NATIONAL LAW UNIVERSITY, JODHPUR

“Principles of Taxation”

Submitted to Submitted by
Dr. Manoj Kr. Singh Ms. Mukta Jangir
Associate Professor and Executive Director LL.M. I semester
(NLUJ)

Submission Date

10rd August 2018

NATIONAL LAW UNIVERSITY, JODHPUR

Summer Semester: July-Nov 2018

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Contents
Introduction ............................................................................................................................................. 3
Arguments from the side of Petitioner .................................................................................................... 4
Arguments from the side of Respondent................................................................................................. 7
Opinion ................................................................................................................................................... 9
Bibliography ......................................................................................................................................... 10

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Introduction
The apparent problem relates to power of Department of Revenue to issue circular under the
Income Tax Act 1961. On 15 July 2018 the department in exercise of the so given power
issued circular in relation to filling appeals before the judicial authorities. Under the circular
it was issued that for filling of appeal before ITAT tax liability should not be less than 20
lakhs, and for High Court it was 50 lakhs and for Supreme Court as 1 corer. The circular was
retrospective in nature which directed the authorities concern to withdraw the exiting cases
before the courts if it is beyond the thresh hold limit. The power to issue circular falls under
section 268A1 and 1192 of the Income Tax Act 1961.

The taxing provisions have to be in compliance with the statutory compliance and
constitutional and that they must have some force of authority of law. Thus the power
conferred over the various authorities under the constitutional and a relevant statue is of great
importance. The circular that is issued to clarify ambiguities in statutory provisions and for
better ease of administration has raised a question about the manner and extent to which they
will be biding over the subjects of it. In general, these circulars are binding over all who
participate in the administration of it. The question of validity arises when these circulars and
regulations cross the statutory limits and comes in the direct conflict with the existing
enforceable law. The similar question arose on issuance of the circular by the Department of
Revenue dated 15 July 2018 which was challenged by an NGO on the ground of
unconstitutional under the provisions of the Income Tax Act 1961. Another reason of
challenging the validity of circular was retrospective effect given to it. Thus present case
apparent before the Supreme Court is focused on deciding the issues below mentioned:

1. Whether circular is unconstitutional and ultra vires to the power under Income Tax
Act, 1961?
2. If not, whether can it be given retrospective effect?

1
Section 268A, Filing of appeal or application for reference by income-tax authority. Income Tax Act 1961.
2
Section 199, Income-tax authorities -Instructions to subordinate authorities. Income Tax Act 1961.

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Arguments from the side of Petitioner
The NGO which is petitioner of the writ petition before Hon’ble Supreme Court argued for
declaration of the circular of Department of Revenue as unconstitutional on the ground that it
is beyond the powers given under the Income Tax Act 1961. The apparent circular is against
the public policy and that it will amount to loss of revenue to the government as well. The
question over the retrospective effect of the regulation was also argued as one of the ground
of declaring the apparent circular as unconstitutional.

The petitioner (NGO) hereby substantiates the arguments in the light of applicable laws and
relevant jurisprudence as follows:

 On the validity of Circular:

The apparent circular issued for extension of the pecuniary jurisdiction of various courts
under Income Tax Act 1961 is likely to affect the right of various assessee and therefore it
should be declared as unconditional and invalid. In the case of UCO Bank versus CIT3, it
was pronounced by the court that circular cannot be against the interest of assessee. The
power to issue circular is given for fair enforcement and administration and it cannot be used
for the benefit of authority itself. The current circular pertain to extension of jurisdiction in
terms of pecuniary limits of judicial authorities and thus increase in the limit with
retrospective effect will have adverse impact over the current cases pending before various
authorities as they will have to withdraw matter from one place where it is already in
progresses and will have to restart again fresh proceeding before the new authority. Thus it is
likely to cause hardship and inconvenience to the sufferers for decisions. Conclusively the
current circular of department of revenue is against the interest of the assessee and thus it
cannot be validated.

In the case of K.P. Varghese vs. Income Tax Officer, Ernakulam and Anr.4. as well the
Supreme Court held enforceability of the circular for Income tax officers and authorities
working under the Act. The petitioner also submits precedent of CIT vs. Jugal Kishore
Mahanta5. In this case it was pronounced by the court that the impugned circular issued by
CBDT under the Income Tax Act 1961 is applicable over the all officers and authorities
working for the execution of the legal instruments expect following instances:

3
UCO Bank versus CIT, 237 ITR 889
4
K.P. Varghese vs. Income Tax Officer, Ernakulam and Anr. [1981]131ITR597(SC)
5
CIT vs. Jugal Kishore Mahanta [2013] 355 ITR 432

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  When the constitutionality of circular is in challenge.
 When the circular and notification are held by the competent authority as Ultra
Vires. or
 When the revenue audit objection has been accepted by the department.

Thus the constitutionality of the impugned circular is under consideration for its
constitutional validity and therefore on being declared unconstitutional the same has to be not
followed.

