THE COMMISSIONER OF INCOME TAX(TDS) vs. STERLING CERAMIC PVT. LTD.

TAXAP/140220/2007 1/64 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL Nos. 1402 to 1405 of 2007 with TAX APPEAL Nos.1322, 1434, 1872 of 2005 with TAX APPEAL Nos.46 To 51, 701, 702, 1348, 1419, 1496, 1501 of 2006, with TAX APPEAL Nos.231, 279, 280, 295, 375, 395, 402, 410, 411, 465, 477, 499, 511, 533, 543, 545, 547, 548, 550, 635, 638, 684, 687, 688, 689, 702, 703, 704, 743, 744, 747, 798, 835, 893, 899, 909, 946, 950, 958, 978, 1092, 1134, 1135, 1138, 1139, 1140, 1141, 1142, 1143, 1144, 1145, 1146, 1147, 1209, 1212, 1240, 1261, 1263, 1360, 1375, 1379, 1409, 1441, 1442, 1472, 1506, 1508, 1514, 1518, 1548,1559, 1620, 1658, 1637, 1659, 1660, 1664, 1665, 1666, 1667, 1668, 1669, 1677, 1678, 1683, 1648 of 2007 with TAX APPEAL Nos.65, 68, 203, 217, 218, 242, 244, 256, 257, 258, 261, 262, 264, 267, 275, 276, 279, 290, 322, 323 of 2008 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ HONOURABLE MR.JUSTICE BANKIM.N.MEHTA ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?

TAXAP/140220/2007 2/64 5 Whether it is to be circulated to the civil judge ? ========================================================= THE COMMISSIONER OF INCOME TAX- I - Appellant(s) Versus CONCORD PHARMACEUTICALS - Opponent(s) ========================================================= Appearance : MR MANISH R BHATT, MRS MAUNA M BHATT, MR BB NAIK, MR PRANAV G DESAI AND MR KETAN M PARIKH for Appellant(s) : 1, MR SN SOPARKAR, MR SN DIVETIA, MR RAJU K PATEL, MR BD KARIA, MR MANISH J SHAH, MR TUSHAR P HEMANI, MR SUDHIR MEHTA, MR TANVISH BHATT for Opponent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Date : 05/08/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ)

TAXAP/140220/2007 3/64 “Whether the Appellate Tribunal is right in law and on facts and in dismissing the appeal filed by the Revenue without adjudicating the same on merits on the ground that since in the appeal, tax   effect   was   below   Rs.2   lakh,   the   revenue could  not have preferred the same in view of the instructions of the CBDT, thereby entitling the Appellate Tribunal not to decide the same on merits?” 2.Alongwith these four Appeals, several other Appeals involving identical question of law were heard by this Court and learned counsels appearing   for   the   parties   have   made   their submissions in great detail. On behalf of the Revenue   Mr.Manish   R.   Bhatt,   Mr.B.B.Naik, Mrs.Mauna   Bhatt,   Mr.Pranav   Desai   and   Mr. Ketan Parikh, learned Standing Counsels have made their submissions, whereas on behalf of the assessees

Mr.S.N.Soparkar,

Mr. S.N.Divetia,   Mr.   R.K.Patel,   Mr.   Manish   J. Shah, Mr. B.D.Karia, Mr. Tushar Hemani, Mr. Tanvish Bhatt and Mr. Sudhir Mehta have made

TAXAP/140220/2007 4/64 their   submissions.   Since   purely   a   legal question   arise   in   all   these   Appeals,   the Court does not go into the facts of each and every   Appeal   and   considered   the   respective submissions   of   the   parties   in   the   present Appeals.   However,   for   the   sake   of convenience,   the   facts   in   brief   are   taken from the Tax Appeal No.1402 of 2007. 3.In   the   present   case   the   order   of   the Assessing   Officer   was   challenged   in   appeal before   CIT(A)   who   allowed   depreciation   on Rs.17,69,953/­   i.e.   on   pre­operational expenses   of   Phase­I   and   on   Rs.59,05,497/­ i.e.   being   cost   of   assets   in   Phase­II.   In further   appeal,   the   Appellate   Tribunal, considering the fact that the assessed income in assessment year 1995­96 was Nil and that there   was   a   loss   of   Rs.34,28,460/­   for assessment year 1996­97, held that both the appeals of revenue are not maintainable and dismissed in limine relying on the decision

TAXAP/140220/2007 5/64 of   the   Appellate   Tribunal,   Special   Bench, Calcutta,   in   the   case   of   JCIT   V/s.Peerless Developers Ltd., 104 TTJ 741, wherein it was held that tax effect being Nil as there are losses,   the   appeals   of   revenue   are   not maintainable.

