Revenue can’t disown its’ own circulars!

Shri. Kapil Goel

Revenue can’t disown its’ own circulars!

CA Kapil Goel

The author argues that the recent judgement of the Constitution Bench of the Supreme Court in CCE vs. Ratan Melting on the binding nature of Circulars requires reconsideration. He makes good his submission by extensive reference to case law and points out the anamolies which will arise if the judgement is allowed to stand.

1. Importance of Subject

In process of legislative drafting of new laws and making changes in earlier laws (for example in Income Tax Act on annual basis, changes are made through Finance Act), it is quite natural that number of areas may require legitimate clarification in the form of delegated/subordinate legislation viz. circulars/instructions etc. In fact, in areas where legislation is at nascent stage (for example , fringe benefit tax in income tax), there may be number of grey areas in parliamentary legislation where for benefit of masses, avoiding litigation and creating certainty etc, clarifications at the end of legislature may be desired. In particular context of annual changes made by Finance Act, we have seen for past more than past 50 years, CBDT (in area of Income Tax- Apex Admin Body) or for that matter CBEC (in area of customs, excise, service tax – Apex Admin Body) through Finance Ministry clarifies by way of corresponding Memorandum Circular (refer, the legislative intent and interpretation (many times) behind the changes made. This executive understanding of changes as introduced by Finance Act act as a major source of clarification, in so far as, subsequent conduct by tax payers is concerned.

In aforesaid connection, an attempt has been made by the author in this article to highlight whether revenue authorities are allowed to challenge their own understanding (Circulars etc), in light of latest Constitution Bench SC ruling in Ratan Melting case.

2. Importance of CBDT Circulars in Income Tax Law

In aforesaid connection, it has been observed that courts have interpreted the statutory provisions on basis of executive understanding codified in circulars etc and consequential benefits have been given to taxpayers. In context of income tax law, some of the areas where courts while relying in extenso have given benefits to taxpayers are tabulated below:

Provision of the Income Tax Act (Act)

Relevant CBDT Circular

Case Law relying on CBDT understanding

Section 9(1)(i) Business Connection and Attribution of Income

Indo Mauritius DTAA

Circular No. 23 of 1969 and 786 of 2000

Circular No. 789 of 2003

Latest BHC ruling in SET Satellite 218 CTR 452

SC ruling in Morgan Stanley 292 ITR 416

Del ITAT in Galileo etc 114 TTJ 289

SC ruling UOI versus Azadi Bachao Andolan 263 ITR 706

Section 9(1)(vii) Fees For Technical Services

Circular No. 202 of 1976 scope of “fees for technical services” etc

Ahd ITAT in Gujarat Electricity Board 82 TTJ 456

Section 32 Depreciation

Circular No. 9 of 1943 (depreciation in hire purchase scenario)

Circular No 2 of 2001 (AS-19 of ICAI not applicable to tax proceedings)

Mum bench of ITAT in Orix Solutions ITA No. 2954/Mum/2004, Asstt. Year: 1998-99 (lex reported) and Bang ITAT in BPL Sanyo 290 ITR 80(AT)

Section 35-D Preliminary Expenses

Circular No. 56 of 1971 (debenture issue expenses to be allowed in full u/s 37 vide SC ruling India Cements)

DHC in Thirani Chemicals 290 ITR 196

Section 37 regarding Foreign Travel Expenses

Circular No. 4 of 1950
(immediate benefit to business in year of travel is not precondition for expense allowability)

Del ITAT in Shar Lee Filtorties and Del ITAT in Amtek Auto

Section 40A(2)(b) Payments to relatives

Circular No 6-P of 1968 (onus on revenue to prove that expense is not bonafide) 

Del ITAT in Mittal Steel and Del ITAT in Shar Lee Filtorties

Fringe Benefit Tax

Circular No 8 of 2005 containing answers on number of issues and Latest Circular for FBT on ESOP’s etc No. 9 of 2007

