CBDT Circulars : Bending Effect

Advocate Akhilesh Kumar Sah

In The Commissioner of Income Tax vs. Income Tax Settlement Commission, Chirag Construction RMC [WRIT PETITION NO.1266 OF 2013, DECISION PRONOUNCED ON : 30 AUGUST 2013], the Bombay High Court observed the decision of the Apex Court in the matter of Commissioner of Central Excise v/s. Ratan Melting & Wire Industries 231 ELT page 22. In the aforesaid decision, the Constitutional Bench of the Apex Court was considering the binding nature of a circular issued under the Central Excise Act, 1944 which were contrary to decisions rendered by the Supreme Court. The Apex Court in the above case held that :­ “ Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the Court. It is for the Court to declare what the particular provision of stature says and it is not for the executive. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.” The aforesaid observations of the Constitutional Bench of the Apex Court in a Central Excise case reiterates the view taken by the Apex Court in an Income Tax case in Hindustan Aeronautics Ltd. v/s. C.I.T. 243 ITR 808.

The Allahabad High Court in a case Shivangee Crafts Limited vs. State Of UP [2013] NTN (Vol. 53)-285, relating to writ petition in reference to UP Trade Tax Act, 1948, has held that till such time as a clarification or amendment by the Legislature or by Ordinance is not incorporated in the statute, no notification or circular of the Department can override the statutory provisions of the Act. It would not be permissible to read words into the statute, which prima facie is very plain and straight. The Rajasthan High Court in CWT v. Sanwarmal Shivkumar (1988) 171 ITR 377 (Raj) had held that the Income-tax and Wealth Tax Departmental Officer is bound to follow the circulars issued by the Central Board of Direct Taxes. The Kerala High Court in CIT v. Malayala Manorama & Co Ltd. (1983) 143 ITR 29 (Ker) has observed that circulars of general directions issued by the CBDT are binding under section 119 of the Act on all officers and persons employed in the execution of the Act. However, the Madras High Court InA.L.A. Firm v CIT (1976) 102 ITR 622 (Mad) has observed that judicial power of the Income Tax Officer cannot be controlled by any circular that may be issued by the Central Board. The circulars that are contemplated under section 119 of the Act, are only in regard to administrative aspects and cannot extend to the judicial aspects of the administration of the Act. It has also observed in CIT v. O.M.S.S. Sankaralinga Nadar & Co. (1984) 147 ITR 332 (Mad) that when a matter comes before the High Court for advisory opinion on the state lf law or a fiscal principle or on the construction of a taxation enactment, the last place where is should look for aid or guidance would be a circular from the Central Board of Direct Taxes on the subject. Courts are not bound by the Board’s circulars. Further, the circulars are issued generally for the occasion and hence are sometimes inconsistent. If a circular had expressed a view which the department did not follow, the remedy is not to ask the court to render its opinion in accordance with the circular but to approach for necessary relief elsewhere.

