1980 (10) TMI 52 - HC - Income Tax

Summary

Issues Involved:
1. Whether the firm could be taxed as an unregistered firm under the Income-tax Act, 1961, even after assessing the partner of the firm.
2. Whether the circular was binding on the Income-tax Officer, and whether the assessee was entitled to the benefit thereof.

Summary:

Issue 1: Taxation of the Firm as an Unregistered Firm
The Tribunal held that the firm could be taxed as an unregistered firm even after assessing the partner. The assessee-firm, consisting of four partners, failed to get one partner, Ramjibhai Mavjibhai, to sign Form No. 12 for renewal of registration due to internal disputes. Consequently, the ITO assessed the firm as an unregistered firm. The AAC initially accepted the assessee's contention, referencing the Supreme Court decision in CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory [1966] 60 ITR 95, which stated that the same income could not be taxed twice'once in the hands of the partners and again in the hands of the unregistered firm. However, the Tribunal overturned this, citing differences in the language between the 1922 and 1961 Acts, and reinstated the ITO's assessment.

Issue 2: Binding Nature of the Circular
The Tribunal also held that the circular issued by the CBDT was not binding on the ITO. The circular, dated August 24, 1966, stated that once the ITO assessed a partner's share of income from a firm, it could not assess the same income again in the hands of the firm. The Tribunal argued that this circular merely stated the legal position and was not in the nature of directions u/s 119 of the 1961 Act. However, the High Court disagreed, emphasizing that the circular was binding on the ITOs as per the Supreme Court's decisions in Navnit Lal C. Zaveri v. K. K. Sen, AAC [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, which mandated that benevolent circulars must be followed by ITOs even if they deviate from the legal position.

Conclusion:
The High Court concluded that the principles laid down in Murlidhar Jhawar's case [1966] 60 ITR 95 (SC) and Raza Buland Sugar Co.'s case [1979] 118 ITR 50 (SC) applied, and the circular of August 24, 1966, must be followed. The Court held that the same income could not be taxed twice, and the circular was binding on the ITOs. Consequently, both questions were answered in the negative, in favor of the assessee and against the revenue. The Commissioner was directed to pay the costs of the reference to the assessee.