SC ruling in R&B Falcon 301 ITR 309

Tax Withholding

Latest Circular No. 4 of 2008 and 1 of 2008 resp. dealing with TDS on service tax on rentals and TDS on cold storage charges etc

Circular No. 275 of 1997 (no tax demand from tax deductor if tax stands paid by deductee)

Circular No 786 of 2000 stating no requirement of TDS u/s 195 in respect of  commission agent services rendered outside India

SC in Hindustan Coca Cola 293 ITR 226

Hyd ITAT in Avanthi leather, Del ITAT in AB Raddission Hotel

3. Whether revenue can argue against their own Circulars: Income Tax Scenario

In view of above, it is manifestly clear that CBDT has been clarifying the grey areas in including providing requisite legal interpretation, which has subsequently been applied by courts, particularly when it comes to benefit of taxpayers. In this connection, in income tax context, hitherto, it has been the view of courts that revenue cannot argue against the lines of their circulars etc which are beneficial to taxpayers. Some of the relevant decisions in this connection are tabulated below:

Case Law

Ratio (Relevant Extract)

Per J&K HC in 248 ITR 744:

“Moreover, in the instant case, the controversy whether the activity of the assessee-forest lessee amounts to manufacture of articles also stands concluded by the circulars of the Board set out above. Section 119(1) of the Act in clear terms provides that all authorities employed in the execution of the Act are duty bound to observe and follow the orders, instructions and directions of the Board. It is well settled that the circulars issued by the Board are binding on the officers and persons employed in the execution of the Act, more so the circulars beneficial to the assessee which tone down the rigour of the law. The benefit of such circulars is available to the assessee even though the circulars might have deviated from the strict tenor of the statutory provision and mitigated the rigour of the law. In view of the binding nature of the circulars, it is not open to the Revenue to raise a contention which is contrary to the circulars and instructions issued by the Board. In that view of the matter also, the assessee in the present case is entitled to relief under section 80J of the Act.”

Per Justice SH Kapadia in BHC in 249 ITR 612

“It is well settled by a catena of decisions that benevolent circulars are binding on the Department, even if they are based on deviations. It is equally well settled that interpretations given by the CBDT in favour of the assessee are binding on the Department. That, the Department is estopped from raising any argument contrary to the interpretation placed by the CBDT. In the circumstances, we hold that the Department is estopped from now raising an argument contrary to the circular dated October 11, 1991.”

Per Justice VC Daga in BHC in 254 ITR 565

“It appears that despite about circular, the Revenue has chosen to file present appeal knowing fully well that the corridors of the Courts are flooded with pending litigations. The presentation of this appeal is quite contrary to the instruction issued in the circular which is binding on the Revenue.”

Per Mad HC in Mahalingam 127 Taxman 534 :.

“That circular being one which is beneficial to the assessee, is also binding on the department and the stand taken by the department inconsistent with the circular cannot be sustained.”

Per SC in JB Boda 223 ITR 271:

“The said circular which seeks to declare and clarity the real scope and impact of section 80-O of the Act, is certainly binding on the respondent which issued it.”

Per SC in 196 ITR 216:

“We, however, consider it necessary to observe that the circulars issued by the Department are normally meant to be followed and accepted by the authorities. We do not find any justification for the officers not following it nor was the Department justified in pursuing the matter further in this court.”

4. Recent SC ruling in R&B Falcon on Executive Estoppel

In continuation of above, there has been latest SC ruling in R&B Flacon (supra) where in context of FBT (Fringe Benefit Tax) CBDT Circular No. 8 of 2005 etc, it has been interalia held by SC (Per Justice S B Sinha) that:

“CBDT has the requisite jurisdiction to interpret the provisions of Income-tax Act. The interpretation of CBDT being in the realm of executive construction, should ordinarily be held to be binding, save and except where it violates any provisions of law or is contrary to any judgment rendered by the courts. The reason for giving effect to such executive construction is not only same as contemporaneous which would come within the purview of the maxim temporania caste pesto, even in certain situation a representation made by an authority like Minister presenting the Bill before the Parliament may also be found bound thereby.