TAXAP/140220/2007 6/64 1995­96   and   1996­97,   the   monetary   limit   as prescribed in Instruction No.1979 would apply taking together the assessment year 1995­96 and 1996­97. Further, in Instruction No.2 of 2005   dated   24.10.2005   the   CBDT,   in   partial modification   of   instruction   No.1979   dated 27.3.2000   and   Instruction   No.1985   dated 29.6.2000, has stipulated that the Board has also   decided   that   the   cases   involving substantial question of law of importance as well as in cases where the same question of law   repeatedly   arises,   either   in   the   case concerned   or   in   similar   cases,   should   be separately considered on merits without being hindered   by   the   monetary   limits.   While dismissing   the   department's   appeals,   the Tribunal   has   not   considered   this   aspect   of the matter. 5.The broad submissions made on behalf of the Revenue are that;

TAXAP/140220/2007 7/64 (i)   The   instructions   contained   in   the circular   are   not   absolute.   There   are exceptions   and   the   Tribunal   is   required   to examine   the   matter   in   the   light   of   the exceptions. (ii) Even as per the circular, Appeals are maintainable   in   a   case   where   circular   is required to be interpreted. As, in this case also,   the   circular   was   required   to   be interpreted, the Appeal was maintainable. (iii) The judgment reported in 267 ITR 272 (SC) is required to be read in the context in which it was rendered. (iv) The assessee concedes that circular is not   binding   on   the   appellate   authority.   As per   the   say   of   the   assessee,   circular   is issued   by   the   CBDT   directing   the   Assessing Officer not to file Appeal and, therefore, as per the say of the assessee, Appeal filed in

TAXAP/140220/2007 8/64 Tribunal   is   not   a   valid   Appeal.   This contention

is misconceived

as the requirements of a valid Appeal are enumerated in Section 253(2) of the Act read with Rule 47 of Income­Tax Rules, read with Rules 6 to 15 of Appellate Tribunal Rules, 1963. (v) In the event, directions of the CBDT are not obeyed by a Revenue Officer, it may, at the most, tantamount to dereliction of duty but would not tantamount to the Appeal being treated as an invalid Appeal. (vi) The ITAT does not have writ jurisdiction to hold that the Assessing Officer had acted beyond the CBDT instructions and, therefore, his action is wrong. (vii)   The   consequences   of   Appeal   not   being filed   in   a   recurring   issue   will   have disastrous   consequences.   If   in   the   main matter due to low tax effect Appeal is not

TAXAP/140220/2007 9/64 preferred and in the subsequent matter where the   tax   effect   is   substantial,   Appeal   is preferred, relying upon the judgment of the Hon'ble Supreme Court reported in 254 ITR 606 (SC), the appellate authority may reject the subsequent Appeal on the ground that in the main matter Appeal has not been preferred by the Revenue. 6.To   substantiate   the   above   grounds   of challenge, the learned counsel has referred to and relied upon certain circulars and/or instructions issued by CBDT on the issue in question.   The   Instruction   No.1328   dated 5.4.1980 refers to the prevailing practice on that   day   and   observes   that   the   Board   is generally   reluctant   to   advise   reference unless   the   tax   effect   is   more   than Rs.10,000/­   or   a   general   question   of   law affecting   a   large   number   of   cases   is involved.   In   supercession   of   previous instructions   on   the   subject,   the   Board   has

TAXAP/140220/2007 10/64 taken   a   fresh   decision   vide   Instruction No.1382   dated   5.4.1980. In   para   3.1   it   is stated   that   the   present   monetary   limits   of Rs.10,000/­ for reference to the High Court and of Rs.30,000/­ for Appeal to the Supreme Court laid down in Instruction No.284 dated 10.1.1975   will   continue.   The   limit   of Rs.10,000/­ for reference to the High Court however shall be relaxed where the question of law is repetetive and the cumulative tax effect in a number of cases is bound to be substantial. 7.Instruction   No.1777   dated   4.11.1987   states that filing of departmental appeal/reference should be selective. Guidelines were issued laying down monetary limits of revenue effect of   Rs.10,000/­   for   filing   appeals   before ITAT, Rs.30,000/­ for reference before High Court and Rs.60,000/­ for appeals to Supreme Court (Instruction No.1573 dated 12.7.84 and 1612 dated 6.4.1985). The Board has, however,

TAXAP/140220/2007 11/64 clarified   that   these   guidelines   should   be adhered   to   subject   to   the   exceptions   given below.   For   the   purpose   of   working   out monetary limit, the cumulative revenue effect of the issue in the assessee's case for all the   years   upto   the   year   for   which   returns have   been   filed   should   be   taken   into consideration.   Where   the   same   issue   is involved in different cases of a group (e.g. Industrial   house,   family,   connected   cases etc.), the revenue effect of the group and not the individual case should be taken into account   for   the   purpose   of   the   monetary limit.   While   applying   the   monetary   limits, the   effect   of   carry   forward,   effect   of consequential   addition/deletions   in   other years   should   be   kept   in   view.   In   cases   of firms/AOP   the   revenue   effect   in   cases   of partners/members be also taken into account. The   Board   has   also   clarified   that   where   a question   of   law   arises   for   the   first   time before the High Court concerned, it should be

