Why The FM’s & CBDT’s Promise Not To Reopen Cases Despite Retro Law Is Lawful

Recently, had an occasion to read the Article “FM’s & CBDT’s Promise Not To Reopen Cases Despite Retro Law Is Illegal” written by Sh. Tarun Jain, Advocate, Supreme Court published in ITATONLINE wherein it has been advocated to the effect that the aforesaid circular and statement of FM have no legal sanctity and therefore not binding on the quasi judicial tax authorities. This view has been expressed on the basis of certain judicial pronouncement. According to him, it is the settled legal position that such circulars are not binding on tax authorities and consequently, the AO can reopen the assessments on the basis of retrospective amendments made by Finance Act 2012 even in cases falling within the ambit of the above circular. With all humility and due respect to the Author, it is humbly submitted that the said circular is valid and binding on tax authorities for the reasons mentioned below:

Under the I.T.Act 1961 (the Act), the circulars are issued u/s 119 of the Act. The relevant portion of the section is being reproduced for the benefit of the readers:-

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 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 sections 115P, 115S, 115WD, 115WE, 115WF, 115WG, 115WH, 115WJ, 115WK, 139, 143, 144, 147, 148, 154, 155, 158BFA, sub-section (1A) of section 201, sections 210, 211, 234A, 234B, 234C, 271 and 273 or otherwise), general or special orders in respect of any class of incomes or fringe benefits 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) —–
(c) —–

It is clear from the above provisions that legal sanctity is attached to the circulars or instructions issued under this section and consequently, the tax authorities are bound to follow such circulars or instructions issued under this section in letter and sprit. If the contention of the author of the said article is to be accepted then section 119 would become redundant. The scope of this section has been examined by the highest court of law in various cases discussed hereafter.

Firstly, it would be appropriate to refer to decision of the Constitution Bench of the hon’ble Supreme Court in the case of Navnit Lal Jhaveri-vs- K.K.Sen, IAC 56 ITR 198 SC where circular issued under similar provisions of Indian Income Tax Act 1922 (Act of 1922) was the subject matter of consideration. In that case, Section 2(6A)(e) and section 12(1B) were introduced in the Act of 1922 by the Finance Act 15 of 1955, which came into force on April 1, 1955. When these amendments were introduced in Parliament, the Hon’ble Minister for Revenue and Civil Expenditure gave an assurance that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment year 1955-56 will not be subjected to tax if it is shown that they had genuinely refunded the loan amounts to the respective companies before the 30th June, 1955. It was realised by the Government that unless such a step was taken, the operation of section 12(1B) would lead to extreme hardship because it would have covered the aggregate of all outstanding loans of past years and that may have imposed an unreasonably high liability on the respective shareholders to whom the loans might have been advanced. In order that the assurance given by the Minister in Parliament should be carried out, a circular [No. 20(XXI-6)/55] was issued by the Central Board of Revenue on the 10th May, 1955 pointing out to all Income-tax 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 officers, therefore, were asked to intimate to all the companies that if the loans were repaid before June 30, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may had been advanced despite the new section.

The constitution bench of the apex court observed as under:

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 officers were, therefore, asked to intimate to all the companies that if the loans were repaid before the 30th June, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced. In other words, past transactions which would normally have attracted the stringent provisions of section 12(1B) as it was introduced in 1955, were substantially granted exemption from the operation of the said provisions 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 section 12(1B). Section 12(1B) would, therefore, normally apply to loans granted by the companies to their respective shareholders with full notice of the provisions prescribed by it.

It is clear from the above judgment that circumstances for issuing circular dated 29.5.12 are similar to the circumstances for issuing the circular in the case before the apex court. In both the situations,(i) the Parliament amended the law which created a fresh liability upon various assessees on account of deemed provisions,(ii) the concerned Minister had made assurance in the Parliament to the effect that a circular shall be issued in order to avoid genuine hardship to various assessees caused to them on account of proposed legislation and (iii) a circular has/had been issued in accordance with the assurance. The constitution bench of the court had upheld the validity of the circular and declared that it was binding on the tax authorities. Therefore, it would be futile to contend that the impugned circular is not binding on the tax authorities.

The above decision was followed by the apex court in the case of Ellerman Lines Ltd-vs-CIT 82 ITR 913. The relevant observations are noteworthy and reproduced below:-

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:

“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.

The above observations are very important in as much as the circulars are binding even when deviated from the provisions of the Act.

The next decision of the apex court is K.P.Varghese-vs- I.T.O. 131 ITR 597 SC. After considering the above decisions, the court made the following relevant observations:

“These two circulars of the CBDT are, as we shall presently point out, binding on the tax department in administering or executing the provision enacted in sub-s. (2),…”

“The two circulars of the CBDT to which we have just referred are legally binding on the revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of subs. (2) and they depart or deviate from such construction. It is now well settled as a result of two decisions of this court, one in Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 and the other in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 that circulars issued by the CBDT under s. 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 above decision, though rendered by a division bench, has been approved by the constitution bench in C.B.Gautam-vs-UOI 199 ITR 530 SC.

