Facts

Assessee challenged the constitutional validity of sections 2(6A)(e) and 12(1B) which were introduced by the Finance Act, 1955 w.e.f. 1st April 1955. Section 2(6A)(e) defined dividend to include any advance or loan by a company  not being a company in which public are substantially interested to its shareholder. Section 12(1B) was inserted to provide that any advance or loan which would have been treated as dividend under section 2(6A)(e) in any year  prior to A. Y. 1955-56 if that clause was in force in that year, shall be treated as a dividend received in A. Y. 1955–56 if such loan or advance remained outstanding  as on 1st April 1955. At the time of introduction of these amendments in Parliament, the Hon’ble Minister for Revenue and Civil Expenditure gave an assurance that outstanding loans and advances which would be otherwise liable    to be taxed as dividends in A. Y. 1955-56 would not be subjected to tax if it was shown that they had been genuinely refunded to the respective companies before 30th June 1955. Government felt that the same was necessary as the operation       of section 12(1B) would otherwise lead to extreme hardships by covering within   its ambit the aggregate of all outstanding loans of past years. Circular No. 20 (XXI—6)/55 was issued by the Central Board of Revenue on the 10th May 1955      so as to honour the assurance given by the Minister in Parliament.

Issue

Whether a circular issued by the CBDT is binding on the revenue?

Held

Supreme Court held that the aforesaid circular issued by  the Board would    be binding on all officers and persons employed in the execution of the Act. Supreme Court observed that the circular clarified that it was likely that some companies might have advanced loans to their shareholders as a result of genuine transactions of loans and the provision was not intended to affect such transactions. Therefore, past transactions which would normally have attracted the stringent provisions of section 12(1B) were substantially granted exemption from the operation of the said provisions  if  the  past  loans  were genuinely refunded to the companies. Such circular issued by the CBDT would be binding on the revenue authorities. (AY.1956-57) (CA No. 45 of 1964 dt. 28-10-1964)

Editorial : Supreme Court in Ellerman Lines Ltd v.  CIT (1971) 82 ITR 913 (SC),  K.  P.  Varghese  v.  ITO  (1981) 131  ITR  597  (SC)/(1981) 24  CTR  (SC) 358, UCO

Bank v. CIT (1999) 237 ITR 889 (SC), Paper  Products Ltd  v.  CCE  (2001) 247 ITR 128 (SC)/(2001) 165 CTR (SC) 693, Commissioner of Customs v. Indian Oil Corporation  Ltd.  & Anr. (2004)  267 ITR 272 (SC)/(2004)  187 CTR (SC) 297/(2004)

136 Taxman 491 (SC), UOI v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)/

(2003) 132 Taxman 373 (SC)/(2003) 184 CTR 450 (SC) have upheld the binding nature of CBDT Circulars/Instructions which are beneficial to the assessee even if they are not in accordance with the correct interpretation of the section.

In Hindustan Aeronautics Ltd. v. CIT (2000) 243 ITR 808 (SC)/(2000) 110 Taxman 311 (SC)/(2000) 160 CTR (SC) 524, CCE v. Ratan Melting & Wire Industries  (2008)  220 CTR (SC) 98/(2008) 14 DTR (SC) 324,  CIT v.  Hero  Cycles P.

Ltd. (1997) 228 ITR 463 (SC)/(1997) 142 CTR (SC) 122 Supreme Court held that though a CBDT Circular is binding on the authorities under the Act but when the Supreme Court or the High Court has declared the law on a question the same  shall be binding and not the circular which is contrary to the view expressed      in the decision of the Supreme Court or the High Court. In CIT v. Anjum M.H. Ghaswala (2001) 252 ITR 1 (SC)/(2001) 119 Taxman 352 (SC)/(2001) 171 CTR

(SC) 1 the Court held that a clarificatory note or press release issued by the CBDT does not have statutory force like circulars issued bythe Board under section 119.

“The good man is the friend of all living things.”

– Mahatma Gandhi