Supreme Court Clarifies Applicability of Tax Circulars: Revenue Appeals Dismissed (23 November 2017)

Date of the Judgment: 23 November 2017
Citation: 2017 INSC 1041
Judges: Rohinton Fali Nariman, J., Sanjay Kishan Kaul, J.
Can the Income Tax Department apply new circulars about tax limits to old cases? The Supreme Court of India addressed this important question in a judgment. The court clarified that circulars issued by the Income Tax Department, which specify a minimum tax amount for appeals, apply to pending cases as well, with certain exceptions. This decision aims to reduce unnecessary litigation and ensure efficient use of court time. The judgment was authored by Justice Sanjay Kishan Kaul, with Justice Rohinton Fali Nariman concurring.

Case Background

The case involves appeals by the Director of Income Tax against S.R.M.B. Dairy Farming (P) Ltd. The Income Tax Department had filed appeals in the High Court. The Central Board of Direct Taxes (CBDT) issued Instruction No. 3 of 2011 on 9 February 2011, stating that appeals should not be filed in the High Court if the tax impact was less than ₹10 lakh. This instruction superseded an earlier instruction from 2000 which had a limit of ₹4 lakh. The Revenue Department argued that the new instruction should only apply to appeals filed after 9 February 2011. However, many High Courts had applied the new instruction to pending cases as well. This led to a divergence of legal opinion and conflicting orders, which the Supreme Court sought to resolve.

Timeline

Course of Proceedings

The Income Tax Department had initially filed appeals in the High Court. The department argued that Instruction No. 3 of 2011 should not apply to pending cases. However, various High Courts took different views on the issue, with some applying the circular prospectively and others retrospectively. This divergence of opinion led to the matter reaching the Supreme Court for final resolution.

Legal Framework

The legal framework in this case revolves around Section 268A of the Income Tax Act, 1961, which empowers the Central Board of Direct Taxes (CBDT) to issue instructions and circulars to its officers. The circulars in question, Instruction No. 1979 of 2000, Instruction No. 5/2008 and Instruction No. 3 of 2011, were issued under this provision. The key provision is Section 268A of the Income Tax Act, 1961, which states:

“268A. Instructions to officers and issue of directions.
(1) The Board may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board:
Provided that no such orders, instructions or directions shall be issued—
(a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner; or
(b) so as to interfere with the discretion of the Commissioner (Appeals) in the exercise of his appellate functions.
(2) Without prejudice to the generality of the foregoing power, the Board may, if it considers it necessary or expedient so to do, for the purpose of proper and efficient management of the work of assessment and collection of revenue, issue from time to time (whether by way of relaxation or otherwise) general or special orders in respect of any class of cases, setting forth directions or instructions (not being prejudicial to assessees) as to the guidelines, principles or procedures to be followed by other income-tax authorities in the work relating to assessment or collection of revenue or the initiation of proceedings for imposition of penalty.
(3) Every direction or instruction issued by the Board under this section shall be binding on all income-tax authorities and all other persons employed in the execution of this Act.”

The National Litigation Policy was also a key consideration, aiming to reduce government litigation and ensure that the government acts as a responsible litigant.

Arguments

The Income Tax Department argued that Instruction No. 3 of 2011 should apply prospectively, meaning it should only apply to appeals filed after the date of the instruction (9 February 2011). They contended that pending cases should be governed by the instructions in force at the time the appeals were filed. The department also argued that the circular should not be applied ipso facto, particularly when the matter has a cascading effect or involves common principles in a large number of matters.

The assessees, on the other hand, contended that the circular should apply retrospectively to all pending cases. They argued that the National Litigation Policy aims to reduce unnecessary litigation and that applying the circular to pending cases would further this objective. They also pointed out that the circular is beneficial to assessees and should therefore be applied retrospectively, as per established legal principles.

The Karnataka High Court, in *Commissioner of Income Tax, Bangalore v. Ranka & Ranka*, had detailed the litigation policy philosophy behind applying the Circular and the benefit being extended in view thereof to all Assessees where appeals have been pending, but below the financial limit, as otherwise an anomalous situation would arise. The High Court also noted that the National Litigation Policy expressly stated that the Government must cease to be a compulsive litigant. The philosophy, that the matters should be left to the courts for ultimate decision is to be discarded and the easy approach that “let the court decide”, must be eschewed and condemned.