TAXAP/140220/2007 12/64 contested   irrespective   of   revenue   involved. Where an adverse judgment is delivered by a High   Court   in   such   cases,   stay   of   the operation of the judgment should be obtained either from the High Court itself or from the Supreme Court. Other adverse judgments which need   to   be   contested   irrespective   of   the revenue effect. (a)   Where   prosecution   proceedings   are contemplated against the assessee; (b) Where strictures have been passed against the Department or its officers. (c) Where Revenue audit objection in the case has been accepted by the department. (d)   Where   board's   order,   notification, instruction or circular is the subject matter of adverse order. (e) Where in respect of one assessment year the   order   is   contested   in   the   case   of   an assessee for any reason, the adverse judgment for   other   years   in   the   issue   in   that   case should also be contested irrespective of the

TAXAP/140220/2007 13/64 amount involved so that department's case on the   issue   is   not   prejudiced   on   the   ground that in respect of some year the department has already accepted the assessee's case. 8.In Instruction No.1985 dated 29.6.2000, the Board   has   revised   the   monetary   limits   for filing   department   appeals/reference   before various   appellate   authorities   and   certain clarifications   were   made   in   respect   of Instruction   No.1979   dated   27.3.2000. The following   clarifications   were   made   by   the Board. (i)   the   monetary   limits   in   the   context   of “each   case   taken   singly”   would   mean   each assessment   year   for   each   assessee.   For instance, in the case of XYZ Limited for the assessment   years   1995­96   and   1996­97,   the monetary limit as prescribed in Instruction No.1979   would   apply   taking   together   the assessment years 1995­96 and 1996­97. TAXAP/140220/2007 14/64 (ii) even if the issues involved in an appeal under   consideration   are   already   pending   in appeal before the appellate authorities, all subsequent   appeals   will,   now,   be   filed   for particular assessment year only as indicated in (i) above, if the tax effect exceeds the prescribed monetary limit. 9.Vide   Instruction   No.2   of   2005   dated 24.10.2005   the   Board   has   made   partial modification and appeals will be filed only in   cases   where   the   tax   effect   exceeds   the revised monetary limits as under; (i)   Appeal   before   Appellate   Tribunal Rs.2,00,000/­. (ii) Appeal under Section 260A Rs.4,00,000/­. (iii)   Appeal   before   the   Supreme   Court Rs.10,00,000/­. The Board has, however, clarified that cases involving   substantial   question   of   law   of importance as well as cases where the same

TAXAP/140220/2007 15/64 question of law will repeatedly arise, either in the case concerned or in similar cases, should   be   separately   considered   on   merits without   being   hindered   by   the   monetary limits. 10.The  Board  has further  clarified  the  issue vide   Instruction   No.5   dated   16.7.2007   that the tax effect means the tax only, i.e. tax excluding   interest.   The   Board   has   further clarified that cases where the questions of law   involved   or   raised   in   appeal   are   of   a recurring nature to be decided by the Court, should   be   separately   considered   on   merits without   being   hindered   by   the   monetary limits. 11.The   Board   has   issued   Instruction   No.5   of 2008   dated   15.5.2008   superceeding   all previous   instructions   and   deciding   monetary limits and conditions specified below. (1) Appeals will henceforth be filed only in

TAXAP/140220/2007 16/64 cases where the tax effect exceeds monetary limits given hereunder;­ (i)   Appeal   before   Appellate   Tribunal Rs.2,00,000/­. (ii) Appeal under Section 260A Rs.4,00,000/­. (iii)   Appeal   before   the   Supreme   Court Rs.10,00,000/­. (2) For this purpose, 'tax effect' means the difference   between   the   tax   on   which   such total   income   be   reduced   by   the   amount   of income in respect of the issue against which appeal   is   intended   to   be   filed   (   i.e.   the disputed issues). However, the tax will not include any interest thereon. Similarly, in loss   cases   notional   tax   effect   should   be taken into account. In the case of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in the case to be appealed against. (3) The Assessing Officer shall calculate the

TAXAP/140220/2007 17/64 tax   effect   separately   for   every   assessment year in respect of the disputed issue in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than   one   assessment   year,   appeal   shall   be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issue exceeds the monetary limit specified above. No appeal shall be filed in respect   of   an   assessment   year   or   years   in which   the   tax   effect   is   less   than   the monetary   limit   specified.   In   other   words henceforth, appeals will be filed only with reference to the tax effect in the relevant assessment   year.   However,   in   case   of   a composite   order   of   any   High   Court   or appellate authority, which involves more than one year, appeal shall be filed in respect of all assessment years even if the 'tax effect' is less than the prescribed monetary limits in any of the year, if it is decided to file appeal in respect of the year in which 'tax

