TAX FORUM: QUESTIONS & ANSWERS
Can board circulars be ignored?
Where the assessing officer gives a relief on the basis of a benevolent Circular, it may well become final with none to challenge it.
I had come across a recent decision of the Supreme Court in a central excise case where it was held that administrative Circulars can have no effect on interpretation of law laid down by the Court and that the decision of the Supreme Court or High Court would have the effect of nullifying Circulars making no exception for benevolent Circulars. Since its judgment is rendered by a Bench of Five Judges, it is bound to be relied upon by revenue against its own interpretations enjoined in its Circular, which has been acted upon in a number of cases. Is my apprehension justified?
If the assessing officers have the option either to go by the Circular or to ignore it in the prospect of adverse court ruling, there will be no equality before law. Where the assessing officer accepts administrative instruction and gives a relief on the basis of a benevolent Circular, it may well become final with none to challenge it. The decision referred by the reader in CCE v Ratan Melting and Wire Industries (2008) 14 DTR (SC) 324 referred by the Bench of five Judges was in pursuance of a reference made by a Bench of three Judges in CCE v Dhiren Chemical Industries (2002) 2 SCC 127, where the Bench doubted the correctness of the conclusion overruling its earlier decision in CCE v Usha Martin Industries (1997) 7 SCC 47, which has upheld the supremacy of the interpretation of the Court over Circulars. In an odd situation, where revenue seeks to question its own Circulars as to its correctness in a case where a relief was granted under a Circular, the argument was that relief could be granted only by notification and not Circulars. It was pointed out on behalf of the taxpayer that it was not its case that the Board Circular is binding on the Courts, but the submission was that it was binding on revenue authorities functioning under the Board. It was also pointed out that revenue cannot file an appeal against a decision following its own Circulars.
The Supreme Court in a Five Member decision in Ratan Melting and Wire Industries’ case (supra) in a short judgment ruled that the Circulars are merely understanding of the interpretation of the administration and that the Board being executive authority cannot declare the meaning of the statute.
The decision of this Constitution Bench of Five Judges has generally dealt with the issue of administrative Circulars vis-a-vis the Court decisions, when there is variation between them, without making any difference between benevolent and other Circulars. The decision may well create a situation where the clarifications so far issued may well become a nullity. Audit may well question the orders of the assessing officers following the Circulars in the view that the Board cannot interpret the law. Circulars are often based on State policy. The Supreme Court has consistently declined to interfere with tax measures based on State policy. A situation where assessing officers question the validity of Circulars of the Board it would make a mockery of its position as a body administering the law. There can be no administration, if it cannot issue instructions, where its officers or taxpayers would need guidance.
The Courts by and large have followed Coke’s proposition of law known as “contemporanea expositio” expressed in Maxwells’ “Interpretation of Statutes” that “It is obvious that the language of a statute must be understood in the sense in which it was understood when it was passed by those who lived in or near the time, when it was passed, may reasonably be supposed to be better acquainted than their descendants with the circumstances to which it had relation, as well as with the sense then attached to legislative expressions”.
Obligation to follow benevolent Circulars was recognised in Indian Law in K. P. Varghese v ITO (1981) 131 ITR 597 (SC) and Dunlop India v Union of India AIR 1977 SC 597 in income-tax and central excise cases respectively. But in another central excise case in J. K. Steel Ltd. v Union of India AIR 1970 SC 1173, it was held that the principle of contemporanea expositio will be applicable only in interpretation of “ancient acts”. But there are number of decisions making a distinction between benevolent Circulars which are binding on the administration as was held in Navnit Lal C. Javeri v K.K. Sen, AAC (1965) 56 ITR 198 (SC) and Ellerman Lines Ltd. v CIT (1971) 82 ITR 913 in an income-tax case. The Supreme Court in State of Tamil Nadu v Mahi Traders (1989) 73 STC 228 held that contemporary Circulars issued by the tax administration, which is conversant with the needs of the statute is equipped to give exposition of tax provisions. There had been some dissenting judgments as in Kerala Financial Corporation v CIT (1994) 210 ITR 129 (SC). But these have been practically superseded in UCO Bank v CIT (1999) 237 ITR 889 (SC) on the ground that the Circular issued under Sec. 119 of the Act would require to be followed. In Pradip J. Mehta v CIT (2008) 300 ITR 231 (SC), the Supreme Court, after citing a number of decisions, chose to follow, inter alia, the decision in Collector of Central Excise v Dhiren Chemical Industries (2002) 126 STC 127 (SC), which is now understood differently by the Five Member Bench in Ratan Melting and Wire Industries’ case (supra).
In a customs case also, the need for the authorities to follow Circulars of the Board was accepted in Commissioner of Customs v Indian Oil Corporation Ltd. (2004) 267 ITR 272 (SC). In Union of India v Azadi Bachao Andolan (2003) 263 ITR 706 (SC) in an income-tax case it was held that a Board Circular giving clarification falls within the parameters of the powers exercisable under Sec. 119 of the Income-tax Act. It added: “The Circular does not in any way crib, cabin or confine the powers of the assessing officers with regard to any particular assessment; it merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the Indo-Mauritius Double Taxation Avoidance Convention, 1983”.
In this context, one may refer to the power of the Central Board of Direct Taxes to give instructions recognised under Sec. 119 to issue such orders, instruction and directions as long as it is not meant for any particular case to be decided in a particular manner or in interfering with the discretion vested by law. It may consist of general or special orders laying down “guidelines, principles or procedures” and may publish it and circulate them.
The Board, it is hoped, would ensure that its officers do not question its instructions and thereby undermine discipline, whether such Circulars are benevolent or otherwise, so that benevolent Circulars would not get challenged in the Courts.
S. RAJARATNAM
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