SECTIONS 4, 5 AND 9

Basis of charge

SECTION 4 l CHARGE OF INCOME-TAX

31. Whether award received by an amateur sportsman is taxable as his income in his hands

1. The Central Board of Direct Taxes had occasion to consider the question whether the award received by a sportsman, who is not a professional, will be taxable in his hands or not. In the case of a sportsman, who is a professional, the award received by him will be in the nature of a benefit in exercise of his profession and, therefore, will be liable to tax under the provisions of the Income-tax Act. However, in the case of a non-professional, the award received by him will be in the nature of a gift and/or personal testimonial. In view of this, it is clarified, that such awards in the case of a sportsman, who is not a professional, will not be liable to tax in his hands as it would not be in the nature of income. The question whether a sportsman is a professional or not will depend upon the facts and circumstances of each case to be decided by the Assessing Officer.

2. In cases where such receipt is in the nature of gift, the chargeability to gift-tax will be considered separately.

Circular :       No. 447 [F. No. 199/1/86-IT(A-I)], dated 22-1-1986.

32. Taxability of subsidy - Revenue receipt or capital receipt - “10 per cent Central Outright Grant of Subsidy Scheme, 1971”

1. The Board had occasion to consider whether the amount of subsidy received under 10 per cent Central Outright Grant of Subsidy Scheme for industrial units to be set up in certain selected backward districts/areas would constitute revenue receipt or capital receipt in the hands of the recipient for the purpose of income-tax.

2. I am directed to say that the payment of subsidy under the scheme is primarily given for helping the growth of industries and not for supplementing their profits. Under the scheme, the quantum of subsidy is determined with reference to the fixed capital and not the profits. The working capital has been specifically excluded from the computation of fixed capital for this purpose. One of the conditions for the grant of the subsidy is that the undertaking must remain in production at least for a period of five years after it goes into production. Since the subsidy is intended to be a contribution towards capital outlay of the industrial unit, the Board are advised that such subsidy can be regarded as being in the nature of capital receipt in the hands of the recipient.

Circular : No. 142 [F. No. 204/25/74-IT(A-II)], dated 1-8-1974.

JUDICIAL ANALYSIS

explained in - In CIT v. Sahney Steel & Press Works Ltd. [1985] 152 ITR 39 (AP) the above circular was explained with the following observations :

“A perusal of the circular makes it clear that it was issued with respect to a particular scheme, viz., 10% Central Outright Grant of Subsidy Scheme of 1971. It is not a circular applicable to all types of subsidy schemes. This much is conceded by Mr. Anjaneyulu also. But what he argues is that inasmuch as our scheme is in the same terms as the Central Scheme of 1971, the principle of the said circular should be applied. We are unable to accede to this contention. We cannot extend the scope of the circular by analogy. Secondly, on a perusal of the Central Scheme of 1971, we find that the scheme concerned therein was not in the same terms as the State Scheme with which we are concerned herein. The subsidy under the Central Scheme was available only to the industrial units with a capital of less than fifty lakhs whereas the State Scheme is applicable to units with a capital up to five crores. The circular was applicable only to those industrial units which were located in the specified districts/areas called ‘selected districts/areas’ whereas the State Scheme is applicable to industries located throughout the State. To those industries which are located in the specified backward districts, certain additional incentives are provided under the State Scheme. Paras 5 to 7 of the Central Scheme would show that it prescribed a particular procedure which had to be followed by the industrial units for availing of the benefits thereunder which is at variance with the procedure prescribed under the State Scheme. Moreover, the Central Scheme did not provide for refund of sales tax or other taxes and charges paid but provided for an outright grant to the extent of 10% of the estimated fixed capital investment. We are, therefore, of the opinion that the said circular is absolutely of no help to the assessee herein.” (pp. 61-62)

explained in - In CIT v. Malayalam Plantations Ltd. [1987] 168 ITR 63 (Ker.) the abovesaid circular was explained with the following observations :

