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Why The FM’s & CBDT’s Promise Not To Reopen Retro Cases Is Still Illegal

Shri. Tarun Jain

Why The FM’s & CBDT’s Promise Not To Reopen Retro Cases Is Still Illegal

Tarun Jain, Advocate, Supreme Court

The question whether the promise made by the FM & the CBDT in Circular dated 29.05.2012 not to reopen completed assessments despite the retrospective amendments is legal or not has created a major controversy. The author, in the light of the criticism of his earlier view, has objectively reconsidered the entire law on the subject and made out a compelling case why his earlier view that the promises are unlawful & unenforceable is correct

At this forum I had the privilege of getting my article published a few days back. In that article I had put forth my view on the purported illegality of the promise made by the Finance Minister and the CBDT Instruction dated 29.05.2012 directing its officers that no reopening should ensue on the basis of the retrospective amendments in the Finance Act, 2012. A number of comments on that article and also a detailed article of Sh. K.C. Singhal (Former Vice President, ITAT) have shed considerable light over the various dimensions covered in my article to opine to the contrary. The learned Former Vice President has in fact gone on to state that the said Instruction is well within the powers of the CBDT. I have examined the views in considerable detail and made further research to analyse the correctness of the proposition. In the end I am unable to persuade myself to the counter-view and would like to reflect my viewpoint in the form of this rejoinder. The intent is not to carry any ill-will but to pose other factors for an erudite debate on the correct legal position.

my view is that since the decision in Ratan Melting has not been rendered on the basis of Section 119 but in general over the powers of Revenue boards to issue Circulars contrary to statutory provisions, it may not be possible to argue that the decision in Ratan Melting will not apply to income tax

The counter-points

The principle points urged to advance my view-point were as under;

– Under the Income Tax Act, 1961 the power to reopen the assessment where income has escaped assessment is vested with the Assessing Officer and retrospective amendment is a valid ground for reopening of assessment subject to the limitation period prescribed within the Act itself.

– The decisions of the Supreme Court do not give any weightage to the statement of the Finance Minister for interpretation of the legal position unless the provisions are ambiguous. Therefore when the statutory provisions are unambiguous, one cannot rely upon the statement/speech of the Finance Minister to contend that legal position should be otherwise.

– Section 14A, which was introduced in the Income Tax Act, 1961 with retrospective effect by Finance Act, 2001 also required a legal provision [proviso to Section 14A(3)] to ensure that the retrospective amendment in Section 14A will not be a ground for reopening of assessment.

– CBDT Circulars do not bind the Departmental officers in exercise of their quasi-judicial power.

– Since the statutory provisions and the decisions of the Supreme Court oblige the Assessing Officer to reopen assessments in the wake of retrospective amendments,then the assessing officer would be failing in the statutory duty by not reopening assessment.

– The law to this regard is well settled that Board’s Circular / instruction cannot be contrary to law. Therefore when the law obliges the assessing officer to reopen the assessment and the Circular / instruction directing the assessing officer not to, renders the Circular / instruction contrary to law.

– From a practical perspective as well, if an Assessing Officer despite the Circular reopens the assessment it would it be wrong as the Assessing Officer has only discharged statutory functions which cannot be controlled by CBDT Instructions.

In his counter-point, Sh. Singhal the given the following line of reasoning to defend the legality of the CBDT instruction dated 29.05.2012;

– Income Tax Officers are bound to follow the Circular issued by CBDT in view of the decisions of the Supreme Court in (a) Navnit Lal Jhaveri v. K.K.Sen, IAC 56 ITR 198 SC Constitutional Bench; (b) Ellerman Lines Ltd v. CIT 82 ITR 913; (c) K.P. Varghese v. I.T.O. 131 ITR 597 SC; (d) C.B. Gautam v. UOI 199 ITR 530 SC, Constitutional Bench; and (e) UCO Bank v. CIT 237 ITR 889 SC.

