Gopalan Nambiyar, C.J.
1. At the instance of the revenue, the Income-tax Appellate Tribunal, Cochin Bench, has sent up its statement of the case and referred the following question of law for our opinion, under Section 256(1) of the Act, namely:
' Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the instructions contained in the Circular of the Central Board of Revenue which were in force on the first day of the assessment year will be applicable and the ITO is bound by it, even though he passed the assessment order subsequent to the withdrawal of the said circular ?'
2. The assessee is an individual and a partner in the firm of M/s. India Sea Foods, Cochin. He is also a partner in M/s. 'Beeyems' in which his wife Mrs. Susanna Edward is another partner. The assessment year with which we are concerned is 1971-72. The accounting year is the year ended December 31, 1970. For the assessment year in question, the business of M/s. ' Beeyems' ended in a loss of Rs. 30,292 for the assessee as well as for his wife, Mrs. Susanna Edward. In the income-tax assessment for the earlier years, the income of the wife in the partnership firm of M/s. ' Beeyems ' was included in the assessee's own income and assessed together under Section 64 of the I.T. Act. For the assessment year in question, the assessee claimed that the loss incurred by, or debited to, his wife, should similarly be set off against his other income. This was disallowed by the ITO on the ground that under Section 64 only the ' income ' of a spouse can be included in the total income, and not the loss. On appeal, the AAC took the view that the expression ' income ' in Section 64 comprehends both positive and negative aspects, and would therefore include loss as well. The officer accordingly allowed the set-off claimed, and also allowed the assessee's appeal. In doing so, he followed the decision of the Mysore High Court in Kapadia's case : 87ITR511(KAR) .
3. The department appealed to the Income-tax Appellate Tribunal. For the revenue, reliance was placed on the unreported decision of this court in H. H. Marthanda Varma Elayarajah of Travancore v. CIT (ITR No. 35 of 1971). A Division Bench of this court had there referred to the decision of the Gujarat High Court in Dayalbhai Madhavji Vadera v. CIT : 60ITR551(Guj) that ' income ' in Section 16 of the 1922 Act will not take in ' loss '. The Division Bench observed I ' We think the same must be the view even under the (1961) Act'. The reference to the Full Bench was occasioned to consider the correctness of the above decision of the Division Bench.
4. From 1944, there was in operation a circular of the Board of Revenue, issued under Section 5(8) of the 1922 Act, corresponding to Section 119 of the 1961 Act. That circular, in brief, allowed the loss suffered by a spouse to be set off against the income of the other spouse. The circular was withdrawn on April 6, 1972, that is, after the expiry of the assessment year with which we are concerned. The assessment was, however, completed only on March 12, 1974, after the withdrawal of the circular. Under these circumstances, the Tribunal took the view that although the circular had been withdrawn at the time when the assessment was made, it was in operation at the commencement of the assessment year, and the circular was binding upon the authorities functioning under the I.T. Act, who were bound to follow the same. There is sufficient authority in support of the proposition stated by the Tribunal that circulars of the type involved, issued under Section 119 of the 1961 Act (or Section 5(8) of the 1922 Act), are binding, so far as the officers of the department are concerned. We may extract the section itself.
'119. Instructions to subordinate authorities.--(1) 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 follow such orders, instructions and directions of the Board :
Provided that no such orders, instructions or directions shall be issued-
(a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner; or
(b) so as to interfere with the discretion of the Appellate Assistant Commissioner or the Commissioner (Appeals) in the exercise of his appellate functions.
(2) Without prejudice to the generality of the foregoing power,--
(a) the Board may, if it considers it necessary or expedient so to do, for the purpose of proper and efficient management of the work of assessment and collection of revenue, issue, from time to time (whether by way of relaxation of any of the provisions of Sections 143, 144, 147, 148, 154, 155, 210, 271 and 273 or otherwise), general or special orders in respect of any class of incomes or class of cases, setting forth directions or instructions (not being prejudicial to assessees) as to the guidelines, principles or procedures to be followed by other income-tax authorities in the work relating to assessment or collection of revenue or the initiation of proceedings for the imposition of penalties and any such order may, if the Board is of opinion that it is necessary in the public interest so to do, be published and circulated in the prescribed manner for general information;
(b) the Board may, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case or class of cases, by general or special order, authorise the Commissioner or the Income-tax Officer to admit an application or claim for any exemption, deduction, refund or any other relief under this Act after the expiry of the period specified by or under this Act for making such application or claim and deal with the same on merits in accordance with law,
(3) Every Income-tax Officer employed in the execution of this Act shall observe and follow such instructions as may be issued to him for his guidance by the Director of Inspection or by the Commissioner or by the Inspecting Assistant Commissioner within whose jurisdiction he performs his functions.'