 On Retrospective Application of the Circular:

Any circular that is issued by any executive department like Department of Revenue cannot
be given the retrospective effect. They can only be made binding for the prospective cases.
The rule of the retrospective is only permissible in the cases where the assesse is benefited
from such application. However, the current circular issued by the department of revenue is
not likely to serve any benefit to the assess and on the other hand they are dragged into the
trouble of withdrawal of the cases from one authority and then initiating the fresh matter
before the newly empowered authority under the circular. Therefore, due to negative
implications of the circular for assess the retrospective validity of the circular is bound to be
wither away by Supreme court. The case of Commissioner of Income Tax ... vs M/S Gemini
Distilleries6, is one in which the circular issued by the Central Board of Direct Tax was
denied to be given retrospective effect on the ground of hardship and inconvenience to parties
i.e. asessee. In Govinddas v. Income Tax Officer7 and CIT Bombay v. Scindia Steam
Navigation Company Limited8 are the case laws in which Supreme Court pronounced the
principles of “lex prospicit non respicit”, which means that ‘The Law looks forward and not
backward was upheld. Thus retrospective given to the current circular is not any way likely to
serve the interest of the assesse and therefore entire circular is invalid.

In the decision of Bombay High court in CIT v. Varindera Construction Co.9, the circular
that is passed under section 268A is for the filling of the appeals and it does not apply to the
hearing of the appeals that are already going on. Thus the appeals that are already in process
before the date of circular are not required to be withdrawn from the adjudicating authorities.

6
Commissioner of Income Tax ... vs M/S Gemini Distilleries, Appeal No.16815/2017 [@ SLP (C)
NO.1425/2014
7
Govinddas v. Income Tax Officer [1976]1 SCC 906
8
CIT Bombay v. Scindia Steam Navigation Company Limited [1962] 1 SCR 788
9
Bombay High court in CIT v. Varindera Construction Co. [2011] 331 ITR 449

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The circular has retrospective effect and not the prospective effect. In the case of Hitendra
Vishnu Thakur v. State of Maharashtra10 it was held that the procedural aspects must not be
regulated by the retrospective amendments and circulars where the new chances are likely to
bring the new disabilities for the transactions that are already accomplished. Thus the
circular issued by the revenue department if given retrospective effective it will cause the
duplication of efforts and money on the part of the litigants and judicial authorities as well
and the same process will have to be followed again which was adopted at the time when the
fresh application was made.

 Public Policy and Loss of Revenue:

It is contended that the current power of Revenue department to issue circular falls in the
legal and statutory limits. However, the circular that has been issued wide section 268A and
119 of the Income Tax is unreasonable and arbitrary since it is made applicable retrospective
effect which means the cases values of which is above the set limit under the circular have to
be withdrawn and they will be send for the fresh proceedings. If the same is held as
constitutional, then it will be against public policy and huge loss of revenue will occur to both
the litigants and the government as well since it will have to take up the matter from the
beginning therefore the loss of revenue is also another adverse impact of the retrospective
effect to the circular.

10
Hitendra Vishnu Thakur v. State of Maharashtra [1994] 4 SCC 602

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Arguments from the side of Respondent
The circulars that are issued for clarification of existing applicable laws or for removing
redundancy of laws are binding on all concerned authorities. The power to issue the circular
is given to the Central Board of Direct Tax (CBDT) under section 119 of the Income Tax Act
1961. The circulars that are issued in exercise of such power are binding on the authorities
concerned in the light of the decided cases of Supreme Court in Navneetlal Jhaveri versus K.
K. Sen11 and Ellerman Lines Ltd. v. Commissioner of Income-tax, West Bengal12.

 On Retrospective Effect:

The current circular was introduced for the fair purpose of reducing the burden of the
adjudicating authority by extending the limits of their pecuniary jurisdiction and this
extension is not likely to affect ultimate decision of courts in relation to cases that will be
withdrawn from the current adjudicating authority. This retrospective effective will only have
the effect of withdrawal of cases on the basis of their valuation and the same will be
transferred to concerned court for adjudication. The main object of passing of the circular by
the de4parment of revenue is not to affect the imparting of justice in any way but to reduce
the burden of the upper authorities only. L’Office Cherifien des Phosphates v. Yamashita-
Shinnihon Steamship Company Limited [1994] 1 AC 486, it was held that the principle of
retrospective was introduced on the basis of principle of fairness which has to be basis of
every legal rule. Thus fairness resolving revenue cases was not affected in any way by current
circular of Department of Revenue. On the basis of this it can legally be given the
retrospective effect.