– Reliance is incorrectly placed upon certain decisions in support of the proposition that the circular is not binding on the income tax authorities and consequently the Assessing Officer would be justified in reopening the assessment on the basis of retrospective amendments. Since these decisions have been rendered in the context of Central Excise Act, they have no application to income tax as the relevant provision under Central Excise Act, 1944 (i.e. Section 37) is limited in application as compared to Section 119 of the Income Tax Act, 1961 which confers Circular and instruction issuing power to the CBDT [The decisions referred are Faridabad Iron & Steel Traders Asso. v. Union of India 2004 (178) ELT 1099 (Del) Affirmed by the Supreme Court in its order reported at 2005 (181) ELT A68 (SC). See also Popular Packing Pvt. Ltd. v. Union of India 2004 (175) ELT 33 (Raj); Madura Coats Ltd. v. CBEC 2004 (163) ELT 164 (Mad); Hindustan Motors Ltd. v. Union of India 2000 (117) ELT 32 (Del); etc.]“

– The specific powers, conferred on the Board under sub section (2) of section 119, to relax the rigour of the provisions mentioned therein includes sections 147 and 148. Therefore, it is clear that Board has enough powers to relax the requirement of section 147 and 148 in favour of tax payers.

– The decision of the Constitutional Bench of the Supreme Court in Ratan Melting, which declares that Circular contrary to law have no existence at all, is not relevant as it does not deal with this proposition and is therefore not an authority for this aspect.

– The instruction dated 29.05.2012 is also valid for the reason that it “only tones down the rigour of the amended provisions so as to remove the hardship caused to a class of assessees on account of the amended provisions. Such an action is permitted by the specific powers conferred on the Board u/s 119 of the Act

In all fairness it must be pointed out that with all his wisdom and experience in the income tax law, Sh. Singhal has agreed that “there is no dispute to the legal position that (i) Parliament is competent to enact law with retrospective effect, (ii) statement or promise made by the Minister in the Parliament, by itself, has no legal sanctity, particularly when provisions are unambiguous, (iii) on the basis of retrospective amendment, the assessments can be reopened u/s 147/148 subject to the limitation prescribed in section 149, (iv) circulars are not binding on the courts when courts are required to interpret the provisions of an enactment.” In this fact these considerably ease my task.  

Restating the current legal position

Without much recourse to different cases, the legal position prior to the decision in Ratan Melting can best be summarized by the following discussion in the treatise ‘The Law and Practice of Income Tax’ by Kanga, Palkiwala & Vyas;

[9th Edition, pg. 1639,]

In the exercise of power to issue general circulars under this section, the Board can neither impose a burden on the taxpayer or otherwise put him in a worse position than he is under the statute, nor can it pre-empt or override any judicial interpretation of a provision by the courts; but the board can relax the rigours of the law or grant relief which is not to be found in terms of the statute. Such Circulars make for a just and fair administration of the law. In Navnitlal Javeri v. Sen, Ellerman Lines Ltd. v. CIT and Verghese v. ITO the Supreme Court accepted the validity and binding nature of such beneficial circulars, and recognized the taxpayer’s right to enforce them in his favour even in court. In UCO Bank v. CIT, the Supreme Court, while exhaustively reviewing its earlier judgments, reiterated that such circulars would be binding on the income-tax authorities even if they deviate from the provisions of the Act so long as they seek to mitigate the rigours of a particular section for the benefit of the assessee.

On the other hand, it has also been held in many cases that circulars cannot run contrary to the statute. This proposition needs to be reconciled with the principles stated in the preceding paragraphs. The position in law is that circulars can certainly deviate from statutory provisions, as has been reiterated in many decisions, but such deviation is permitted where it is for the purpose of proper administration of the Act; and beyond that, the circulars cannot run contrary to the Parliamentary mandate or nullify the provisions of the statue. The Parliament could never have intended that the circulars issued by the Board could supersede any substantive provision of the Act. The Board’s powers are limited by the mandate of the section and the legislative intent is clear from the language of sub-section (1) that the power is granted to the board to issue orders, instructions and directions only ‘for the proper administration of this Act’; to this extent, therefore, the circulars can undoubtedly mitigate the rigours of the statutory provisions.”

The legal position which emanates from the above is that Circulars under Section 119 can be issued by the CBDT contrary to statutory provisions or judgments if they benefit the assessee. This is essentially what was reflected by Sh. Singhal also.

