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1997 Supreme(All) 1295
HIGH COURT OF ALLAHABAD
Om Prakash, R.K. Gulati, JJ.
Commissioner of Income-Tax – Appellants
Versus
Fazal Hussain And Sons - Respondents
Income-tax Reference 153 of 1981
Decided on : Nov 07, 1997
Instructions issued by the Central Board of Direct Taxes, unless they are held contrary to the statute, are binding upon the Departmental authorities.
Headnote:
INCOME TAX - REGISTRATION OF FIRM - CONTINUATION - MINOR PARTNER ATTAINING MAJORITY - NO CHANGE IN CONSTITUTION OF FIRM - NO FRESH PARTNERSHIP DEED REQUIRED - INSTRUCTION ISSUED BY CENTRAL BOARD OF DIRECT TAXES - BINDING ON DEPARTMENTAL AUTHORITIES.
Fact of the Case:
The assessee-firm was granted registration for the assessment year 1973-74. During the scrutiny of the case for the assessment year 1977-78, it was noticed that a minor partner, Munawar Hussain, had attained majority during the previous year relevant to the assessment year 1976-77. The Commissioner of Income-tax held that there was a change in the constitution of the firm and cancelled the order of the Income-tax Officer granting continuation of registration. The Appellate Tribunal, relying on a Full Bench decision of the Allahabad High Court, held that there was no change in the constitution of the firm and directed the Income-tax Officer to make an inquiry into whether the minor, upon attaining majority, agreed to share the losses.
Finding of the Court:
The court held that there was no change in the constitution of the firm upon the minor attaining majority and that no fresh partnership deed was required to be executed. The court also held that the instruction issued by the Central Board of Direct Taxes, which required the Assessing Officer to satisfy himself whether the minor, upon attaining majority, agreed to share the losses, was binding on the departmental authorities.
Issues: 1. Whether, on the facts and circumstances of the case, the Tribunal was legally correct in holding that the evidence and material other than the partnership deed dated January 20, 1973, could be considered for ascertaining the shares of partners in profits and losses on the minor becoming major? 2. Whether, on the facts and circumstances of the case, the Tribunal was legally correct in holding that Instruction No. 1161, dated April 4, 1973, issued by the Central Board of Direct Taxes was binding on the Commissioner of Income-tax while passing the order under Section 263? 3. Whether, on the facts and circumstances of the case in view of the Allahabad High Court decision in Badri Narain Kashi Prasad v. Addl CIT [19781 115 ITR 858, the Tribunal was legally correct in modifying the order of the Commissioner of Income-tax dated September 7, 1978, under Section 263 and in directing the Income-tax Officer to make enquiry whether there was a change in the shares of the partners as evidenced by the partnership deed dated February 20, 1973, on the lines indicated in the Board's instructions and to decide the issue of continuance of registration afresh?
Ratio Decidendi: The court held that the Full Bench decision of the Allahabad High Court in Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858 (All) [FB] was binding on the Tribunal and that the Tribunal was right in modifying the order of the Commissioner of Income-tax and in directing the Income-tax Officer to make an inquiry into whether the minor, upon attaining majority, agreed to share the losses.
Final Decision: The court answered questions Nos. 1, 2, and 3 against the Revenue.
Om Prakash, J.
1. FOLLOWING the direction given by this court under Section 256(2) of the Income-tax Act, 1961 (briefly, the Act), the Income-tax Appellate Tribunal referred the following questions relating to the assessment year 1976-77 for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the evidence and material other than the partnership deed dated January 20, 1973, could be considered for ascertaining the shares of partners in profits and losses on the minor becoming major ?
2. WHETHER, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that Instruction No. 1161, dated April 4, 1973, issued by the Central Board of Direct Taxes was binding on the Commissioner of Income-tax while passing the order under Section 263 ?
Whether, on the facts and in the circumstances of the case in view of the Allahabad High Court decision in Badri Narain Kashi Prasad v. Addl CIT [19781 115 ITR 858, the Tribunal was legally correct in modifying the order of the Commissioner of Income-tax dated September 7, 1978, under Section 263 and in directing the Income-tax Officer to make enquiry whether there was a change in the shares of the partners as evidenced by the partnership deed dated February 20, 1973, on the lines indicated in the Board's instructions and to decide the issue of continuance of registration afresh ?"
The undisputed facts are that for the assessment year 1973-74, the assessee-firm was granted registration, vide order dated October 30, 1973. The assessment on the assessee-firm for the assessment year 1976-77 came to be completed on September 14, 1976, and on the basis of a declaration filed under Section 184(7) of the Act, the continuation of registration was allowed. In the said declaration one Munawar Hussain, a minor, who was admitted to the benefits of the partnership, was declared as a partner.
2. During the scrutiny of the case for the assessment year 1977-78, the Income-tax Officer noticed that Munawar Hussain was shown as major. It came to the notice of the Income-tax Officer that Munawar Hussain had attained majority on June 13, 1975, that is, during the previous year ending March 31, 1976, relevant to the assessment year 1976-77.
3. Following the decision of a Division Bench of this court in the case of Ganesh Lal Laxmi Narain v. CIT [1968] 68 ITR 696, the Commissioner of Income-tax took the view that when the minor admitted to the benefits of the partnership, attained majority and elected to continue as a partner in the firm, there was a change in the constitution of the firm within the meaning of Section 184(7)(i) of the Act, which according to the Commissioner of Income-tax should have been evidenced by a fresh partnership deed.
3. THE Commissioner of Income-tax being of the view that the grant of continuation of registration on the basis of the declaration furnished by the assessee, was erroneous, in so far as that was prejudicial to the interests of the Revenue, initiated proceedings under Section 263 of the Act. Relying on the Full Bench decision of this court in the case of Badri Narain Kashi Prasad v. Addl CIT [1978] 115 ITR 858, the Commissioner of Income-tax was of the view that "THE redistribution of the shares in the loss on the minor attaining majority has also to be ascertained". He further held as follows (paragraph 6, page 16, of the paper book) :
"Applying the ratio of the Full Bench, referred to above, it is, therefore, clear that the partnership deed dated 20th January, 1973, did not provide as to how the profits or losses would be divided amongst the partners after any of the partners becomes major. In this case, therefore, there was a change in the constitution of the firm when Sri Munavvar Hussain (minor) attained majority and, therefore, the assessee was not entitled to continuation of registration under Section 184(7)." (underlining by the court)
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