Further the case of Government of India & Ors v. Indian Tobacco Association [2005]13 and
Vijay v. State of Maharashtra & Ors [2006]14 in which the apex court itself accepted the
ground of fairness as relevant factor to determine whether the statute is likely to benefit
without causing detriment in nature. On the ground of fairness of purpose of the statute it can
be given retrospective effect. The present circular of the department of revenue as well is
reasonably fair and the retrospective if held constitutional by the Supreme Court it is not only
to cause the detriment to the assesse and parties who are parties in the matter before the

11
Navneetlal Jhaveri versus K. K. Sen, 56 ITR 198, Ellarman Lines versus CIT, 82 ITR 913, K. P. Vargheese
versus ITO, 131 ITR 597 and UCO Bank versus CIT, 237 ITR 889.
12
Ellerman Lines Ltd. v. Commissioner of Income-tax, West Bengal [1971]82ITR913(SC).
13
Government of India & Ors v. Indian Tobacco Association [2005] 7 SCC 396
14
Vijay v. State of Maharashtra & Ors [2006] 6 SCC 286

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various authorities. Since it is a matter of procedure only and there will not be the case that
every case has to be withdrawn from the adjudicating authority. There will be very less
number of the cases which would have to be withdrawn if circular is held to be valid and
effective. The limit of the various adjudicating authorities has been increased in order to
solve the matters at the initial stage only so that burden of the higher authorities can be
reduced to an extent. Thus the object of giving retrospective effect to circular is fair and on
the basis of the above referred judgment of Supreme Court, current circular must also be held
valid with retrospective effect.

 Validity of Circular- Not Ultra vires:

It is contended that department of revenue does not have the express right to challenge the
validity of the circular for the cases that are already pending in the various adjudicating
authorities. It cannot be used as ground of defence by the department that the circular will
only be binding for the new cases15. In CIT vs. Paramount Guest House & Resort Ltd.,
[2013] 38 taxmann.com 262 (Allahabad) it was held that CBDT has the express power to
issue circular for setting the monetary limits for the adjudicating authority under section
268A and the same cannot be challenged in any appeal by the revenue authority. All the
circulars that are passed by the competent authority under the Income Tax Act 1961 are
binding and they must be enforced by the authorities and board employer to execute the
same.

In the case of Union of India and Anr vs Azadi Bachao Andolan and Anr 16, in exercise of
power wide under section 119 of the Income Tax Act 1961 a circular was issued by the
CBDT. Under section 119 (1) (2)17 CBDT is allowed make circulars for better administration
and therefore the current circular passed by it falls within the statutory limits and therefore it
is not ultra vires in the evil of law making and circular issuing power of the CBDT. Therefore
the Circular issued on 15 September 2018 by the CBDT also falls under section 119 and
268A of the income tax act and therefore it cannot be accepted the fact that it is ultra vires.

15
CIT v. Cameo Colour Co. [2002]254ITR565(Bom)
16
Union of India and Anr vs Azadi Bachao Andolan and Anr [2003]
17
"for the purpose of proper and efficient management of the work of assessment and collection of revenue, to
issue appropriate orders, general or special in respect of any class of income or 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 the imposition of penalties".

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Opinion
On the presentation of the arguments of the two sides in the apparent case it is analysed that
the circular passed by the department of revenue was not ultra vires as the express provisions
is given under section 268A and 119 of the income tax Act. The constitutionality of the
circular cannot be challenged mere on the ground that the retrospective effect was given
under this circular since circular is in no way arbitrary and unreasonable under article 14 and
19 of the Constitution of India 1950. The object of issuance of the circular was to reduce the
burden of the upper courts and address the issues and grievance of the parties at the
subordinate level only. So the object of the circular was to provide ease and convenience for
both courts and the person whose cases and matters are pending before the court. The
retrospective effect is allowed to be given to the subordinate instruments in the cases when
the benefit is likely to be there to the assesse who are the subject matter of the circular. Thus
according to my understanding from the issues and relevant legislation and jurisprudence
aspect the circular must not be held unconstitutional.

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Bibliography
Statutes:

Constitution of India 1950.

Income Tax Act 1961.

Case Laws:

Bombay High court in CIT v. Varindera Construction Co. [2011] 331 ITR 449

CIT Bombay v. Scindia Steam Navigation Company Limited [1962] 1 SCR 788

CIT v. Cameo Colour Co. [2002]254ITR565(Bom)

CIT vs. Jugal Kishore Mahanta [2013] 355 ITR 432

Commissioner of Income Tax ... vs M/S Gemini Distilleries, Appeal No.16815/2017 [@ SLP
(C) NO.1425/2014

Ellerman Lines Ltd. v. Commissioner of Income-tax, West Bengal [1971]82ITR913(SC).

Government of India & Ors v. Indian Tobacco Association [2005] 7 SCC 396

Govinddas v. Income Tax Officer [1976]1 SCC 906

Hitendra Vishnu Thakur v. State of Maharashtra [1994] 4 SCC 602

K.P. Varghese vs. Income Tax Officer, Ernakulam and Anr. [1981]131ITR597(SC)

Navneetlal Jhaveri versus K. K. Sen, 56 ITR 198, Ellarman Lines versus CIT, 82 ITR 913, K.
P. Vargheese versus ITO, 131 ITR 597 and UCO Bank versus CIT, 237 ITR 889.

UCO Bank versus CIT, 237 ITR 889

Union of India and Anr vs Azadi Bachao Andolan and Anr [2003]

Vijay v. State of Maharashtra & Ors [2006] 6 SCC 286

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