However I will like to add the legal position stated above does not reflect the latest position. There is a sea change as far as the nature and ambit of Circulars is concerned after the decision of the Constitutional Bench of Supreme Court in Ratan Melting (2008) 220 CTR 98 (SC), which has to be closely examined.

The turning point was the decision of a Constitutional Bench in Dhiren Chemical Industries [2002 (2) SCC 127] wherein the Supreme Court granted relief to the assessee on the basis of the Circular issued by Board which was at variance with the decision of the Supreme Court. Granting relief, in that decision the Constitutional Bench observed as under;

We need to make it clear that regardless of the interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding upon the Revenue

In Ratan Melting another Constitutional Bench was constituted to examine the correctness of this legal position i.e. whether the assessee can rely upon a Circular which is contrary to decision of Supreme Court. Before we proceed with the finding / conclusion in Ratan Melting one must note that this trend (as concluded in Dhiren Chemicals) had persisted for long as reflected from the quoted observation as well as also rightly stated by Sh. Singhal.

However in Ratan Melting the Constitutional Bench reversed this legal position. One will be surprised to note that in that case the Government argued against its own Circulars. As the order of Ratan Melting notes, it was argued by the Government Counsels that the decision of the Supreme Court was to be preferred over their own Circulars. However it was vehemently contended for the assessee that if the Circular of the Board gives some benefit to the assessee it should prevail. This contention of the assessee had found favour with the Supreme Court in earlier decisions such as Navnit Lal Jhaveri; Ellerman Lines Ltd; K.P.Varghese etc. but this was not to happen in Ratan Melting.

The Constitutional Bench in Ratan Melting noted the rival contentions and thereafter delineated the legal position in the following terms;

4. Learned counsel for the Union of India submitted that the law declared by this Court is supreme law of the land under Article 141 of the Constitution of India, 1950 (in short the ‘Constitution’). The Circulars cannot be given primacy over the decisions.

5. Learned counsel for the assessee on the other hand submitted that once the circular has been issued it is binding on the revenue authorities and even if it runs counter to the decision of this Court, the revenue authorities cannot say that they are not bound by it. The circulars issued by the Board are not binding on the assessee but are binding on revenue authorities. It was submitted that once the Board issues a circular, the revenue authorities cannot take advantage of a decision of the Supreme Court. The consequences of issuing a circular are that the authorities cannot act contrary to the circular. Once the circular is brought to the notice of the Court, the challenge by the revenue should be turned out and the revenue cannot lodge an appeal taking the ground which is contrary to the circular.

6. 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 statute 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.

Thus in Ratan Melting it has been held that Circulars are no doubt binding on the Department but these Circulars cannot be enforced against the decisions of the High Court and Supreme Court. However the Court in Ratan Melting did not stop at that. It went on to declare that “a circular which is contrary to the statutory provisions has really no existence in law”. Thus the Constitutional Bench in Ratan Melting declared that a Circular which is contrary to statutory provisions has no existence in law, even though that was not the issue before the Bench in that case.

Legal experts may argue that this finding of Ratan Melting is not the final legal position for the following reasons;

(a) Whether a Circular which is contrary to statutory provisions is valid, was never an issue before the Supreme Court in Ratan Melting and therefore the declaration is not ratio but only obiter dicta.

(b) Earlier decisions of the Supreme Court, including those of Constitutional Benches themselves have held that if there was a Circular of the CBDT then it was binding on the Department even if the Circular was contrary to statutory provisions.

Few comments were made to the first article written by me that the Department cannot argue against the Circular of the CBDT. However the findings recorded in the order of Ratan Melting reflect to the contrary. In fact, in Karamchand Thapar and Bros. (Coal Sales) Ltd. [2010] 23 STJ 252 (Calcutta) on the strength of Ratan Melting decision the Department counsel argued before the Calcutta High Court that Department can also challenge the Board Circulars. The further observations in Ratan Melting are also relevant. The Constitution Bench in that decision went on to observe as under;

7. As noted in the order of reference the correct position vis-à-vis the observations in para 11 of Dhiren Chemical’s case (supra) has been stated in Kalyani’s case (supra). If the submissions of learned counsel for the assessee are accepted, it would mean that there is no scope for filing an appeal. In that case, there is no question of a decision of this Court on the point being rendered. Obviously, the assessee will not file an appeal questioning the view expressed vis-à-vis the circular. It has to be the revenue authority who has to question that. To lay content with the circular would mean that the valuable right of challenge would be denied to him and there would be no scope for adjudication by the High Court or the Supreme Court. That would be against very concept of majesty of law declared by this Court and the binding effect in terms of Article 141 of the Constitution.

