1997 (2) TMI 77 - HC - Income Tax

Business Expenditure, Income Tax Act, Provisions Of I.T.Act, Retrospective Effect, Supreme Court

Summary

Issues:
- Applicability of Circular No. 737 with retrospective effect
- Interpretation of section 40(b) of the Income-tax Act, 1961
- Authority of circulars issued by the Central Board of Direct Taxes
- Binding nature of circulars on income-tax authorities
- Effect of conflicting decisions on the interpretation of circulars

Analysis:
The judgment addressed the issue of the applicability of Circular No. 737, dated February 23, 1996, with retrospective effect, which aimed to clarify the provisions of section 44AD of the Income-tax Act, 1961. The petitioners argued that Circular No. 684, dated June 10, 1994, had provided a benefit to the assessee by allowing deductions under section 40(b) while calculating the comprehensive rate under section 44AD. However, the Central Board of Direct Taxes found ambiguity in the earlier circular and issued a new one to rectify it. The court emphasized that circulars are executive in nature and cannot override legislative provisions. The judgment highlighted that circulars are meant for the proper administration of the Act and cannot create rights or obligations contrary to the statute.

Regarding the interpretation of section 40(b) of the Income-tax Act, the court examined the provisions related to deductions for interest and remuneration to partners of a firm. The judgment clarified that the admissible deductions are specifically mentioned in sections 30 to 38 of the Act and not under section 40(b). It was emphasized that circulars issued by the Board cannot deviate from the provisions of the Act and must be in line with the legislative framework.

The judgment also discussed the authority of circulars issued by the Central Board of Direct Taxes and their binding nature on income-tax authorities. It referenced previous decisions, such as K P. Varghese v. ITO and CIT v. T. V. Ramanaiah and Sons, which supported the binding nature of circulars. However, the court noted a later development in the law, as seen in the case of State Bank of Travancore v. CIT, which emphasized that circulars cannot alter the provisions of the Act and are in the nature of concessions that can be prospectively withdrawn.

Furthermore, the judgment analyzed the effect of conflicting decisions on the interpretation of circulars. It compared the views expressed in different cases, such as Kerala Financial Corporation v. CIT and C. B. Gautam v. Union of India, to determine the binding nature of later Supreme Court decisions. The court concluded that the later decision becomes binding, and in this case, the later circular of the Central Board of Direct Taxes did not deprive the assessee of any existing right or create a new liability.

In conclusion, the court dismissed the petitions, stating that the liability to pay tax arises from the statute, and the authorities have the right to rectify errors in circulars. The judgment refused oral application for leave to appeal to the Supreme Court, as it did not involve any substantial question of law requiring the apex court's intervention.