The innovativeness of the arguments was in the interpretation of the National Litigation Policy to apply the circular retrospectively, which was a novel approach.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issue:

1. Whether Instruction No. 3 of 2011, which raised the tax limit for appeals, should apply to pending appeals in the High Court.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases

• *Commissioner of Income Tax, Bangalore v. Ranka & Ranka* – Karnataka High Court: The court approved of the detailed analysis of the litigation policy philosophy.
• *Commissioner of Income Tax v. Pithwa Engg. Works* – Bombay High Court: The court considered the ratio of the judgment.
• *Commissioner of Income Tax v. Madhukar K. Inamdar (HUF)* – Bombay High Court: The court considered the ratio of the judgment.
• *Commissioner of Income Tax v. Ashok Kumar Manibhai Patel & Co.* – Madhya Pradesh High Court: The court considered the ratio of the judgment.
• *Commissioner of Income Tax v. P.S. Jain & Co.* – Delhi High Court: The court considered the ratio of the judgment.
• *Commissioner of Income Tax v. Varindera Construction Co.* – Punjab & Haryana High Court: The court disagreed with the view taken by the High Court.
• *Commissioner of Income Tax v. Navbharat Explosives Co. P. Ltd.* – Chhattisgarh High Court: The court disagreed with the view taken by the High Court.
• *Commissioner of Income Tax v. Kodanand Tea Estates Co* – Madras High Court: The court disagreed with the view taken by the High Court.
• *CWT v. John L. Chackola* – Kerala High Court: The court disagreed with the view taken by the High Court.
• *CIT Central-III v. Surya Herbal Ltd.* – Supreme Court of India: The court followed the order passed by the three judge bench.
• *Commissioner of Income Tax-VII, New Delhi v. Suman Dhamija* – Supreme Court of India: The court noted that this order was passed without considering the order in *Surya Herbal Ltd.* case.
• *The Commissioner of Income Tax Bangalore I & Anr. v. M/s. Gemini Distilleries* – Supreme Court of India: The court noted that this order was passed without considering the order in *Surya Herbal Ltd.* case.
• *Commissioner of Income Tax & Anr. V. Century Park* – Supreme Court of India: The court followed the line adopted in *Surya Herbal Ltd.* case.
• *Suchitra Components Ltd. v. Commissioner of Central Excise, Guntur* – Supreme Court of India: The court relied on the general principle of application of circulars.
• *Commissioner of Central Excise, Bangalore v. Mysore Electricals Industries Ltd.* – Supreme Court of India: The court relied on the principle that a beneficial circular has to be applied retrospectively.

Statutes

• Section 268A of the Income Tax Act, 1961: The court considered the provision and its implications.

Judgment

The Supreme Court held that Instruction No. 3 of 2011 would apply to pending matters, subject to two caveats established in the case of *CIT Central-III v. Surya Herbal Ltd.*. The circular should not be applied ipso facto if the matter has a cascading effect or involves common principles in a large number of matters. The court emphasized that the National Litigation Policy aims to reduce government litigation and that applying the circular to pending cases would further this objective. The court also noted that the circular is beneficial to assessees and should therefore be applied retrospectively, as per established legal principles.

The Supreme Court dismissed the appeals of the Revenue. The court noted that the subsequent orders in *Commissioner of Income Tax-VII, New Delhi v. Suman Dhamija* and *The Commissioner of Income Tax Bangalore I & Anr. v. M/s. Gemini Distilleries* were passed without considering the order in *Surya Herbal Ltd.* case. The court also noted that the order in *Commissioner of Income Tax & Anr. V. Century Park* followed the line adopted in *Surya Herbal Ltd.* case.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the need to reduce unnecessary litigation and ensure that the government acts as a responsible litigant, as envisioned in the National Litigation Policy. The court emphasized that the government should not be a compulsive litigant and that matters should not be left to the courts for ultimate decision without proper consideration. The court also considered the fact that the circular was beneficial to assessees and should therefore be applied retrospectively. The court also took into consideration that the previous order in *CIT Central-III v. Surya Herbal Ltd.* had already clarified the position of law.