The above observations have a lot to say and that too from a practical perspective. It has been clearly noted that the assessee will not file an appeal where the case has been decided in its favour by following the Board Circular. However the Revenue may be aggrieved by the decision in as much as the decision of the Supreme Court may be contrary to the Circular. In such instances, if the earlier decisions as pointed out by Sh. Singhal were to hold, then the Revenue could not have succeed as the Board Circular was in favour of the assessee. However in Ratan Melting the Supreme Court has held that by not permitting the Revenue to challenge such decisions would have implied that the decisions of the Supreme Court would not have been followed. Therefore the Revenue, as declared by the Supreme Court in Ratan Melting, cannot be denied the right to appeal such decisions before High Court and Supreme Court. In short, the Department can contend before the High Court and Supreme Court that the decision of the authorities based on the Circular is incorrect.

Thus the law has changed drastically after the decision of the Supreme Court in Ratan Melting in as much as the validity of a Circular beneficial to assessee is concerned. Given the clear finding of the Supreme Court, a Circular which is contrary to law does not exist at all. Thus it cannot form the basis for any decision making. This may be so even if the Circular is in favour of the assessee. This is exactly what happened as the final outcome in Ratan Melting. The Supreme Court dismissed the appeals of the Assesee, who had placed reliance upon the Circular beneficial to them.

This legal position emanating from the decision in Ratan Melting has been followed subsequently by the Supreme Court in Gurukripa Resins Pvt. Ltd. [2011 (13) SCC 180] wherein the Supreme Court reversed the decision of the Tribunal granting relief to the assessee based on a Board Circular in the context of Central Excise law. The legal position was declared by the Supreme Court in the following terms;

19. In that view of the matter, when the law on the question at issue before the Tribunal had already been declared by this Court, the Tribunal should not have based its decisions on the clarification issued by the Board, which otherwise stood rescinded, on the specious ground that the said clarification issued by the Board was binding on the Deputy Commissioner as also on the Commissioner (Appeals). It is well settled proposition of law that Circulars and instructions issued by the Central Board of Excise and Customs are no doubt binding in law on the authorities under the respective Statutes but when this Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Courts or the Tribunal, as the case may be, to direct that the Board’s Circular should be given effect to and not the view expressed in a decision of this Court or a High Court. ((See: Ratan Melting & Wire Industries (supra)).

Sh. Singhal has pointed out that decisions rendered in context of Central Excise Act may not be relevant for Income Tax purposes. There is no shortage of judicial decisions in Income Tax where decisions in Central Excise Act have been borrowed. Nonetheless to take the point home I will only mention the recent ruling the Special Bench of the ITAT [IndusInd Bank Ltd. (2012) 15 ITR (T) 89] which has declared that general meaning assigned by the Hon’ble Supreme Court under one enactment is binding in the context of other enactments. Further in Gujarat Gas Co. Ltd. v. CIT (2000) 245 ITR 84 (Guj) the ambit of CBDT’s powers under Section 119 of the Income Tax Act was interpreted by the High Court by placing reliance upon decisions rendered in context of Section 37 of Central Excise Act.

In this background my view is that since the decision in Ratan Melting has not been rendered on the basis of Section 119 but in general over the powers of Revenue boards to issue Circulars contrary to statutory provisions, it may not be possible to argue that the decision in Ratan Melting will not apply to income tax. The ITAT in ACIT v. Modern Insulators Ltd. (2011) 10 ITR(T) 147 has noted the contention of the Department where the Departmental Representative himself relied upon Ratan Melting to argue that their own circulars should not be followed as they are contrary to law. Further, in ITO v. Data Software Research Company (International) Pvt. Ltd. (2009) 125 TTJ 700 the ITAT applied Ratan Melting to declare the Board Circular as contrary to law and thus not requiring compliance.