The Delhi High Court in Addl. CIT v. Mrs. Avtar Mohan Singh (1982) 136 ITR 645 (Del) has observed that though the circulars of the Central Board are not binding on the court, yet general circulars are binding on the Income Tax Authorities. Through them the Board cannot impose a burden on the taxpayer greater than what the statute provides but it can relax the rigour of the law. The Bombay High Court has taken the view in CWT. v. Gammon India (P) Ltd. (1981) 130 ITR 471 (Bom) that if a circular is relied upon for the first time in the High Court in the course of the hearing of a reference under the Income Tax Act, it must be given effect to by the Court because the circulars issued by the CBDT are binding on the Income Tax Officer. It is clear that while a circular of the Board will be binding upon an Income Tax Officer in materials relating to the general interpretation of any provisions of the statute, the circular cannot over-ride judicial decisions rendered on the statute. In fields which are covered by judicial decisions, the circular will not be conclusive even so far as the Income Tax Officer is concerned [Geep Industrial Syndicate Ltd. v. CBDT (1987) 166 ITR 88 (Del). The Kerala High Court in K.V. Produce. v. CIT (1992) 196 ITR 293 (Ker)has held that though circulars issued under section 119 of the Act may have the force of law, they may not override the law itself. Concepts like ultra vires would come into play if a notification or a rule runs derogatory to the parent law. Also, the Delhi High Court, in All India Lakshmi Commercial Bank Officer’s Union v. Union of India (1984) 150 ITR 1 (Del), has observed that the income-tax authorities acting anywhere in India have to respect the law laid down by a High Court, whether of a State in which they are functioning or of a different State, in the absence of any contrary decision of any other High Court. Circulars (See for the circulars dealt in the case) couched in language suggesting to the contrary are not in good taste. The power conferred upon the CBDT to issue instructions and directions by section 119 is for proper working of the Act. In cannot be presumed that the CBDT has issued any circular which runs counter to or is inconsistent with the provisions of the Act or the Rules. Unless the language is quite implicit, one shall not presume so [CIT v. J.K. Cotton Spg. & Wvg. Mills Co. Ltd. (1991) 188 ITR 80 (ALL)].

Some Hon’ble Supreme Court Cases

In Catholic Syrian Bank Ltd. v/s. CIT 2012(3) SCC 784, the Supreme Court examined the effect of the circulars which are in force and are issued by the Central Board of Direct Taxes (for short, `the Board’) in exercise of the power vested in it under Section 119 of the Act. Circulars can be issued by the Board to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored. A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain
specified circumstances. So long as the circular is in force, it aids the uniform and proper administration and application of the provisions of the Act.

The Supreme Court in K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) has observed (at page 613) that it is now well settled at a result of two decisions of this court, one in Navnit Lal C. Javeri v. K.K. Sen, AAC (1965) AAC (1965) 56 ITR 198 (SC) and the other in Ellerman Lines Ltd. v. CIT (1971) 82 ITR 913 (SC) that circulars issued by the CBDT under section 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 Supreme Court in Bengal Iron Corporation  v. CTO (1993) UPTC 1312 (SC) has observed that so far as clarifications/ circulars issued by the Central Government and/or State Government are concerned, they represent merely their understanding of the statutory provision. They are not binding upon the courts.  There can be no estoppel against the statute. The understanding of the government, whether in favour or against the assessee, is nothing more than its understanding and opinion. It is doubtful whether such clarifications and circulars bind the quasi-judicial functioning of the authorities under the Act. While acting in quasi-judicial capacity, they are bound by law and not by any administrative instructions, opinions, clarifications or circulars. Law is what is declared by the Supreme Court and the High Court-to wit, it is for the Supreme Court and the High Court to declare what does a particular provision of statute say, and not for the executive. Of course, the Parliament/Legislature never speaks or explains what does a provision enacted by it mean. The Supreme Court has held in, CIT v. Hero Cycles (P) Ltd. (1998) 1 DTC 226 (SC) : (1997) 228 ITR 463 (SC), that it is well settled that circulars can bind the Income Tax Officer but will not bind the appellate authority or the Tribunal or the court or even the assessee.

Resume

It was held in the case of Tata Iron & Steel Co. Ltd. v. N.C. Upadhyaya (1974) 96 ITR 1 (Bom), that circulars issued by the Central Board of Direct Taxes would be binding on the Income Tax Officers and must be given effect to by the Court [See Navnitlal Ambalal v. CIT (1976) 105 ITR 735 (Bom)]. Also the Bombay High Court , in Dattatraya Gopal Shette v. CIT (1984) 150 ITR 460 (Bom) observed that it is now well-settled that even if the contents of a circular may amount to a deviation on a point of law, a circular of the Central Board of Revenue which confers some benefit on the assessee is binding on all officers concerned with the execution of the Income Tax Act, and they must carry out their duties in the light of the circular, See also, Mindteck (India) Limited [TS-554-ITAT-2014(Bang)].