TAXAP/140220/2007 18/64 effect'

exceeds

the monetary

limit prescribed. 12.Based  on the above instructions  issued  by the   Board   from   time   to   time,   the   learned counsels strongly urged that the tax effect is   not   the   only   criteria   for   deciding   the maintainability   of   appeal.   The   circular issued by the Board from time to time will have to be read in light of the exceptions contained in such circulars or instructions. The Tribunal has committed a grave error in blindly   applying   the   monetary   limit   only without   considering   the   fact   as   to   whether the exceptions are applicable to the facts of each case. It is, therefore, submitted that the   orders   passed   by   the   Tribunal   in   all these appeals are required to be quashed and set aside and the matter will have to be sent back   to   the   Tribunal   for   deciding   as   to whether matters on hand fall within the scope of   exceptions   contained   in   applicable

TAXAP/140220/2007 19/64 circulars. 13.In   support   of   their   submissions,   the learned   counsels   for   the   Revenue   relied   on the following judgments. (i)  In  Commissioner   of   Income­Tax   Vs.   Hero Cycles Pvt. Ltd. and others, reported in 228 ITR 463 (SC)  it was held that Circular can bind the Income­tax Officer but will not bind the   appellate   authority   or   the   Tribunal   or the Court or even the assessee. (ii)   In  Commissioner   of   Income­Tax   Vs. Rajasthan Patrika Ltd., reported in 258 ITR 300  (Raj)  it   was   held   that   if,   inspite   of administrative instructions in a circular of the   Central   Board   of   Direct   Taxes   to   the effect that no appeal should be filed when the tax effect is not more than Rs.50,000/­, the Department prefers to file an appeal or take a reference to the High Court, on such

TAXAP/140220/2007 20/64 administrative   instructions   the   High   court ought not to dismiss the appeal or reject the reference. There is no infirmity in disposing of the appeal or reference on the merits. (iii)   In  Commissioner   of   Income­Tax   Vs. Shivaji Works Ltd., reported in 295 ITR 542 (Bombay), the facts were to the effect that the Revenue filed an appeal against the order of the Tribunal holding that repairs to the guest house was not an expenditure incurred on the maintenance of the guest house under Section   37(4)   of   the   Income­tax   Act,   1961, and   was   therefore   an   admissible   deduction. The   assessee   challenged   the   maintainability of the appeal considering the valuation for the   purpose   of   filing   appeal   and   the notifications by the Central Board of Direct Taxes.   The   Court   further   held   that   under paragraph   3   of   the   circular   dated   October 24,2005, cases involving substantial question of   law   of   importance   as   well   as   cases

TAXAP/140220/2007 21/64 involving   a   question   of   law   which   would repeatedly   arise,   should   be   separately considered   on   the   merits   without   being hindered   by   the   monetary   limits.   Therefore the circular itself makes out an exception, when appeals could be preferred. The question raised   being   covered   in   favour   of   the Department by the Supreme Court decision in Britannia   Industries   Ltd.,   (2005)   278   ITR 546, the appeal was to be allowed. The Court further held that the supervisory jurisdiction   of   the   High   Court   is   always available to correct errors of law apparent on   the   face   of   record.   The   mere   fact   that there   is   a   circular   prescribing   monetary limits for litigation by the Department would not   stand   in   the   way   of   the   High   Court exercising its jurisdiction. The Court also held that in those cases where the issue is not   covered   by   a   judgment   of   the   Supreme Court or of the High Court, the Circular will

TAXAP/140220/2007 22/64 apply and the Revenue would be bound by the Income­Tax, reported in 268 ITR 220 (P & H) it was   held   while   dismissing   the   appeals,   (i) that the Board's Circular No.F/279/126/98­IT dated March 27,2000, was only an instruction issued to the income­tax authorities not to file   appeals   where   the   tax   effect   is   less than   Rs.1,00,000/­.   The   Tribunal   was   not bound by any such instruction and once the

TAXAP/140220/2007 23/64 Department filed an appeal, the Tribunal was bound to decide the same on merits. The Court

therefore held that no substantial question of   law   arose   from   the   admission   of   the appeal. (v) In Commissioner of Income­Tax Vs. Kodanand Tea   Estates   Co.,   reported   in   275   ITR   244 (Madras).   The   appeal   filed   by   the   Revenue before   the   Tribunal   had   been   dismissed without going into the merits on the basis of Circular   Instruction   No.1903   dated   October 28,   1992   and   instruction   No.1777   dated November 4,1987 by which a monetary limit for filing of the appeal by the Department before the   Tribunal   was   laid   down.   Under   the Circular, the monetary limit was revised to Rs.one lakh. As the tax effect in these cases was   less   than   Rs.one   lakh,   the   appeal   was dismissed   relying   the   instructions.   On further appeal to the High Court it was held that   the   instruction   came   into   force   only