In my view, therefore, the legal position which emanates from the above discussion and taking note of the decision in Ratan Melting is as under;

(a) Any Circular / Instruction of the CBDT is first to be examined from the view point of conformity with law. If it is contrary to law, it is not valid.

(b)Thereafter the Circular has to be examined from the perspective of it being at variance with the decisions of the High Court or Supreme Court. If the Circular is contrary to the decisions of High Court or Supreme Court, it cannot be enforced.

(c) Both (a) and (b) hold good even if the Circular is beneficial to the assessee.

In my view, from a jurisprudential perspective as well this is the correct legal position. As per the hierarchy of laws in India, delegated or sub-ordinate legislations always come at a lower footing than statutory provisions. Therefore Circulars cannot go against the statute. However some decisions had recognized in the past that the Circulars contrary to statute can be enforced if they are beneficial to assessee. Now Ratan Melting puts the hierarchy of laws in correct order, even though to the detriment of the assessee.

Instruction dated 29.05.2012 discriminatory?

If it is correct to hold that by issuing Circular dated 29.05.2012 no reopening will take place, the history of Circular dated 23.07.2001 tells a different story… Still there was reopening of assessment by the Assessing Officers… This forced the Government to amend the Income Tax Act ..

I would also like to thank the readers who have contributed generously to my understanding by pointing out that the Circular dated 29.05.2012 is not the final word in reopening. It only postulates that assessments closed under Section 143(3) shall not be reopened. What about the assessments closed under Section 143(1)? Since the Instruction dated 29.05.2012 does not cover such assessments, it cannot be argued as creating a bar on the Assessing Officer to reopen such assessments. In this event can the Instruction dated 29.05.2012 be argued as discriminatory and thus be declared as invalid?

Article 14 of the Constitution of India guarantees equality before law and equal protection of laws to all persons in India. All executive decisions have to stand the test of non-discrimination in view of the settled law on this aspect. Thus it may very well be argued that if the intent is to ensure that there is no reopening of closed assessments then there is no intelligible differentia to distinguish between assessments closed by way of assessment under Section 143(1) as compared to those under Section 143(3) so as to shield the assessments under the later provision from reopening whereas not providing the same protection to the assessments under the earlier provision. On this aspect as well the Department will require to brace up on the legal front to protect its Instruction from being invalidated.

Section 14A’s tryst with reopening: Final nail in the coffin?

Sh. Singhal that has also contended that the Instruction dated 29.05.2012 is validly issued in exercise of powers under clause (a) of sub-section (2) of Section 119 and it is valid since the Circular only tones down the rigours of Section 147. My task of responding to this assertion is made easy by a precedent already set in the context of these very provisions itself. This point was mentioned in the first article but not dwelled upon in detail, which I have undertaken now.

Readers will recall that the Income Tax Act was amended by the Finance Act, 2001 to introduce Section 14A with retrospective effect from 01.04.1962. However Section 14A was again amended with retrospective effect by Finance Act, 2002 to insert a proviso as under;

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

This amendment has a very interesting background which is relevant for our discussion. When Section 14A was amended in 2001, similar fears were expressed by the industry that it will lead to reopening of assessments. The Ministry conceded and issued an instruction to allay the doubts. Circular No. 11 of 2001 dated 23.07.2001 [250 ITR (St.) 84] issued to this effect stated as under;

1. The Finance Act, 2001 has inserted section 14A in the Income-tax Act, 1961 wherein it was specifically provided that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act. The amendment takes effect from 1-4-1962.

2. Section 14A was introduced retrospectively in order to clarify and state the position of law that any expenditure relatable to income which does not form part of total income cannot be set off against other taxable income. This section was not introduced with prospective effect, as that would have implied that before the introduction of the said provisions, expenditure incurred to earn exempt income was allowable.

3. Instances of reopening of old assessments, which had attained finality, after insertion of section 14A in the Act, have come to the notice of the Board. Reopening of past completed assessments, having attained finality, on the basis of newly inserted provisions of section 14A is likely to cause hardship to a large number of taxpayers and would result in increasing avoidable litigation.