“We may also in this context refer to a Circular No. 142, dated August 1, 1974, issued by the Central Board of Direct Taxes. By this circular, the Board stated that 10% Central Outright Grant of Subsidy Scheme, 1971, was given for helping the growth of industries in selected backward districts/areas and not for supplementing the profits of the recipient. The subsidy was accordingly not treated by the Board as a revenue receipt for the purpose of income-tax. In so deciding, the Board acted on the principle that amounts paid specifically for beneficial purposes are not to be treated for the purpose of income-tax as a revenue receipt.” (p. 70)

explained in - In U.P. State Handloom Corpn. Ltd. v. Dy. CIT [1992] 42 ITD 436 (All.-Trib.) it was held that in the Board’s Circular No. 142, dated August 1, 1974, the only clarification is that the amount of subsidy received under “10 per cent Central Outright Grant of Subsidy Scheme, 1971”, for industrial units to be set up in certain selected backward districts has to be treated as capital receipt in the hands of the recipient. It must be noted that in that case of 10 per cent Central Outright Grant, the payment was primarily given for the growth of industries and not for supplementing profits.

33. Share income from AOP or firm once assessed directly in the hands of member or partner - Whether open to ITO to assess the same income in the hands of AOP or firm as unregistered firm - Decision of Supreme Court in Murlidhar’s case to that effect whether applies to assessments under 1961 Act

1. The effect of this decision [CIT v. Murlidhar Jhawar and Purna Ginning & Pressing Factory [1966] 60 ITR 95 (SC)] 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 persons 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 to be assessed as partners of a registered firm, even though while dealing with the assessment of the firm, 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.

2. In view of the above decision, the Income-tax Officer assessing the partners of a firm should not normally complete the regular assessments 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 firms’ 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 held 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 under section 26A of the 1922 Act/section 184/185 of the 1961 Act even before passing the order of assessment. After an order on the firm’s claim for registration has been passed 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 under section 155 after the firm’s assessment or reassessment has been made.

Letter : F. No. 75/19/191/62-ITJ, dated 24-8-1966.

JUDICIAL ANALYSIS

explained in - In Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 (Guj.), the abovesaid circular letter was explained with the following observation :

“lt must be pointed out that the directions given by this circular were regarding the steps to be 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 1961 Act. 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 1961 Act, 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 his 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 v. CWT [1981] 127 ITR 1 (Guj.), the decisions of the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 at page 203 and in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, 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’case [1971] 82 ITR 913, 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’ case [1971] 82 ITR 913, 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 Murlidhar Jhawar’s case [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....” (pp.752,753)

explained in - In CIT v. V.H. Sheth [1984] 148 ITR 169 (Bom.), the abovesaid circular letter was explained with the following observations :

“. . . As per the circular of the Central Board of Direct Taxes issued on August 24,1966, and set out in the judgment of the Gujarat High Court in Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747, at page 751, the effect of the decision of the Supreme Court in CIT v. Murlidhar Jhawar and Purna Ginning & Pressing Factory [1966] 60 ITR 95, is that once the ITO assesses directly an assessee on his 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 persons 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 ITO is precluded from assessing the firm in the status of an unregistered firm or an association of persons. The circular clarifies that although the Supreme Court’s aforesaid decision is under the 1922 Act, the Board is advised that it will equally apply to assessments made under the 1961 Act.

This circular set out in the above paragraph is binding on the I.T. Department as per the decisions of the Supreme Court in the cases of Navnit Lal C. Javeri v. K.K. Sen AAC of I. T. [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 . . . .” (pp. 170-171)

explained in - In Smt. K. Bhoomiamma v. CIT [1992] 194 ITR 723 (Kar.), the abovesaid circular letter was explained with the following observations :

“In the case before the Gujarat High Court [Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747], the assessing authority sought to ignore the circular while the assessee insisted that the circular was bound to be followed by the Income-tax Officer. The court was concerned only with this question and not with whether the assessee was also bound by the circular. The circular, in no way, specifically states that, under section 4 of the 1961 Act, there is an option vested in the Income-tax Officer to assess the firm or its members. Similarly, the circular in no way, states that, under section 4, the Income-tax Officer has the option to assess the individual members or the association of persons. It simply states that the other entity shall not be charged to tax; in fact, the circular is confined to cases of firms and their partners; it does not refer to associations of persons.

