1991 (6) TMI 5 - HC - Income Tax

Summary

Issues:
1. Interpretation of Income-tax Act, 1961 regarding taxation of interest on advances.
2. Jurisdiction of Commissioner of Income-tax under section 263.
3. Binding nature of Central Board of Direct Taxes Circulars on income-tax authorities.
4. Impact of subsequent Supreme Court judgments on assessments made based on circulars.

Analysis:

1. The judgment involved a reference at the instance of the Commissioner under section 256(1) of the Income-tax Act, 1961, for the assessment year 1981-82. The issue revolved around the taxation of interest on advances not recovered for three consecutive years. The Inspecting Assistant Commissioner had completed the assessment initially computing the total income at "nil" based on a CBDT circular. However, the Commissioner found the assessment erroneous as per a Supreme Court decision in a similar case, directing the interest to be taxed. The Tribunal considered the timing of available circulars and Supreme Court decisions, concluding that the assessment was not prejudicial to the Revenue's interest. The High Court was tasked with determining if the Tribunal's decision was legally justified.

2. The jurisdiction of the Commissioner of Income-tax under section 263 was a key aspect of the judgment. The Commissioner invoked this section based on the belief that the initial assessment was erroneous and prejudicial to the Revenue. The argument presented was whether subsequent legal developments, particularly Supreme Court judgments, could render an assessment made in accordance with a circular as erroneous. The High Court emphasized that if a circular's direction is found to be contrary to law by a subsequent Supreme Court decision, assessments made based on such circulars must also be deemed erroneous.

3. The binding nature of Central Board of Direct Taxes Circulars on income-tax authorities was extensively discussed. While the Income-tax authority is obligated to follow circulars issued by the Board under section 119 of the Income-tax Act, subsequent judicial pronouncements, especially those by the Supreme Court, can supersede the circulars. The High Court highlighted that if a Supreme Court decision contradicts a circular, the assessment made in compliance with the circular would be considered erroneous and prejudicial to the Revenue.

4. The impact of subsequent Supreme Court judgments on assessments made based on circulars was a crucial aspect of the judgment. The High Court referred to a Division Bench decision that considered the State Bank of Travancore case and relevant circulars, emphasizing the binding nature of Supreme Court decisions on tax authorities. The judgment underscored that even if the validity of the assessment is not challenged on merits, a subsequent Supreme Court ruling can render the assessment invalid, allowing the Commissioner to exercise revisional jurisdiction under section 263.

In conclusion, the High Court held that the Commissioner of Income-tax was justified in invoking section 263 to rectify the assessment based on a subsequent Supreme Court decision, despite the initial assessment being made in accordance with a circular. The judgment reaffirmed the precedence of judicial pronouncements over circulars in determining the correctness of tax assessments.