4. The Board have considered this matter and hereby directs that the assessments where the proceedings have become final before the first day of April, 2001 should not be re-opened under section 147 of the Act to disallow expenditure incurred to earn exempt income by applying the provisions of newly inserted section 14A of the Act.

Learned readers will notice that this Circular No. 11 of 2001 is similar in wording and in form to Circular dated 29.05.2012 as far as paragraph 4 of this Circular dated 23.07.2001 and paragraph 4 of Circular dated 29.05.2012 is concerned.

Probably this Circular dated 23.07.2001 did not have the desired effect. Therefore the intent of this Circular dated 23.07.2001 was again emphasised by the CBDT in Circular No. 14 of 2001 dated 12.12.2001 [252 ITR (St.) 65 at 86] wherein it was stated as under;

25.3 It is also being clarified that the assessments where the proceedings have become final before the first day of April, 2001 should not be reopened under Section 147 of the Act to disallow expenditure relatable to the exempt income by applying the provisions of Section 14A of the Act.

One would have thought that this was the end of the chapter on reopening due to retrospective amendment of Section 14A. However this was not to be so. This led the CBDT to amend the No. 14 of 2001 by issuing a Corrigendum [vide F.No. 153/88/2001-TPL] [254 ITR (St.) 279] stating as under;

For Para No. 25.3 of the Circular No. 14 of 2001 on Explanatory Notes for the Finance Act, 2001, issued by the Central Board of Direct Taxes, the following para may be substituted:

“25.3 Vide Circular No. 11 of 2001, dated 23rd July, 2001, a direction was issued by the Central Board of Direct Taxes that the assessment where the proceedings have become final before the 1st day of April, 2001, should not be reopened under Section 147 to disallow expenditure relatable to exempt income by applying the provisions of Section 14A of the Act. This Circular has been issued by the Board by exercising its powers to issue beneficial circular under Section 119(2)(a) of the Income Tax Act.”

Thus the CBDT had to clearly specify that its Circular dated 23.07.2001 was issued in exercise of its powers under Section 119(2)(a) of the Income Tax Act. This clearly implies that there were indeed challenges from various quarters over the validity of the Circular dated 23.07.2001. Though similar to Circular dated 23.07.2001 the present CBDT Instruction dated 29.05.2012 also does not state that it was issued by the CBDT in exercise of its powers under Section 119(2)(a) of the Income Tax Act and it may have a bearing upon the validity of the Instruction dated 29.05.2012, I will not press upon the aspect as there is a much wider issue requiring consideration.

If it is correct to hold that by issuing Circular dated 29.05.2012 no reopening will take place, the history of Circular dated 23.07.2001 tells a different story. The Circular dated 23.07.2001 was also issued by the CBDT in similar circumstances and to the same effect and its defects were also removed by Circular No. 14 of 2001 and the Corrigendum published at 254 ITR (St.) 279. However this was not enough. Still there was reopening of assessment by the Assessing Officers. [See ITO v. Big Apple Clothing Pvt. Ltd. (2011) 10 ITR (T) 782, which notes this factual position that AO issued notice for reopening despite the CBDT Circular of July, 2001].

This forced the Government to amend the Income Tax Act by Finance Act, 2002 whereby a proviso [as reproduced above] was added to Section 14A(3) specifically providing that there shall be no reopening in the wake of Section 14A. [See also Navin Bharat Industries Ltd. v. DCIT (ITAT) (MANU/IU/5010/2002) which notes that the proviso was introduced by way of amendment “in order to avoid the controversy as to whether the circular would be binding or not”]. The Memorandum to the Finance Bill, 2002 explained the rationale for introducing the proviso in the following terms;

23.1 Through the Finance Act, 2001, a new section namely 14A was inserted in the Income tax Act retrospectively with effect from 1-4-1962 to clarify the intention of the Legislature that no deduction shall be allowed in respect of any expenditure incurred by an assessee in relation to income which does not form part of the total income under the Income tax Act. The intention of inserting the new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh.

23.2 Through the Finance Act, 2002, a proviso to section 14A has been inserted so as to clarify that the Assessing Officer shall not reassess the cases under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

23.3 This amendment takes effect retrospectively from 11th May, 2001, that is, the date on which the Finance Bill, 2001 received the assent of the President of India.