From the decision of the Gujarat High Court, it is not possible to infer that the court recognised an option having vested in the Income-tax Officer either to assess the firm or its partners or vice versa; the court was not at all concerned with the interpretation of section 4.

A circular issued by the Board is binding on the subordinate officer of the Income-tax Department. However, such a circular, if opposed to the provisions of the Act, is not enforceable against an unwilling assessee. The assessee is entitled to ignore the circular if its terms are beyond the scope of the provisions of the Act. Thus, if, under section 4 of the Act, no option is vested in the Income-tax Officer to assess the association of persons or its members individually, but tax has to be charged in the hands of the association of persons in respect of the income received by the association of persons, the ambit of section 4 cannot be widened by any circular issued by the Board so as to attract the charge on the members of the association of persons individually. The decision of the Gujarat High Court as also the scope of the circular are to be understood bearing in mind the above principle.” (pp. 732-733)

explained in - In CIT v. Manjunatha Motor Service [1992] 197 ITR 321 (Kar.), the abovesaid circular was explained with the following observations:

“In I.T.R. Cs. Nos. 64 and 65 of 1987 [Bhoomiamma’s case [1992] 194 ITR 723 (Kar.)], we have pointed out the scope of the said circular; its object is to apply the doctrine against double taxation of the same income in the hands of two sets of assessees; the circular has nothing to do with the interpretation of section 4 of the present Act; the circular binds the Revenue, but the assessee is not bound by it and an assessee can always contend that the circular issued by the Board goes beyond the scope of the taxing provision.

In the instant case, the circular has been invoked against the Revenue. The Tribunal held that in view of the circular in question, it was not open to the Income-tax Officer to assess the association of persons, having assessed the members of the association of persons earlier. This view is based not on the interpretation of section 4 of the new Act, but on the binding nature of the circular. This view is fully supported by the observations of the Supreme Court made while rejecting an appeal filed against the decision of the Madras High Court following CIT v. Blue Mountain Engineering Corporation [1978] 112 ITR 839. The report of the Supreme Court’s observations is found in [1989] 178 ITR (St.) 73 and reads:

‘25-7-1989: Their Lordships S. Ranganathan and T. Kochu Thommen, JJ., dismissed the Department’s special leave petition against the judgment dated October 20, 1986, of the Madras High Court in T.C. Nos. 338-340 of 1984, whereby the High Court, following 112 ITR 839, answered against the Department the question whether, where the Income-tax Officer had already assessed each member of an association of persons (under the 1961 Act), he could again assess the association of persons. While dismissing the petition, their Lordships made the following order: ‘In view of the fact that the view taken by the Tribunal is also the view that has been followed since 1966 as per Circular of the Central Board of Direct Taxes, dated August 24, 1966, extracted in 128 ITR 747, 751, we do not think this is a fit case for interference under article 136. The special leave petitions are therefore, dismissed’.” (pp. 322-323)

relied on in - This circular was relied on in ITO v. Shri Dwarkadhish Estate [1992] 42 TTJ (Ahd. - Trib.) 72, with the following observations :

“4. As regards the grant of registration it is admitted fact that for assessment year 1982-83 Smt. Preetiben, one of the partners of the assessee firm, has been assessed to income-tax by order dated 16th March, 1984. In this assessment the share of profit of Smt. Preetiben amounting to Rs. 12,927 has been included. The assessment of the firm had taken place on 8th March, 1985. Thus, the partner of the assessee firm has been assessed prior to the assessment of the assessee firm in respect of her share in the profits and gains of the business of the firm. The assessment is no doubt under section 143(1). However, that fact is immaterial. It has been held in the case of Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 (Guj.) by the Gujarat High Court that if a partner of a firm is assessed in respect of share income from the said firm, registration to the firm cannot be refused because in such a case assessment of the firm as unregistered firm would amount to double taxation of the same income. In this connection CBDT Circular No. 75/19/62-II-J, dated 24th Aug., 1966 is also relevant. In that circular the ITO’s have been informed that they should take care that assessment of the partner did not take place prior to the assessment of the firm if there was any doubt about the genuineness of the firm. In view of the decision of the Gujarat High Court and in view of the CBDT circular referred to above, registration for assessment year 1982-83 cannot be denied to the firm. On this technical ground alone the assessee-firm is entitled to obtain registration.” (p. 75)

