SECTION 119 - INJUDICIOUS CBDT TAXPAYERS' WELFARE OR WARFARE

[Mr. Harish Chander Bhatia]

If a circular is in conflict with the law laid down by the High Courts or Supreme Court, the revenue authorities while acting quasi judicially, should ignore such circulars in discharge of their quasi-judicial functions , Bhartia Ind Ltd vs. CIT 2011 (8) TMI 519 - CALCUTTA HIGH COURT

This write-up is in context with CBDT circular No 5 of 11.2.2014 clarifying the CBDT stand on applicability of Rule 8 D read with section 14A of the Act.

An attempt to disallow expenses irrespective of any tax-free income included in total income, against the spirit of legislative provisions

Although there would have been many instances, when CBDT has used the provisions of this section in issuing clarification of a particular provision of the Act even those were against the taxpayers. In the recent past the CBDT has issued a circular No 5 on 11.2.2014 on section 14A of the Act(for detail one can refer to my article on website taxmanagementindia.com under the head "CBDT BURIES CONTROVERSIES UNDER S 14A r.w.r 8D") and another just in September 2013, when the system of ITR & TAR filing was made manual filing. Both against the taxpayers and resultantly against the spirit of this section. But the Board had to bow down amidst protest and judicial intervention.

Before I proceed, a brief history of this section is given below-

The CBDT is the highest executive authority, is a limb of the Finance Ministry, it was constituted under Central Board of Revenue Act, 1963. It has powers to make rules and to issue orders, instructions, and directions to all officers and persons employed in execution of this Act with two exceptions:

1) It cannot interfere with the discretion of the CIT (Appeals) in the exercise of his appellate functions,

2) It cannot direct any income tax authority to make particulars assessment or to dispose of a particular case in a particular manner, but a general direction can be issued

The power of the Board to issue instructions under this section to subordinate authorities is limited

Most important is that the Board being a quasi-judicial Authority is required to follow the principles of natural justice by affording an opportunity of hearing to the assessee[1]. The circular issued under this subsection cannot affect the assessee in adverse manner[2]. A circular, which made the penalty compulsory, was set aside as it interfered with the quasi-judicial discretion of the Assessing Officer[3].Another circular, which directed ex-gratia payment to be treated as capital expenditure was quashed as being prejudicial to the assessee[4]. A Circular which was contrary to section 244A[5] or 194C[6] was held invalid. Circular has no statutory force and cannot be utilized for altering provisions of the Act[7].CBDT under the garb of section 119 cannot exercise wider powers then the powers bestowed on it; CBDT has no power to introduce a substantial change or alteration in the provisions of the Income Tax Act 1961, by importing the ideas unknown to the Act[8]

In the exercise of its power to issue general circular under this section, the Board can neither impose a burden on the taxpayers or otherwise put him in worse position than he is under the statute[9], nor can it pre-empt[10] or override[11] any judicial interpretation of a provisions by the Courts, but the Board can relax the rigour of the law or grant relief which is not to be found in the terms of the statue. Such circulars make for a just and fair administration of the law. Thus, a circular can be issued to reduce the rigours of a provision or to prevent hardship. At the same time a circular cannot enforce an additional burden on the assessee, which is not prescribed in the statute, the circulars bind the department, they are not binding on the appellate authority, the tribunal, the courts, or the assessee.[12] If a circular is in conflict with the law laid down by the High Courts or Supreme Court, the revenue authorities while acting quasi judicially, should ignore such circulars in discharge of their quasi-judicial functions[13]. However, the reality is just the opposite, the circular against the assessee are always followed.

By this clarificatory circular, the Board has overruled many court decisions, which have been delivered since introduction of section 14A & Rule 8D and again activated the judicial intervention, which could have been avoided. The contents of the section and the relevant rule, its applicability are already an illogical homework, because the taxpayer is made to pay the taxes for income, which he has not received. To work out the disallowance the formula and its calculation is cumbersome mathematics.

The section 119 is meant to facilitate the taxpayer and to reduce the hardship, how this circular will ease the tension of the taxpayer is not understandable, and more so after 12 years of its introduction, when there has already been number of judgments of different courts including the Apex Court. Those who sought relief by quoting earlier judgments are in quandary now because of this clarification in an injudicious manner and inconsistent with legislative provision. Why this much delay in issuing clarification, why not in the beginning. The CBDT takes the important things very lightly in a comical way. One must remember, how so beneficiary the provisions may be, the CBDT would never work for the welfare of the taxpayers, the CBDT albeit dependent on the taxpayers, considers them as a national thief and act accordingly and the same is inculcated in the staff.

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[1] Satyam Computer services Ltd vs. CBDT 2012 (9) TMI 350 - Supreme Court of India = 346 ITR 566(SC) 2011,

[2] UCO Bank vs. CIT 1999 (5) TMI 3 - SUPREME Court = 237 ITR 889 (SC)

[3] Dedicated Health care Services TPA India Pvt Ltd vs. ACIT 2010 (5) TMI 98 - BOMBAY HIGH COURT = 324 ITR 345(2010)

[4] Madura Coats vs. DCIT 2004 (12) TMI 31 - MADRAS High Court = 273 ITR 32 (2005)

[5] Dinakar Ullal vs. CIT 2010 (2) TMI 215 - KARNATAKA HIGH COURT = 323 ITR 452 (2010)

[6] East India Hotels Ltd vs. CBDT 2009 (3) TMI 8 - BOMBAY HIGH COURT = 320 ITR 526 (2009)

[7] CIT vs. Ruby Traders & Exporters Ltd 2004 (9) TMI 97 - CALCUTTA High Court = (2004) 270 ITR 526

[8] Jalgaon Distt Central Co-op Bank Ltd vs. 2003 (9) TMI 56 - BOMBAY High Court = (2004) 265 ITR 423

[9] Gestetner vs. CIT 1978 (12) TMI 1 - SUPREME Court = 117 ITR 1, 13 (SC)

[10] Keshavji Raviji vs. CIT 1990 (2) TMI 1 - SUPREME Court = 183 ITR 1, 17 (SC)

[11] N N Bhagwati vs. CIT 2000 (7) TMI 68 - SUPREME Court = 247 ITR 206 (SC)

[12] CIT vs. Hero Cycles Ltd 1997 (8) TMI 6 - SUPREME Court = 228 ITR 463 (SC)

[13] Bhartia Ind Ltd vs. CIT 2011 (8) TMI 519 - CALCUTTA HIGH COURT = 353 ITR 486 (2011)