The last decision is in case of UCO Bank-vs-CIT 237 ITR 889 SC. The following question was referred to the high court for adjudication:

“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in cancelling the Commissioner of Income-tax’s order under section 263 of the Income-tax Act, holding that when the assessment was completed, the only paper available was the Board’s circular dated October 9, 1984, and therefore, it cannot be said that the Inspecting Assistant Commissioner’s order of assessment in not taxing the interest suspense of Rs. 49,15,435 in view of that circular was erroneous and prejudicial to the interests of the Revenue?”

The High Court answered the reference in favour of the Revenue and the assessee challenged the same before the apex court. The court decided the issue as under:

“What is the status of these circulars ? Section 119(1) of the Income-tax Act, 1961, provides that, “the Central Board of Direct Taxes 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 in the exercise of his appellate functions”. Under sub-section (2) of section 119, without prejudice to the generality of the Board’s power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time 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 in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or -in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities.”

All the above decisions including the decision delivered by constitution bench point to only one conclusion that circulars issued by the CBDT are binding on the tax authorities ment for execution of the Act even though such circulars tone down the rigour of law or deviate from or relax the provisions of the Act. Further such circulars are not binding on the assessee. It is only the benevolent circulars which are binding on the authorities.

Now, would discuss as to how the view expressed by the ld. author, Tarun Jain, is erroneous. The reasons are given below:

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. Therefore, the case law referred to by the ld. Author on these aspects need no comments.

The issue for discussion is whether the impugned circular issued by the board on 29.5.12 is binding or not on the tax authorities?

The ld. Author has relied on the following decisions in support of the preposition that the impugned circular is not binding on the income tax authorities and consequently, the AO would be justified in reopening the assessment on the basis of retrospective amendments:-

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); CCE v. Ratan Melting and Wire Industries Ltd. (2008) 220 CTR 98 (SC) (Constitutional Bench)

At the outset, it may be stated that in none of the cases, the issue relating to the binding nature of circulars issued under the Income Tax Act was the subject matter of consideration since all these decisions were rendered under the Excise Act. The powers conferred u/s 119 of I.T.Act are much wider than the powers conferred u/s 37B of the Central Excise Act. For reference, both the provisions are quoted below even at the cost of repetition:-

Section 37B–‘Instructions to Central Excise Officers. – The Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963), may, if it considers it necessary or expedient so to do for the purpose of uniformity in the classification of excisable goods or with respect to levy of duties of excise on such goods, issue such orders, instructions and directions to the Central Excise Officers as it may deem fit, and such officers and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the said Board:

Provided that no such orders, instructions or directions shall be issued –

so as to require any Central Excise (a) Officer to make a particular assessment or to dispose off a particular case in a particular manner; or

so as to interfere with the discretion of (b) the Commissioner of Central Excise (Appeals) in the exercise of his appellate functions.’

——————————————————————

Section 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 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 sections 115P, 115S, 115WD, 115WE, 115WF, 115WG, 115WH, 115WJ, 115WK, 139, 143, 144, 147, 148, 154, 155, 158BFA, sub-section (1A) of section 201, sections 210, 211, 234A, 234B, 234C, 271 and 273 or otherwise), general or special orders in respect of any class of incomes or fringe benefits 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 any income-tax authority, not being a Commissioner (Appeals) 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;

(c) 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 for reasons to be specified therein, relax any requirement contained in any of the provisions of Chapter IV or Chapter VI-A, where the assessee has failed to comply with any requirement specified in such provision for claiming deduction thereunder, subject to the following conditions, namely:-

(i) the default in complying with such requirement was due to circumstances beyond the control of the assessee; and

(ii) the assessee has complied with such requirement before the completion of assessment in relation to the previous year in which such deduction is claimed:

Provided that the Central Government shall cause every order issued under this clause to be laid before each House of Parliament.

The comparison of both the provisions reveals that the powers conferred on CBDT u/s 119 are much wider than the powers conferred CBEC u/s 37B. Specific powers have been conferred on CBDT even to tone down the rigour of law and deviate from the provisions of law in order to mitigate the hardships caused to the taxpayer due to any amendment in law as held by the apex court in various cases mentioned earlier and therefore need not be repeated. Such specific powers are not conferred on CBEC u/s 37B. Accordingly, it is humbly submitted that decisions rendered with reference to the powers of Board u/s 119 of I.T.Act only would be relevant in deciding such issue. Therefore, the decisions rendered with reference to the provisions of Excise Act cannot be applied to the circulars issued under the provisions of the I T Act 1961.

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. Thus the impugned circular is in consonance with the provisions of section 119 of the Act as well as the decisions of the Apex court mentioned earlier.

Apart from the submission that decisions rendered by the courts under Excise Act are not relevant in considering the issue with reference to Income tax Act, it is humbly submitted that the decisions relied upon by the ld. author are also distinguishable.