23. Rules of executive construction in a situation of this nature may also be applied. Where a representation is made by the maker of legislation at the time of introduction of the Bill or construction thereupon is put by the executive upon its coming into force, the same carries a great weight.

24. In this regard, we may refer to the decision of the House of Lords in the matter of R.V. National Asylum Support Service [(2002) 1 W.L.R.2956] and its interpretation of the decision in Pepper v. Hart [(1993) A.C. 593]. on the question of ‘executive estoppel’. In the former decision, Lord Steyn stated:-
“If exceptionally there is found in the Explanatory Notes a clear assurance by the executive to Parliament about the meaning of a clause, or the circumstances in which a power will or will not be used, that assurance may in principle be admitted against the executive in proceedings in which the executive places a contrary contention before a court.”

25. A similar interpretation was rendered by Lord Hope of Craighead in Wilson v. First County Trust Ltd., [2004] 1 A.C. 816, wherein it was stated:-

“As I understand it [Pepper v. Hart], it recognized a limited exception to the general rule that resort to ‘Hansard’ was inadmissible. Its purpose is to prevent the Executive seeking to place a meaning on words used in legislation which is different from that which ministers attributed to whose words when promoting the legislation in Parliament”

For a detailed analysis of the rule of executive estoppel useful reference may be to the article authored by Francis Bennion entitled “Executive Estoppel: Pepper v. Hart revisited”, published in Public Law, Spring 2007, pg. 1 which throws a new light on the subject matter.

26. We may notice a decision of this Court in Sedco Forex International Drill. Inc. and Ors. v. Commissioner of Income Tax, Dehradun and Anr. [(2005) 12 SCC 717], the question which arose therein was as to the salary paid to the employees of UK National Services for field breaks outside India would be subjected to tax under Section 9(1)(ii) and explanation appended thereto as inserted in 1983 w.e.f 1.4.1979. Appellant therein entered into agreements which are executed in the United Kingdom with each of the said employees who were residents of the said country. This Court, upon noticing the explanation appended to Section 9(1)(ii), as regards its retrospective operation, held:

“16. The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under Section 119 of the Act, nevertheless affords a reasonable construction of it, and there is no reason why we should not adopt it.”

5 Constitution Bench in Ratan Melting case

In aforesaid background, comes the latest 5 Member Constitution Bench SC ruling in Ratan Melting interalia holding that:

“As noted in the order of reference the correct position vis-`-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-`-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”

Although it has been settled that board circulars are not binding on assessees and courts, SC aforesaid observations expanding the “right of appeal” to question board circulars to revenue, on the pretext that otherwise there would be no scope for adjudication by SC/HC, in humble and respectful opinion of the author, suffers from more than one infirmity:

a) Acting Dehors the terms of Reference: When analysed in light of underlying Larger Bench ruling in Ratan Menting case (supra) making reference to instant Constitution Bench, it becomes manifest that only issue which was called upon to be decided by Constitution Bench was:

“It appears to us that the law declared by this Court is binding on the Revenue/Department and once the position in law is declared by this Court, the contrary view expressed in the circular should per force lose its validity and becomes non est. Though the view expressed in Kalyani’s case (supra), and our view about invalidation might clarify the observations in para 11 of Dhiren Chemical’s case (supra), we feel that the earlier judgment in Dhiren Chemical’s case (supra), being by a Bench of five Judges, it would be appropriate for a bench of similar strength to clarify the position. In the circumstances, we refer the matter to a larger bench of five Hon’ble Judges…” and hence, (respectfully submitted) Constitution bench in instant ruling by pulling the reference thread a one step ahead by making revenue authorities eligible to challenge their own circulars etc has erred in doing so, being extravagant in their observations.

b) Right of appeal has been held by SC in Ashoka Engg case 194 ITR 546 to be statutory in nature and not inherent in nature that is unless specifically provided in the statute itself, no appeal can be preferred against the decision and hence SC instant ruling, by envisaging a valuable right for revenue to “challenge its own circulars” has apparently landed in making contradiction with its former ruling on the subject. .

