions contained in s.
2(6A) of the 1922 Act defined "income" as including dividend. Sec.
2(6A) defined "dividend" in an inclusive manner, which inter alia, takes in the payments to which cl. (e) of s. 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 shareholders 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 shareholder by way of advance or loan; (2) payments made on his behalf; and (3) payments made for his individual benefit. There are five conditions which must be satisfied before s. 12(1B) can be invoked against a shareholder. It appears that when the relevant amendments were introduced in Parliament, the Honble Minister for Revenue and Civil Expenditure gave an assurance that outstanding loans and advances which are otherwise liable to be taxed as dividends in the asst. yr.
1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before the 30th June, 1955. The year under consideration before the Supreme Court was asst.
yr. 1956-57. In the absence of clarification by the Government the operation of s. 12(1B) would have resulted in extreme hardships because the said provisions would have covered the aggregate of all outstanding loans of past years and that may have imposed an unreasonably high liability on the respective shareholders to whom the loans might have been advanced. In order that the assurance given by the Minister in Parliament should be carried out, a Circular No. 20(XXI-6) 55 was issued by the Central Board of Revenue on the 10th May, 1955. 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 s. 5(8) of the Act. This circular was held to be binding by the Supreme Court in the case of N. C. Javeri (supra).
7.9. The Supreme Court in the subsequent judgment in the case of Ellerman Lines Ltd. (supra) considered the binding nature of the beneficial circular issued by the Board with reference to the findings given by the Supreme Court in the case of N. C. Javeri (supra). At pages 75 of 1972 CTR (SC) and 921 of 82 ITR the Supreme Court made the following observations : "Now, coming to the question as to the effect of instructions issued under s. 5(8) of the Act, this Court observed in Navnit Lal C. Javeri vs. K. S. Sen, AAC (1965) 56 ITR 198 (SC) : 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 s. 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect 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 ITO." 7.10. The Honble Patna High Court in the case of CIT vs. Sriram Agrawal (1986) 161 ITR 302 (Pat) considered the question relating to binding nature of beneficial circulars in the light of the judgment of the Supreme Court in the case of N. C. Javeri (supra) 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 (supra). The following observations made by the Honble 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 Navnit Lal C. Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 (SC), where Gajendragadkar, C.J. observed as follows : 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 s. 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the provisions. The officers were, therefore, asked to intimate to all the companies that if the loans were repaid before the 30th June, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced. In other words, past transactions which would normally have attracted the stringent provisions of s. 12(1B) as it was introduced in 1955, were substantially granted exemption from the operation of the said provisions by making it clear to all the companies and their shareholders that if the past loans were genuinely refunded to the companies, they would not be taken into account under s. 12(1B). Sec.
12(1B) would, therefore, normally apply to loans granted by the companies to their respective shareholders with full notice of the provisions prescribed by it.
The above observations were quoted with approval in Ellerman Lines Ltd. vs. CIT (1971) 82 ITR 913 (SC), where Hegde, J. after quoting from the above observation of Gajendragadkar, C.J. laid down in paragraph 19 in unmistakable terms that direction given in the circulars in the earlier case clearly deviated from the provisions of the Act, yet the Supreme Court held that the circular is binding on the ITOs. Again in K. P.Varghese vs. ITO (1981) 131 ITR 597 (SC), Bhagwati J. (as he then was), again observed as below : The two circulars of the CBDT to which we have just referred are legally binding on the Revenue and this binding character attracts to the two circulars even if they be found not in accordance with the correct interpretation of sub-s. (2) and they depart or deviate from such construction. It is now well settled as a result of two decisions of this Court, one in Navnitlal C. Javeri vs. K. K. Sen, AAC (supra) and the other in Ellerman Lines Ltd. vs. CIT (supra) that circulars issued by the CBDT under s. 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act.
The observations in State Bank of Travancore vs. CIT (supra) 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 (supra). The latter being judgment of five Judges and the former of three Judges, I am bound to follow the case of Navnitlal C. Javeri (supra). It is thus obvious that in terms of the circular of the CBDT quoted above, no penalty could have been levied.
The assessee was certainly in default, but the CBDTs circular being binding on the officers employed in execution of the Act under s. 5(8), they were bound to give effect to the circular." 8. In view of the aforesaid judgment of the Honble Patna High Court, we are of the considered opinion that Circular No. 320, dt. 11th Jan., 1982 (supra) issued by the Board in relation to interpretation of s.
167A is clearly applicable on the facts and circumstances of the present case. The provisions of s. 167A will not be attracted in the case of the assessee and tax will be payable at rate ordinarily applicable to the total income of an AOP and not at maximum marginal rate. The appeal is allowed to that extent.
9. Before parting we would like to express our feelings of appreciations for Shri M. P. Lohia, the learned Senior Departmental Representative, for admirable efforts made by him while presenting his case. The note submitted by him on the question relating to binding nature of circulars contained the gist of judgments both for and against the Department. He was extremely fair in making such impartial representation of the aforesaid legal point.