2011 (8) TMI 519 - HC - Income Tax

Revision u/s 263 - Assessing Officer in course of the assessment proceedings obtained full details of the said expenditure incurred on account of VRS and after considering all the facts and circumstances allowed deduction for the same - Tribunal held that the Assessing Officer was duty bound to follow the instruction of the Central Board of Direct Taxes and non-compliance of such instructions amounted to dereliction of duty and subordination - Commissioner of Income tax simply by taking aid of a circular which says that ex-gratia payment made for gaining enduring benefit or voluntary retirement scheme should be prima facie treated as capital expenditure sought to reopen the assessment by invoking Section 263 of the Act notwithstanding the fact that the said circular is in conflict with the view of this High Court which is binding upon the Assessing Officer - Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT, reported in (1980 -TMI - 5837 - SUPREME Court) wherein it was held that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the Revenue - Decided in favor of the assessee

Issues Involved:
1. Binding nature of the circular dated January 23, 2001, on the Assessing Officer.
2. Jurisdiction and authority of the Board to issue instructions affecting quasi-judicial functions.
3. Legality of the circular in treating VRS payments as non-allowable revenue expenditure.
4. Justification for the Tribunal affirming the Commissioner's order for a fresh assessment.
5. Validity of invoking Section 263 of the Act by the Commissioner when the Assessing Officer had taken a reasonable view.

Issue-wise Detailed Analysis:

1. Binding Nature of the Circular:
The Tribunal held that the circular dated January 23, 2001, was binding on the Assessing Officer. The court examined Section 119 of the Income-tax Act, 1961, which allows the Board to issue instructions for the proper administration of the Act. However, it emphasized that such instructions should not interfere with the quasi-judicial functions of the Assessing Officer. The court cited the Supreme Court's decision in M/s. Hindustan Aeronautics Ltd. vs. Commissioner of Income-tax, which stated that circulars conflicting with judicial decisions should be ignored by Revenue Authorities in their quasi-judicial capacity. Consequently, the Tribunal's view that the circular was binding was incorrect.

2. Jurisdiction and Authority of the Board:
The court analyzed whether the Board had the jurisdiction to issue instructions affecting the quasi-judicial functions of the Assessing Officer. It concluded that while the Board can issue administrative instructions under Section 119, these instructions should not dictate the outcome of specific assessments or interfere with the discretion of the Assessing Officer. The court found that the circular in question overstepped this boundary by directing the treatment of VRS payments, thus infringing on the Assessing Officer's quasi-judicial role.

3. Legality of the Circular:
The appellant argued that the circular was contrary to established legal principles that treated VRS payments as revenue expenditure. The court agreed, referencing multiple High Court decisions, including Commissioner of Income-tax vs. Machinery Manufacturing Corporation Ltd. and Grindlays Bank P.L.C. vs. Commissioner of Income-Tax, which held that VRS payments were revenue expenditures. The court concluded that the circular's directive to treat VRS payments as capital expenditure was contrary to these judicial pronouncements and thus not legally binding.

4. Justification for Tribunal's Affirmation:
The Tribunal had affirmed the Commissioner's order for a fresh assessment based on the circular. The court found this unjustified, noting that the original assessment was consistent with judicial precedents that treated VRS payments as revenue expenditure. The Tribunal's reliance on the circular, which conflicted with binding judicial decisions, was therefore misplaced.

5. Validity of Invoking Section 263:
The court scrutinized whether the Commissioner was justified in invoking Section 263 to reopen the assessment. It found that the original assessment by the Assessing Officer, which allowed the VRS payments as revenue expenditure, was a reasonable and possible view supported by judicial precedents. The Commissioner's reliance on the circular to invoke Section 263 was deemed inappropriate, as the circular could not override binding judicial decisions.

Conclusion:
The court set aside the Tribunal's order and the Commissioner's order under Section 263, ruling in favor of the appellant. It answered all the formulated questions against the Revenue, emphasizing that the circular could not override judicial decisions and that the original assessment allowing VRS payments as revenue expenditure was valid. The appeal was allowed without any order as to costs.

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