c) Prospective versus Retrospective Withdrawal of Circulars: As SC in the case of State Bank of Travancore 158 ITR 102 and Per BHC ruling in the case reported at 249 ITR 612 (supra), have concluded that benevolent circulars cannot be withdrawn retrospectively, instant Constitution bench ruling by holding revenue can challenge its circulars in courts, has indirectly permitted retrospective withdrawal of Circular, as any court decision to the same will be retrospective in effect (refer latest SC ruling in Saurasthtra Stock Exchange), which is not in accordance with earlier SC ruling on the subject. On the contrary, in the opinion of the author, in overall fitness of the things and for complete justice, revenue could have been directed by Constitution bench to withdraw its circular (prospectively) operating contrary to SC ruling, instead of giving open license to revenue to challenge its own circulars.

d) Applicability of Doctrine of Estoppel vis a vis views expressed in following rulings (not considered in instant Constitution Bench ruling) : Per SC in Motilal PadamPat 118 ITR 326:

“”The law may, therefore, now be taken to be settled as a result of this decision, that where the government makes a promise knowing or intending that it would be acted on by the promisee and, in fact, the promisee, acting in reliance on it, alters his position, the Government would be held bound by the promise and the promise would be enforceable against the Government at the instance of the promisee, notwithstanding that there is no consideration for the promise and the promise is not recorded in the form of a formal contract as required by Article 299 of the Constitution.” & SC in Godphrey Philips 158 ITR 574 : “”There can, therefore, be no doubt that the doctrine of promissory estoppel is applicable against the government in the exercise of its governmental, public or executive functions and the doctrine of executive necessity or freedom of future executive action cannot be invoked to defeat the applicability of the doctrine of promissory estoppel.”

e) To say that courts (HC/SC etc) taking cognizance of board circulars, on their own (suo motto) can hold against the lines of board Circulars, vide their plenary powers to do justice, highlighting correct statutory position, is correct but to say that revenue has a valuable implied right to challenge their own circulars/understanding (specially which are beneficial to taxpayers) is against the spirit of “contermporania expositio (exposition given by contemporaneous authority needs to be given due weightage in statutory interpretation also refer SC in KP Varghese 131 ITR 597) ” and legal principle that “no one should be allowed to take advantage of his own wrong”.

6. Conclusion

Further, in case revenue is allowed to argue against the lines of their own circulars which are beneficial to assessee, specifically in context of income tax law (in light of above table highlighting the case laws where CBDT Circulars have been extensively relied):

a. It will become difficult for tax payers to make their business decisions of investment etc placing reliance on existing CBDT understanding as codified in their circulars. For example, a foreign tax payer willing to invest in India, to make a well informed investment decision, will not be able to place reliance on CBDT Circular No 23 of 1969 or No. 786 of 2000 (supposedly concerning his business) to calculate its potential tax burden in India and hence may choose not to make Indian investment as revenue has been allowed by Indian Supreme Court to challenge/back out from their own understanding.

b. The Memorandum Circulars issued by revenue in clarification of annual Finance Act, may loose their efficacy, especially wherever something beneficial is interpreted for taxpayer, as revenue may next day challenge the same in courts as allowed. Specially in area of FBT where CBDT has clarified in extenso the legal provisions of section 115WB etc and in area of tax withholding where a taxpayer do not withhold tax relying on CBDT Circular, it will be really draconian for a tax payer, if revenue is allowed to usurp or go against the position clarified.

In view of concerns highlighted above, it will be better if either SC itself comes forward in reconsidering its own decision, or Government of India comes forward for making suitable clarificatory amendment so as to confirm requisite legal base to board understanding/circular etc, in the statute.

2 comments on “Revenue can’t disown its’ own circulars!
  1. Kirit Dedhia says:

    A very educative and well researched article. I congratulate Kapil.

  2. CA Sandeep Nagar says:

    a very good publication about circulars and interpretation of judgements. fabulous

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