The Madras High Court, in KA.A Meera Sahib Tharaganar, In re (1953) 23 ITR 451 (Mad) has observed that there is nothing in section 5(8) of the Indian Income Tax Act, 1922, (corresponding to section 119 of the Income Tax Act, 1961) which is inconsistent with the right guaranteed under Article 14 of the Constitution of India. Assuming judicial function, therefore, should not be subject to executive pressure or any extraneous influence, it cannot be said that the issue of directions by the Central Board of Revenue which is the chief income-tax authority under the Act is in the nature of outside or executive pressure or interference and it affects the independence and impartiality of the assessing officer. Also the Madras High Court in CIT v. Prasad Productions (P) Ltd. (1989) 179 ITR 147 (Mad) had held that if a circular was in force on the first day of the assessment year, the benefit of the should be made available to the assessee(see also CIT v. Common Wealth Trust Ltd. (1988) 169 ITR 134 (Ker).

The Punjab & Haryana High Court in B.S. Bajaj v. CIT (1996) 222 ITR 418 (P&H) has held that benevolent circulars providing administrative relief to the assessee, even if they are issued subsequent to the decision by an authority under the Act, have to be taken notice of and given effect to if found applicable in the given facts. Circular, even if produced in the High Court for the first time during the course of hearing has to be taken note of and the assessee will be entitled to the benefit of the circular, if found entitled, irrespective of the fact that it was not produced before the authorities below or was issued by the CBDT subsequent to the decision given by the Tribunal. Also, the Gujarat High Court in Madhu Silica (P) Ltd. v. CIT (1997) 227 ITR 350 (Guj) has noted (in reference to the Circular No. 589 dt. 16-1-1991) that circular being in the nature of laying down general guide lines for proper administration of the Act for those who are employed in the execution of the Act are bound to observe such instructions particularly those which are beneficial to the assessee.

So long as circular issued under section 119 is in force it would be binding on the departmental authorities to ensure a uniform and proper administration and application of the Income Tax Act (UCO Bank vs. CIT (1999) 11 SITC 415 (SC). Circular or instructions given by the CBDT are binding in law on the authority under the Income Tax law on the question arising for consideration it will not be open to a court to direct that a circular should be given effect to and not the view expressed in a decision of the Supreme Court or High Court (Hindustan Aeronautics Ltd. Vs. CIT (2000) 157 Taxation 307 (SC).  There is no scope for the Revenue authorities to imply a provision not specifically provided for which would in any way modify the explicit terms of the scheme (Hemalatha Gargya vs. CIT (2003) 259 ITR 1 (SC). The Supreme Court in CIT vs. Anjum M. H. Ghaswala & Ors. (2002) 166 Taxation 586 has held that circular issued by CBDT are legally binding on the Revenue. Press releases remain only clarificatory in nature. No statutory force attached like circular to such clarification, withdrawal of circular by CBDT would operate prospectively and not retrospectively (Unit Trust of India vs. P. K. Unny (2002) 19 SITC 159 (Bom.) Circular issued under foreign exchange Regulation Act are not binding on income tax authorities (The Coca-Cola Export Corporation vs. ITO (1998) 144 Taxation 341 (SC). The power of the CBDT are wide enough to enable in to grant relaxation from the provisions of several sections enumerated in clause (a) to Section 119 (1). The only bar on the exercise of the power is that  it is not prejudicial to the assessee (Union of India vs. Azadi Bachao Andolan. (2003) 177 Taxation 775 (SC). The Supreme Court in the case as reported in 1997 SCC 31 has ruled that beneficial notification has to receive beneficiary interpretation to an assessee in the given circumstances (A. S. Mani Vs. Union of India (2004) 26 SITC 109 (Kar). Circular issued by CBDT is binding on departmental authority (Pradip J. Mehta vs. CIT (2008) 300 ITR 231 (SC).

Bottomline:

The above cited cases may be of practical use while dealing with the circulars of CBDT.