TAXAP/140220/2007 24/64 with   effect   from   April   1,   2000. The assessment   years   involved   in   these   appeals were   earlier   to   the   date   from   which   the notification   was   given   effect.   Hence,   the application   of   the   notification   for dismissing   the   appeal   was   not   legally sustainable. Apart from that clause (ii) of paragraph 3 of Instruction No.1979 provides that where the Board's order, notification, Commissioner of Income­Tax (2004) 269 ITR 133

TAXAP/140220/2007 25/64 (Allahbad).   The   Court   held   that   the instructions of the Central Board of Direct Taxes   regarding   filing   of   appeals   are   only internal   matters   of   the   Department   and   the assessee cannot object to filing of an appeal despite such an instruction. The appeal was clearly maintainable before the Tribunal on behalf of the Department under Section 253(2) of the Income­tax Act and this right to file an appeal was a statutory right and could not be   taken   away   or   prohibited   by   executive instructions. (vii)   In  Commissioner   of   Income­Tax   Vs. Abhishek Industries Ltd., reported in (2006) 286 ITR 1 (P&H) it was held that the circular issued by the Central Board of Direct Taxes can bind the Income­tax Officer, but will not bind the appellate authority or the Tribunal or the Court or even the assessee. The Court further held that the Tribunal must examine the   material   on   record   before   rendering   a

TAXAP/140220/2007 26/64 decision on any issue raised by the parties. The   Tribunal   being   the   last   fact   finding authority a higher responsibility is cast by the Legislature on it to decide the cases by recording complete facts and assigning cogent reasons. It is the duty of the Tribunal to decide the cases on the basis of the law laid down by the Supreme Court/High Court and not what the Tribunal decides on the particular issue.   Every   effort   must   be   made   by   the Tribunal to decide the issue by taking help from the decisions of the Supreme Court and if   there   is   no   direct   authority   of   the Supreme   Court   on   the   point   then   of   the jurisdictional High Court and lastly of any other   High   Court.   Not   taking   note   of   the facts of the case, nor the legal position and not even referring to the facts of the case involved in those decisions on which reliance is placed for deciding the appeal amounts to non­exercise of the appellate powers by the Tribunal.

TAXAP/140220/2007 27/64 (viii) In Bengal Iron Corporation and another Vs.   Commercial   Tax   Officer   and   others, reported   in   AIR   1993   SC   2414,   it   was   held that   Clarifications/Circulars   issued   by   the Central   Government   and/or   State   Government regarding   taxability   of   certain   item represent merely their understanding of the statutory   provisions.   They   are   not   binding upon the Courts. Though those clarifications and   circulars   were   communicated   to   the concerned   dealers   but   even   so   nothing prevents the State from recovering the tax, if in truth such tax was leviable according to law. There can be no estoppel against the statute. The understanding of the Government, whether in favour or against the assessee, is nothing   more   than   its   understanding   and opinion,   It   is   doubtful   whether   such clarifications and circulars bind the quasi­ judicial functioning of the authorities under the   Act.   While   acting   in   quasi­judicial

TAXAP/140220/2007 28/64 capacity, they are bound by law and not by any   administrative   instructions,   opinions, clarifications or circulars. Law is what is declared by Supreme Court and the High Court. It is for Supreme Court and the High Court to declare what does a particular provision of statute say, and not for the executive. Of course,   the   Parliament/Legislature   never speaks   or   explains   what   does   a   provision enacted by it mean. (ix) In Commissioner of Income­tax Vs. Chhajer Packaging   &   Plastics   (P)   Ltd.,   reported   in (2008) 214 CTR 389, it was held by the Bombay High   Court   that   Instruction   No.2   of   2005 dated   24th  Oct.,   2005,   is   applicable   only prospectively   and   it   makes   no   reference   to pending matters; appeal is also saved by para 3   of   the   instruction   since   it   involves   a question of law regarding interpretation of s.275(1)(c), particularly the manner in which

TAXAP/140220/2007 29/64 the limitation should be computed.

Based   on   the   aforesaid   judicial pronouncements and considering the true scope and ambit of the circulars it was forcefully contended   by   all   the   learned   counsels appearing   for   the   Revenue   that   the substantial   question   of   law   raised   before this   Court   be   answered   in   favour   of   the Revenue   and   the   Tribunal   be   directed   to decide all these matters on their own merits.