In the case CCE v. Ratan Melting and Wire Industries Ltd. (2008) 220 CTR 98 (SC) (Constitutional Bench), the court observed as under:-

“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.”

At this stage it would be appropriate to mention that in this case, bench of three judges found that there was a difference of opinion between two benches of equal strength on the issue of applicability of circular on the basis of some observations made by constitution bench in the case of Dhiren Chemical Industries 172 CTR 670. Accordingly the matter was referred to the constitution bench. In the case of Dhiren Chemical Industries 172 CTR 670, the apex court was concerned with the interpretation of words “on which the appropriate amount of duty of excise has already been paid” used in the notification. The court interpreted these words and held the issue against the assessee. However, following observations were made:-

“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.”

The difference of opinion mentioned above was on account of the above observations. Such difference of opinion was resolved by the constitution bench in the case of Ratan Melting (supra). Thus, this decision is an authority for the preposition that where a particular provision is interpreted by the court, the circular, contrary to such interpretation, cannot be given effect to.

Again in the case of Faridabad Iron & Steel Traders Asso. v. Union of India 2004 (178) ELT 1099 (Del) which has been affirmed by the SC 2005 (181) ELT A68 (SC), the circular issued by CBEC was concerned with the issue of interpretation of law. The issue for consideration was-“Whether slitting of HR/CR coils of Iron and steel sheets into strips would amount to manufacture”. By issue of circular, the CBEC clarified that slitting of HR/CR coils of Iron and steel sheets into strips would amount to manufacture. The High court, after considering various decisions, held that the Board could not issue such circular u/s 37B of Central Excise Act. The other high court decisions were also concerned with the validity of circulars issued u/s 37B of central Excise Act and in consonance with the ratio laid down in above two decisions.

In all other decisions, referred to by the ld. author, the high courts were concerned with the circulars issued u/s 37B of the Central Excise Act and such decisions are in consonance with the earlier two decisions.

The essence of all such decisions is that where the interpretation of provisions of an enactment/ notifications etc are involved, it is the courts or judicial/quasi judicial authorities who can interpret the law and the executive authorities cannot issue any circular involving the interpretation of the provisions of Act. Such decisions have been rendered considering the powers conferred u/s 37B of Excise Act.

It is humbly submitted that there is no conflict between the decisions relied upon by the ld author and the decisions relied upon by me. All the decisions should be understood contextually. The validity and binding nature of the circular has to be judged with reference to the statutory powers conferred on the Board for issuing circulars. All the decisions relied upon by Mr. Jain were rendered considering the powers conferred u/s 37B of Excise Act which does not empower the board to relax or tone down the rigour of the provisions of the Act to remove the hardships caused to the tax payers. On the other hand, all the decisions referred to by me were rendered considering the provisions the provisions of section 119 of I T Act which empowers the board to issue the circulars even to relax or tone down the rigour of the provisions of the Act to remove the hardships caused to the tax payers. Perhaps, this aspect was missed by Mr. Jain.

At this stage, it would be appropriate to reproduce the impugned circular for the benefit of the readers:-

Clarification regarding reopening of completed assessments on accounts of clarificatory amendments introduced by Finance Act, 2012, in Section 2(14)/(47), 9 and 195 with retrospective effect

Letter [F.No.500/111/2009-FTD-1(Pt.)], dated 29-5-2012

The Finance Act, 2012 has introduced certain clarificatory amendments in section 2 clause (14), Section 2 clause (47), Section 9 and Section 195, of the Income Tax Act, 1961 (“Act”), with retrospective effect from 01.04.1962 or 01.04.1976, whereby meaning of various terms used in these sections have been clarified in order to remove any doubt regarding their interpretations.

2. These amendments have been introduced retrospectively in order to clarify the legislative intent and state the position of law from the date of coming into effect of these sections in the Act.

3. Doubts have been raised in various quarters about the implication of these amendments on the assessments that have already been completed and attained finality.

4. The Board, after due consideration, hereby directs that in case where assessment proceedings have been completed under section 143(3) of the Act, before the first day of April, 2012, and no notice for reassessment has been issued prior to that date; then such cases shall not be reopened under section 147/148 of the Act on account of the abovementioned clarificatory amendments introduced by the Finance Act, 2012. However, assessment or any other order which stand validated due to the said clarificatory amendments in the Finance Act, 2012 would of course be enforced.

5. This may be brought to the notice of all officers in your region immediately.

A bare reading of the above clearly reveals that it nowhere involves the interpretation of any provisions. Rather it presupposes a valid action u/s 147/148 in the absence of such circular. 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. It is also supported by the various decisions of SC including decision by constitution bench. Such circular, in my humble view, is valid and binding on the tax authorities engaged in implementing the Act.

In the end, may I submit that purpose of this article is not to hurt the feelings of any person. The only purpose is to project the correct legal position and to assist the public at large.