Death of a Circular

Circular No. 23 dated 23rd July 1969 held the fort valiantly for 40 years but in the end met an unceremonious death.

The Circular, issued in an era where fair play was still respected, was a masterful analysis of section 9 which provided a tax liability on non-residents from income accruing or arising through or from business connection in India.

The Circular was essentially a series of illustrative instances and guidelines designed to guide befuddled taxpayers from the labyrinth of tax laws. Written in a simple and easy-to-understand style, it told you in clear terms whether your transaction was taxable or not and the reasons for the same.

The Circular had its share of admirers. Picked up for scrutiny … minutely examined … dissected … on a number of occasions …. by the finest legal brains … it still held up and came up on top! There is a long list of judgements which endorsed the correctness of the interpretation of section 9 made in the Circular … Morgan Stanley 292 ITR 416 (SC), SET Satellite (Singapore) 11 DTR 313 (Bom) / 173 TM 475, Gulf Oil (Great Britain) Ltd. 108 ITR 874 (Bom.) and Amadeus Global 113 TTJ 767 (Del.) … the list goes on.

In the end the reason for the withdrawal is very tame and unconvincing: “…interpretation of the Circular by some of the taxpayers to claim relief is not in accordance with the provisions of section 9 of the Income-tax Act, 1961 or the intention behind the issuance of the Circular.”

Since when have Circulars started to get withdrawn because of the taxpayers’ interpretation?

Meanwhile, the battle as to whether benevolent Circulars issued by the Board are binding on the Revenue even if they are contrary to the law rages on. The first salvo in favour of the assessees was fired several decades ago in Navnit Lal C. Javeri 56 ITR 198 (SC) and Ellerman Lines Ltd 82 ITR 913 (SC)where it was held that a circular in favour of the assessee was binding on the department even if it was contrary to the statutory provision.

A discordant note was struck in State Bank of Travancore 158 ITR 102 (SC) that “circulars cannot detract from the Act” though this was fortunately promptly reversed in UCO Bank 237 ITR 889 (SC)

A new twist was given in Hindustan Aeronautics Ltd 110 TM 311 (SC) that while circulars or instructions given by the board were binding in law on the authorities under the Act this was not the position if the Supreme Court or the High Court had declared the law. It was held that it not 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 the High Court.

Even on this new angle, a discordant note was expressed in CCE vs Dhiren Chemical Industries 139 ELT 3 that even though the view expressed by the court was against the assessee the view expressed by the CBEC had to prevail because that was in favour of the assessee.

Ultimately, a five-judge bench held in Rattan Melting & Wire Industries 220 CTR SC 98 came down heavily on the assessees by stating that “a circular which is contrary to the statutory provisions has really no existence in law”.

Of course, some experts are severely critical of the judgement and urge that it should be reconsidered.

Meanwhile, all may not be lost yet for the assessees. In Oman International Bank 313 ITR 128 (Bom.) it was held that though the Circulars issued by the CBDT were not binding on the court, it was binding on the authorities and while it was for the Court to read the section in its proper context, while so reading the Court will bear in mind the circular issued by the CBDT. The Board’s interpretation of a statutory provision in favour of the assessee has to be borne in mind, the Court ruled.

Of course, whether there will at all be any Circulars favourable to the assessee under the present regime is a million dollar question!!


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