TAXAP/140220/2007 30/64 substantial question of law, the same shall be answered in favour of the assessees and all these appeals be dismissed. It is further submitted   that   circulars   issued   by   the Central Board of Direct Taxes are binding to the   Department   and   the   Departmental authorities   cannot   act   nor   they   can   file appeals before the Tribunal contrary to such circulars.   The   Tribunal   is   well   within   its power to dismiss such appeals filed contrary to the circulars issued by the Central Board of Direct Taxes. It is further submitted that whether   any   particular   case   is   covered   by exceptions curved out in the circular, must specifically be pleaded in the appeal memo or at the time of hearing of appeal before the Tribunal. If no such contentions were raised by the Departmental representative before the Tribunal, the same cannot be raised for the first time before this Court. It is further submitted   that   simply   because   an   appeal   is filed   by   the   Department   contrary   to   the

TAXAP/140220/2007 31/64 circulars, it is not obligatory on the part of the Tribunal to dispose of such appeal on merits.   Suffice   it   for   the   Tribunal   to dismiss   any   of   such   appeals   simply   on   the ground of low tax effect. There are catena of judgments laying down the principle that the circulars are binding to the Department. The Court's   attention   is   invited   to   the provisions contained in Section 268A of the Act inserted by the Finance Act, 2008, with retrospective   effect   from   1.4.1999. Sub Section 4 of Section 268A clearly states that the Appellate Tribunal or Court, hearing such appeal   or   reference,   shall   have   to   record orders,   instructions   or   directions   issued under   Sub   Section   1   and   the   circumstances under   which   such   appeal   or   application   for reference was filed or not filed in respect of any case. Till now there are only judicial pronouncements which state that the circular issued by the Central Board of Direct Taxes are   binding   to   the   Department   and   the

TAXAP/140220/2007 32/64 Tribunal or the Court are not bound by such Circulars. Sub Section 4 of Section 268A now cast an obligation on the Appellate Tribunal or   the   Court   to   consider   the   orders, instructions   or   directions   issued   by   the Board under Sub Section 1 of Section 268A of the   Act   and   shall   decide   the   appeal   or application filed before it. Sub Section 5 of Section   268A   makes   it   further   clear   that every order, instruction or direction which has been issued by the Board fixing monetary limit for filing an appeal or an application for reference shall be deemed to have been issued under Sub Section 1 and the provisions of   Sections   2,   3   and   4   shall   apply accordingly. By virtue of this Sub Section 5, the controversy is resolved once and for all which is prevalent prior to this amendment. One view was that only the Circular issued under   Section   119   of   the   Act   are   having binding   effect   and   other   Circulars, instructions or directions are not having any

TAXAP/140220/2007 33/64 binding   effect.   This   amendment   now   gives statutory force to all orders, instructions or directions issued by the Board under Sub Section 1 of Section 268A of the Act, fixing monetary limit for the purpose of regulating filing of appeal/application for reference by any Income­tax Authority under the provisions of Chapter­XX of the Act. It is, therefore, urged that the Tribunal has rightly dismissed all these Tax Appeals on the ground of low tax effect and no question of law much less any   substantial   question   of   law   has   arisen out of the order of the Tribunal and hence these Appeals deserve to be dismissed.

TAXAP/140220/2007 34/64 Memoranda   dated   5.6.2007,   pursuant   to   the order passed by the Bombay High Court. The Bombay High Court in ITA(L) No.118 of 2003 in the   case   of   CIT   Mumbai   Vs.   M/s.   Vitessee Trading

Ltd.,

dated

made observation that the Department has not been following the instructions issued by the CBDT while   filing   appeals   and   has   directed   that wherever, the appeals already filed fail to meet the criteria of monetary limits the same should be withdrawn, unless the question of law involved or raised in appeal or referred to   the   Court   is   of   a   recurring   nature required   to   be   settled   by   the   Court.   The directions   are   issued   in   this   Office Memoranda that all appeals already filed by the department before the Bombay High Court should be examined case to case basis and in cases where the criteria of monetary limit as per   the   prevailing   instruction   is   not satisfied,   the   appeal   should   be   withdrawn unless, a question of law involved or raised

TAXAP/140220/2007 35/64 in appeal or referred to the High Court is of a recurring nature requires to be settled by the Court.

