Board circulars are binding on the Department, even if they are wrong or against decisions of the Supreme Court

NEW DELHI, OCT 09, 2007 :IT is now an axiomatic law that Board circulars are binding on the Department, even if they are wrong or against decisions of the Supreme Court. But our Boards do not have the habit of tracking down the multitude of circulars they issue and considering whether they are relevant after the Law has been amended and the Apex Court had already ruled on the issue. In the Dhiren Chemicals case (2002-TIOL-83- SC-CX), the Supreme Court had held that if there was a Board Circular which was not in tune with the views of the Supreme Court, the Board Circular would prevail. The whole idea is that the Department should not be seen arguing that the Board was wrong – even if it is wrong, the Departmental officers should be bound by it.

So when the Law is amended or when the Revenue gets a favourable order from the Supreme Court, they should verify whether there is a contradictory circular and track it down and withdraw it. But the Board can’t be expected to do this kind of hard work. So more litigation, as this case would show.

The Special Bench was constituted for deciding the question, “Whether, the assessment made on the AOP is invalid, in the light of the Board’s circular dated 24th August, 1966 or is valid in the light of the judgment of the Supreme Court in Achtaiah’s case and/or statutory amendments of the Income Tax Act?” and also to decide the appeal of the assessee on the following grounds:-

That on the facts and circumstances of the case the learned CIT (A) erred in fact and in law in confirming the finding of the Assessing Officer that

1. the commission income of Rs.2,37,55,912/ – was taxable in the hands of the appellant in the status of AOP and not in the hands of the respective members of the Joint Venture.

2. the tax should be levied at the Maximum Marginal Rate.3. even though the Assessing Officer acted in contravention of the Board’s instructions which are binding on him (the Assessing Officer).”

Facts: The assessee is an Association of Persons (AOP) constituted by joint Venture agreement entered into by five different entities on 30.03.2002. The association was constituted for carrying on the business of procuring orders on behalf of M/s. Reliance Industries Ltd (RIL) for supply of Purified Terephthalic Acid (PTA) to M/s. Indo Rama Synthetics India Ltd. During the year under consideration the AOP has earned commission of Rs. 2,40,61,937/ – and after meeting expenses, net profit at Rs. 2,37,55,912/ – is shown by the assessee which has been apportioned amongst the members of JV according to their profit sharing ratio. During the year under consideration all the members of AOP have income above the exemption limit. The tax amounting to Rs. 13,63,810/- was deducted at source from the payment of the said commission made to the assessee. A return of income was filed at Nil on 31.12.2003 claiming therein the refund of TDS. The return was first processed u/s 143(1) and later on notice was issued u/s 143(2) in pursuance to which present assessment has been framed. During the course of assessment proceedings the assessee was required to explain as to why its income of Rs. 2,37,55,912/ – should not be charged to tax in the status of AOP under the provisions of section 167 B(2) of Income Tax Act, 1961. In reply, it was submitted that the AOP has distributed the profit amongst its members as per their respective shares which are determined and defined in the JV agreement dated 30.3.2002 and some of the members have already been assessed for their share in the AOP under the provisions of section 67 A of the Act. It was submitted that since there is a deed defining the share of profit of each member of the AOP and the individual shares of all such members were determined and known, the provisions of section 167 B(2) will not be applicable . The AO did not accept such plea of the assessee, According to the AO, since the total income of all the members of the AOP was admittedly exceeding the maximum amount which is not chargeable to tax, tax has to be charged on its total income at the Maximum Marginal Rate (MMR) as per Section 167B (2).