5. The section sufficiently brings out the object and the scope of the circulars. Sub-section (2) requires that in certain cases the circulars are to be published and circulated in the prescribed manner for general information. We have little doubt that although the circulars are primarily meant to serve as guidelines and are binding upon the subordinate authorities vested with the administration of the I.T. Act, some of them, from their nature and content, do confer some privileges and rights on the assessee whose cases have to be assessed by the authorities concerned. There may be circulars which affect only certain administrative or procedural aspects ; there may equally be circulars which affect certain important rights in regard to assessment of the assessees. This has been noticed and is sufficiently implicit in the provisions of Sub-section (2) of Section 119 of the Act. In regard to the latter type of circulars affecting the rights of assessees, we are of the opinion that despite the power to recall or withdraw the circulars, the assessee's right to have the assessments effected or carried out in accordance with the circulars, cannot be prejudicially affected by the recall or the withdrawal of the circulars. This, we gather, is the effect of the decisions of the Supreme Court which we may briefly notice. In Navnit Lal C. Javeri v. K. K. Sen, AAC : 56ITR198(SC) , the Supreme Court had occasion to examine the statutory basis and background of the circulars issued by the Board of Revenue under the provisions of the I.T. Act, and the scope and the effect of such circulars. It was remarked that a circular of the kind there considered, issued by the Board under Section 5(8) of the 1922 Act, was binding on all officers and persons employed in the administration of the Act. Noticing the effect of the circular in that case, the Supreme Court pointed out that past transactions which would normally have attracted the stringent provisions of Section 12(1B) as it stood in 1955, were substantiallygranted exemption from the operation of the said provision, 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 the section.
6. In Ellerman Lines Ltd. v. C1T : 82ITR913(SC) , the question again fell to be examined by the Supreme Court. At page 921, the court observed I
' Now, coming to the question as to the effect of instructions issued under Section 5(8) of the Act, this court observed in Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner, Bombay : 56ITR198(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 Section 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 Income-tax Officer.'
7. A Division Bench of this court in Rajarajeswari Weaving Mitts v. ITO : 113ITR405(Ker) had again examined the force and the effect of the circulars issued under Section 119 of the 1961 Act. No final opinion was expressed on the question, as it was unnecessary to do so on the actual facts of the case considered by the Division Bench, where the order of the Commissioner with respect to which the question of law was referred, was prior to the issuance of the circular and was unaffected by it. But this court noticed the succinct statement of law regarding the scope and effect of the circulars at pages 773 and 774 of Kanga and Palkhivala's Law and Practice of Income-tax, 7th edn., Vol. I, and also the two decisions of the Supreme Court in Navnit Lal C. Javeri v. K. K. Sen, AAC : 56ITR198(SC) and Ellerman Lines Ltd. v. CIT : 82ITR913(SC) . Reference was also made ot J. K. Synthetics Ltd. v. CBDT : 83ITR335(SC) and Sirpur Paper Mills Ltd. v. CWT : 77ITR6(SC) rendered under Section 13 of the W.T. Act corresponding to Section 119 of the the I.T. Act. There were certain other decisions also which were referred to.
8. The decision of the Division Bench of this court in ITR No. 35 of 1971 (H.H. Marthanda Varma Elayarajah of Travancore v. CIT) failed to take note of the existence of the circular which had directed that loss of one spouse could be set off against the income of the other spouse. The decision had also not independently discussed the position in support of the conclusionformed in the case, but had merely stated, after noticing the Gujarat decision rendered under the 1922 Act, that the same must be the view under the 1961 Act also. We cannot, in the circumstances, accept the decision as correct.
9. Having regard to the scope, effect and the purport of the circular involved in this case, and particularly to the fact that the circular was in force and operation throughout the assessment year 1971-72 and was withdrawn only on April 6, 1972, we are of the opinion that the assessee is entitled to have the assessment made and completed in accordance with the circular, which had issued the necessary directions as to how the assessment had to be made. In that view, we answer the question referred in the affirmative, that is, in favour of the assessee and against the revenue. There will be no order as to costs.
10. A copy of this judgment under the seal of the court and the signature of the Registrar will be communicated to the Tribunal as required by law.