TAXAP/140220/2007 36/64 liability   of   the   assessee   is   below   the monetary   limit   prescribed,   Revenue   cannot file   an   appeal   in   transgression   of   the circular by which it is bound. However, in a case   which   falls   within   the   excepted category,   it   would   always   be   open   to   the Department to bring it to the notice of the forum   approached   and   to   insist   that   the question   being   covered   by   the   exceptions contained   in   cl.3   of   the   Circular   dt.   24th Oct. 2005 as modified by the Instruction No.5 of   2007,   dt.   16th  July,   2007,   the   same deserves   to   be   considered   by   the   superior forum,

the circular

of the CBDT notwithstanding.   In   view   of   the   above,   the question raised in these appeals is answered against the Department subject to the liberty that   if   a   case   falls   within   the   excepted category, it would be open to the Department to bring the said fact to the notice of the Court or the Tribunal so that the appropriate

TAXAP/140220/2007 37/64 authority/Court   applies   its   mind   to   the necessity   of   formulating   the   question   of rendering the decision thereon. (iii)   In  Commissioner   of   Income­tax   Vs. Pithwa Engineering Works, reported in 276 ITR 519 (Bombay), it was held that the Court can very well take judicial notice of the fact that by passage of time money value has gone down,   the   cost   of   litigation   expenses   has gone   up,   the   assessees   on   the   file   of   the Departments have increased; consequently, the burden on the Department has also increased to a tremendous extent. The corridors of the superior courts are choked with huge pendency of   cases.   In   this   view   of   the   matter,   the Board   has   rightly   taken   a   decision   not   to file   references   if   the   tax   effect   is   less than   Rs.2   lakhs.   The   same   policy   for   old matters   needs   to   be   adopted   by   the Department. The Board's circular dated March 27, 2000, is very much applicable even to the

TAXAP/140220/2007 38/64 old references which are still undecided. The Department   is   not   justified   in   proceeding with   the   old   references   wherein   the   tax impact   is   minimal.   Thus,   there   is   no jurisdiction   to   proceed   with   decades   old references having negligible tax effect. (iv)   In  Commissioner   of   Income­tax   Vs.   A. Rajendra Prasad & Ors., reported in (2008) 215 CTR (AP) 511, the Andhra Pradesh High Court held that if an interpretation as pleaded by the Revenue is placed on the circulars, then the Department could use these instructions arbitrarily without any reason. They can file an   appeal   in   matters   in   which   they   were instructed by the Board not to file appeals and in certain matters, they would not file appeal on the ground that the statutory power could not be limited by the Circular and it will   give   rise   to   arbitrariness,   which, obviously, could not be the purpose of the circular. The selection of the cases in which

TAXAP/140220/2007 39/64 appeals should be filed and cases in which, appeals should not be filed, cannot be left to the discretion of the concerned authority without any guidelines whatsoever. There is no material before the Court and no material was placed even before the Tribunal to come to   a   conclusion,   that   the   circulars,   which have   been   mentioned   as   'circulars'   by   the Board itself, were not circulars under s.119. The   circulars   in   question   are   statutory   in nature   and   are   issued   by   the   Board   in, exercise   of   powers   under   s.119. The   first contention of senior counsel for Revenue that the   circulars   were   not   enforceable   as   they were   not   issued   under   s.119   and   even   if issued under s.119, could not take away the power   of   the   Department   to   file   an   appeal created   under   the   Act,   cannot   be   accepted. The second contention is that the circulars create an exception and this aspect was not looked   into   by   the   Tribunal.   All   these exceptions which have been created in these

TAXAP/140220/2007 40/64 circulars,   require   consideration   by   the Department   with   reference   to   each   case   and after   consideration,   they   should   come   to   a

conclusion that though the case was falling under   the   monetary   limits,   it   was   also covered   by   an   exception.   No   such   exercise appears to have been done and therefore, this argument would not be available at this stage to the Department. Even such an exercise was not   made   at   the   Tribunal.   Therefore,   these appeals   deserve   to   be   dismissed   and   are

accordingly dismissed. The Court further held that in order to avoid any confusion, it is laid down that in case the Department finds a certain matter to be agitated by way of an appeal although it falls within the monetary limits   of   the   circulars,   the   Department should clearly, plead in the memo of appeal itself   that   the   appeal   falls   under   the exceptions. In the absence of such a pleading in the memo of appeal, normally appeal should not   be   entertained.   On   the   basis   of   this

TAXAP/140220/2007 41/64 judgment   the   conclusion   can   be   drawn   that CBDT instructions prohibiting the Department to file appeals before various fora where tax effect   was   below   the   limit   specified   were binding on the Department and so far as the exceptions   provided   in   the   aforesaid instructions   are   concerned,   the   Department should clearly plead in the memo of appeal itself   that   the   appeal   falls   under   the exceptions. (v) In  Commissioner of Income­Tax Vs. Camco Colour   Co.,   reported   in   (2002)   254   ITR   565 (Bombay), it   is   held   that   Circular F.No.279/126/98­ITJ,   dated   March   27,   2000, reflected   the   policy   decision   taken   by   the Central Board of Direct Taxes not to raise questions   of   law   where   the   effect   is   less than   the   amount   prescribed   in   the instructions issued by the Central Board of Direct   Taxes   with   a   view   to   reduce litigations   before   the   High   Courts   and   the