The court’s reasoning was based on the following:

• The National Litigation Policy aims to reduce government litigation and ensure that the government acts as a responsible litigant.
• The circular is beneficial to assessees and should therefore be applied retrospectively.
• The previous order in *Surya Herbal Ltd.* had already clarified the position of law.

The court considered the argument that the circular should only apply prospectively but rejected it. The court held that the circular should apply retrospectively to all pending cases, subject to the caveats in *Surya Herbal Ltd.*.

The decision was unanimous, with both judges agreeing on the outcome and the reasoning.

The court quoted the following from the judgment of the Karnataka High Court:

“The Government must cease to be a compulsive litigant. The philosophy, “that matters should be left to the courts for ultimate decision”, has to be discarded. The easy approach, “Let the court decide,” must be eschewed and condemned.”

The court also quoted the following from *Suchitra Components Ltd. v. Commissioner of Central Excise, Guntur*:

“…a beneficial circular has to be applied retrospectively while an oppressive circular has to be applied prospectively.”

The court also stated:

“Thus, the said view of the three Judges Bench would hold water and the Circular would apply even to pending matters but subject to the two caveats provided in Surya Herbal Ltd. case (supra).”

Key Takeaways

• The Income Tax Department’s circulars regarding tax limits for appeals apply to pending cases as well, with certain exceptions.
• The circular should not be applied ipso facto if the matter has a cascading effect or involves common principles in a large number of matters.
• This decision aims to reduce unnecessary government litigation and ensure efficient use of court time.

Directions

The Supreme Court did not issue any specific directions in this case.

Development of Law

The ratio decidendi of this case is that the circulars issued by the Income Tax Department, which specify a minimum tax amount for appeals, apply to pending cases as well, with certain exceptions. This clarifies the legal position and ensures consistency in the application of such circulars. This is a reiteration of the position of law as stated in the case of *CIT Central-III v. Surya Herbal Ltd.*.

Conclusion

The Supreme Court dismissed the appeals of the Revenue, holding that Instruction No. 3 of 2011 applies to pending cases, subject to the caveats established in *Surya Herbal Ltd.* This decision reinforces the National Litigation Policy, aiming to reduce unnecessary litigation and promote the efficient use of court time. The judgment provides clarity on the applicability of tax circulars and ensures that the government acts as a responsible litigant.

Category

Parent category: Income Tax Act, 1961
Child categories: Section 268A, Income Tax Act, 1961; National Litigation Policy; Tax Appeals; Retrospective Application of Circulars; Government Litigation

FAQ

Q: What is the main issue in this case?
A: The main issue is whether the Income Tax Department’s circular, which raised the tax limit for appeals to ₹10 lakh, should apply to cases that were already pending in the High Court.

Q: What did the Supreme Court decide?
A: The Supreme Court decided that the circular should apply to pending cases as well, with two exceptions: it should not be applied automatically if the case has a cascading effect or involves common principles in many other cases.

Q: What does “cascading effect” mean?
A: A “cascading effect” means that the decision in one case could have a significant impact on a large number of other similar cases.

Q: Why did the court make this decision?
A: The court made this decision to reduce unnecessary government litigation and ensure that the government acts as a responsible litigant. It also noted that the circular was beneficial to taxpayers and should be applied retrospectively.

Q: What is the National Litigation Policy?
A: The National Litigation Policy is a government policy that aims to reduce unnecessary litigation and ensure that the government acts as a responsible litigant.

Q: What does this mean for me as a taxpayer?
A: If you have a pending tax appeal in the High Court where the tax amount is less than ₹10 lakh, your case might be dismissed based on this judgment, unless it falls under the exceptions mentioned by the court.

Q: What is Section 268A of the Income Tax Act, 1961?
A: Section 268A of the Income Tax Act, 1961, empowers the Central Board of Direct Taxes (CBDT) to issue instructions and circulars to its officers for the proper administration of the Act.

Disclaimer

This is a summary of the judgment and should not be considered as legal advice. Please consult a legal professional for advice on your specific situation. The information provided here is for educational purposes only.