If Circular dated 23.07.2001 [as reinforced by Circular No. 14 of 2001] held the field, why was there the need to amend Section 14A to insert the proviso? The answer is clear. The Government also realized that without there being a prohibition under the Act itself on reopening, the Circulars cannot help the assessee. Does this history of proviso to Section 14(3) not have a reflection upon the fate of CBDT Instruction dated 29.05.2012. With these words and background, I will leave the readers to draw their own conclusions on this aspect as ultimately it is only a Court of law which will have the final word on this debate.  

Conclusion

Having discussed the legal position in an extensive manner, I will like to conclude briefly. The message is clear; if the Finance Ministry indeed intends that no reopening should take place in the wake of the retrospective amendments introduced by the Finance Act, 2012 then a statutory provision to this effect is required to be introduced enacted as the Finance Minister’s assurance and the CBDT Instruction may not have the desired effect.

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4 comments on “Why The FM’s & CBDT’s Promise Not To Reopen Retro Cases Is Still Illegal
  1. Avinash Rajopadhye says:

    In mythological stories there is a concept of shap [bane ] and ushap [boon not exactly boon but something that moderates the effect of bane ]. However the ushap works subject to certain conditions to be fulfilled by the affected person. Okay the F.M. made retrospective amendment and also made the promise on the floor of the house that retrospective amendment will not be applicable to completed assessments. To fortify this promise the CBDT came out with the instruction. It is like “ushap” in mythological stories. When F.M. and CBDT have shown flexibility in their approach I wonder why we are so rigid and hesitant in accepting ” ushap”.

  2. K S Dhingra says:

    It must be accepted that the retrospective amendments to the income Tax Act are made in the interest of revenue. It can be argued based on the first principles that in case revenue decides to forgo the benefit accruing as a consequence of retrospective amendment, no law should force the revenue to not do so. That is one aspect on consideration of which no objection can be raised to the validity of the CBDT circular dated 29.5.2012.

    Further, learned author has relied upon the judgment of the Supreme Court in Ratan Melting. If it has been correctly understood, in Ratan Melting the issue was whether the circular issued by the Government gets primacy over the judgment of the Supreme Court . It was held that the circular cannot override the law declared by the Supreme Court since such law is binding by virtue of Article 141 of the Constitution. The Government’s approach to support this proposition before the Supreme Court cannot be faulted. Similarly, is the position as regards the High Court since High Court being a constitutional court exercises power of judicial review which has been held to be part of basic structure of the Constitution. Therefore, the judgment in the case of Ratan Melting cannot be pressed into service to argue that the circular dated 29.5.2012 is invalid or unenforceable. As seen from the opening part of para 6 of the judgment extracted by the learned author, even in Ratan Melting case, the Supreme Court has held that Circulars and instructions issued by the Board were binding in law on the authorities under the statutes.

    As a matter of policy, it has been decided that the past cases shall not be re-opened. It is not that the decision not to re-open the past cases is being applied selectively. The decision is to apply uniformly So the question of violation of Right to Equality under Article 14 of the Constitution should not arise. Two categories of cases viz the cases pending before the revenue authorities on the date of enforcement of the amendment Act and those already closed form two separate and distinct classes.

  3. Appreciate your writing on the subject. The following words from SC (99ITR592) may be referred to as they suggest that even statement by FM in the form of a circular would not be any worth:

    “As a general principle of interpretation, where the words of a statute are plain, precise and unambiguous, the intention of the legislature is to be gathered from the language of the statute itself and no external evidence such as Parliamentary Debates, Reports of the Committees of the Legislature or even the statement made by the Minister on the introduction of a measure or by the framers of the Act is admissible to construe those words. It is only where a statute is not exhaustive or where its language is ambiguous, uncertain, clouded or susceptible of more than one meaning or shades of meaning, that external evidence as to the evils, if any, which the statute was intended to remedy, or of the circumstances which led to the passing of the statute may be looked into for the purpose of ascertaining the object which the legislature had in view in using the words in question.”

  4. J.P.Gupt says:

    Disagree

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