34. Whether assignment of share in partnership firm by individual to his HUF amounts to diversion of income

1. An instance has come to the notice of the Board where a person, who was a partner in a firm in his individual capacity, had impressed one-half of his share in the firm with the character of a joint family property thereby abandoning all his individual rights over the half share in the firm in favour of a joint family of which he was a “karta”. On the basis of a declaration to this effect duly reduced in writing and placed before the Income-tax Officer, the assessee claimed and had 50 per cent of the share of profits accruing to him in the firm taxed in the hands of the HUF of which he was a “karta”.

2. The Board being advised that such a claim made by the assessee was not in order, have examined the issues involved in detail. Under the Hindu law, if a separate property voluntarily is thrown into the joint stock with the intention of abandoning of separate claims upon it, then it becomes joint family property. However, this doctrine of blending can be applied where the separate property which is thrown into the common stock confers benefits on the joint family. If such separate property involves liability, then the doctrine of blending would not be applicable because a coparcener cannot unilaterally burden the joint family estate or the joint family with his separate property involving liabilities under the guise of throwing it into the common stock. In a case like the one under consideration, the assessee would be liable for the debts incurred by the firm, his debt not being confined to the extent of his share because, as laid down in section 25 of the Indian Partnership Act, every partner is liable jointly and severally for all acts binding on the firm, thus including liability arising from contracts as well as torts. Hence, it would be incorrect to assume that the share of an assessee in the said firm consists only of income-yielding assets. It equally comprises of risk and liability of paying debts on behalf of the firm. Therefore, the assessee cannot, under the Hindu law, make a declaration of the type under consideration whereby the joint family would have to bear the risk and liability of the business. Therefore, the declaration made by the assessee has to be ignored altogether.

Instruction : No. 747 [F. No. 288/29/74-IT(A-II)] (relevant extracts), dated 30-8-1974. [Source: 141st Report (1974-75) of the Public Accounts Committee, p. 77].

35. Taxability of lump sum payment made gratuitously or by way of compensation or otherwise to widow/other legal heirs of an employee

1. Clarifications have been sought from the Central Board of Direct Taxes whether a lump sum payment made gratuitously or by way of compensation or otherwise, to the widow or other legal heirs of an employee, who dies while still in active service, is taxable as income under the Income-tax Act, 1961.

2. The issue has been examined by the Board and it is clarified that any such lump sum payment will not be taxable as income under the aforesaid Act.

Circular : No. 573, dated 21-8-1990.

36. Taxability of ex gratia payment made by Central Government/State Government/Local Authority/Government Public Sector Undertaking to heirs of employee on his death, etc.

Circular No. 573, F.No. 200/115/90-IT(A-I), dated 21-8-1990 provided that a lump sum ex gratia payment made, to the widow or other legal heirs of an employee, who dies while still in active service, will not be taxable as income under the Income-tax Act, 1961.

It is noted that there can be situations in which a person or his heir receives ex gratia payment from the Central Government/State Government/Local Authority/Public Sector Undertaking, consequent upon injury to the person/death of a family member, while on duty. Such an ex gratia payment will not be liable to income-tax under the Income-tax Act, 1961.

Circular : No. 776, dated 8-6-1999.

37. Taxability of Gurudakshina

Gurudakshina from Swayamsevaks on the ground of mutuality cannot be subjected to tax in the hands of the assessee.

Letter : No. 290/26/MO/IM (Inv.), dated 19-12-1976. [CIT v. Rashtriyas Swayam Sewak Sangh [1994] 207 ITR 479 (Pat.)].