On appeal, the assessee failed with the Commissioner (Appeals) and so the present appeal to the Tribunal. Tax on AOP and binding Board Circular?The Circular was issued on 24.8.1966. After the date of issue of the circular, two important events happened.1. the judgment of the Supreme Court in the case of ITO v. Ch. Atchaiah came to be delivered on 11th December, 1995 propounding that the position of law regarding chargeability of tax on the AOP and its member is different under 1961 Act as compared to the provisions of 1922 Act. (The old and new Income Tax Acts)2. Section 167 B regulating “charge of tax where shares of members in the AOP or BOI unknown etc.” was introduced in the statute by the Direct Tax Laws (Amendment)Act, 1989, w.e.f. 1.4.1989. Sub-section (2) of section 167 B governs the case of the assessee. This Section has given a clear mandate that the tax is chargeable in the hands of AOP alone and it has been brought in the statute subsequent to the issue of above mentioned circular of the CBDT.

Can a Board circular be still valid against a Supreme Court order and amended provisions of the Act?The Special bench of the ITAT observed,

1. There cannot be any dispute to the proposition that Income Tax authorities are bound to follow the circulars issued by CBDT u/s 119 of the Act.

2. At the same time, it is also well settled that it is not irrelevant for the judicial forum to examine the circumstances/ context as well as the prevailing conditions under which such circular came to be issued.

3. A close look at the circular will reveal that the basis of issue of circular is the decision of the Supreme Court in the case of CIT v. Murlidhar Jhawar And Purna Ginning & Pressing Factory (supra), which was then available on the date of issue of circular. Considering the said decision, a view was expressed by the CBDT that the position as described in the said decision will continue to apply to the provisions of 1961 Act.

4. The law is well established that the circular cannot over-write, modify or amend the provisions of the Act or judicial decision.

5. In other words, working within the ambits of section 119 of 1961 Act, CBDT (Board) does not have power either to over-write, modify and amend the provisions of law or to over-come over a judicial pronouncement either of a High Court or of an Apex Court.

6. Under sec. 119, the Board is empowered to issue orders, instructions and directions to other Income Tax authorities which are deemed fit by it for proper administration of the Act.7. This power is meant only for working within the four corners of the Act.The Special Bench considered several judgements of the Supreme Court, High Courts and the ITAT, including the famous excise cases of Dhiren Chemicals and IOCL and observed,

1. It is thus clear that mandate of law is that effect cannot be given to a circular in preference to the view expressed by the court, and this being so, we are of the view that the AO cannot be said to be bound to follow the aforementioned circular in preference to the decision of Hon’ble Supreme Court in the case of ITO Vs. At chaiah.

2. On the contrary, he was bound to follow the proposition as propounded by the Apex Court in the case of ITO Vs. Atchaiah, which was directly applicable in the present case.

3. Thus, the AO did not commit any mistake in not following the said circular and rather he was right in framing the asse
ssment on the AOP applying the law as declared by the Hon’ble Supreme Court in the case of ITO Vs. Atchaiah.

The Supreme Court in the case of Keshavji Ravji & Co. held that the Tribunal is not an Income Tax Authority under the Act, therefore, circulars do not bind it. Though the benefits of such circulars to the assessee have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provisions and mitigate the rigor of law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular.

So the ITAT opined that

1. powers of CBDT exercised U/S 119 are not wide enough to travel beyond the scope of the Act.

2. Its powers are same as are the powers of the Rule making Authority Moreover, it has already been pointed out that in any case the circular had lost its validity as per law declared by the Apex Court by way of the decision in the case of ITO Vs. Atchaiah when the controversy prevailing on the issue was resolved and it was interpreted that under 1961 Act no option was vested with the ITO to either assess the AOP or its members.

3. Such option though was available under 1922 Act but was not provided in 1961 Act as there was a difference in the language of both the Acts.

4. It has also been pointed out in this order that there was subsequent change in the legislation when Section 167B was introduced.

5. Thus relying on the circular it cannot be held that AO had no jurisdiction to assessee the AOP (assessee) as he had already assessed its members.

So the Tribunal held that assessment made by AO on AOP is valid in the light of the judgment of Hon’ble Supreme Court in the case of ITO v. Ch. Atchaiah and also in the light of the statutory amendments brought in the statute. For the reasons discussed above Board’s circular dated 24.8.1966 cannot be relied upon to hold that the assessment on AOP is invalid. The said circular had lost its validity.

And so the assessee’s appeal is dismissed.