TAXAP/140220/2007 42/64 Supreme Court. The circular is binding on the Revenue. An appeal or reference contrary to the instructions issued in the Circular will not   be   considered   by   the   Courts.   For   the purpose   of   contending   that   the   Circular issued by the Central Board of Direct taxes is   binding   on   all   the   Officers   and Commissioner,   reliance   is   placed   on   the decision of Hon'ble Supreme Court in the case Court in the case of Commissioner of Income­ TAXAP/140220/2007 43/64 before the High Courts and the Supreme Court. The circular is binding on the Revenue. (vi) In  Commissioner of Income­tax Vs. Blaze Advertising   (Delhi)   Pvt.   Ltd.,   reported   in (2002)   255   ITR   460   (Delhi),   wherein   it   is held that, Circular issued under Section 119 of   the   Income­tax   Act,   1961   stand   on   a different   footing   and   they   are   meant   for ensuring   proper   administration   of   the statutes   and   mitigate   rigours   of   the provisions   of   law.   These   circulars   are binding and enforceable against the Revenue. However, when the Supreme Court or the High Court have declared the law on a question, it is not open to the Court to direct that a circular should be given effect to and not the   decision.   A   statutory   right   of   the Tribunal for making references to the Court cannot be taken away by the Central Board of Direct Taxes by issuing a circular.

TAXAP/140220/2007 44/64 (vii)   In  Commissioner   of   Income­tax   Vs. Associated   Electrical   Agencies,   reported   in (2007) 295 ITR 496 (Mad.), it is held that the CBDT Circular (F. No.279/126/98­ITJ dated March   27,   2000,   prescribes   monetary   limits for appeals. An appeal cannot be filed by the Revenue ignoring the circular. The exceptions stand in the circular for filing an appeal irrespective of the revenue effect are: (i) where a Revenue audit objection in the case has   been   accepted  by   the   Department,   (ii) where   the   Board's   order,   notification, instruction or circular is the subject matter of an adverse order, (iii) where prosecution proceedings   are   contemplated   against   the assessee, and (iv) where the constitutional validity of provisions of the Act are under challenge, and the monetary limit would not apply   to   writ   matters.   The   circular   would come   into   effect   from   April   1,   2000. The Court dismissed the appeal on the ground that the tax effect involved in the case was only

TAXAP/140220/2007 45/64 Rs.5,000/­. The Court has also considered the issue even dehors the Circular and on facts found   that   no   question   of   law,   much   less, substantial question of law arose. (viii)  In  State of Kerala and Ors Vs. M/s. Kurian Abraham Pvt. Ltd., and Anr. decided on 8.2.2008  the Hon'ble Supreme Court has held that   the   Circular   No.16/1998   issued   by   the Board   of   Revenue   under   Section   3(1A)(c), Kerala   General   Sales   Tax   Act,   1963,   is binding on all the authorities administering the   Tax   Department.   This   Circular   is statutory in nature and hence it is binding on the department though not on the Courts and the assessee. Completed assessment would not be reopened on the ground that the said Circular was not binding. Such an approach is unsustainable   in   the   eyes   of   law.   If   the State Government was of the view that such circulars are illegal or that they are ultra vires Section 3(1A), which it is not, it was

TAXAP/140220/2007 46/64 open to the State to nullify/ withdraw the said circular under Section 60 of the 1963 Act. If the Circular is not withdrawn till this   date,   it   is   not   open   to   the   Officers administering the law working under the Board of Revenue to say that the said circular is not binding on them. The Court further held that if such a contention is to be accepted, it would lead to chaos and indiscipline in the   administration   of   tax   laws.   The   Court further   took   the   view   that   whenever   such binding   circulars   are   issued   by   the   Board granting   administrative   relief,   as   long   as circular remains in force it is not open to the subordinate officers to contend that the circular   is   erroneous   and   not   binding   on them. (ix) In Commissioner of Income­Tax Vs. Vikrant Crimpers,   reported   in   (2006)   282   ITR   503 (Guj.)  this Court has held that the Central Board   of   Direct   Taxes   has   by   Circular   No.

TAXAP/140220/2007 47/64 RA/86­87/DIT dated August 26, 1987, directed that   no   remedial   action   is   necessary   in summary cases. The Commissioner being bound by   the   directions   of   the   Central   Board   of Direct   Taxes   cannot   exercise   powers   under Section 263 of the Income­tax Act, 1961, in the Indo­Mauritius Double Taxation Avoidance Convention,   1983   wherever   a   certificate   of residence   is   issued   by   the   Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership of shares, is a circular within the meaning of Section 90, and, therefore, it must have

TAXAP/140220/2007 48/64 the   legal   consequences   contemplated   by Section 90(2). In other words, the circular will   prevail   even   if   inconsistent   with   the provisions of the Income­tax Act, 1961, in so far as assessees covered by the provisions of the   Convention   are   concerned.   The   Court further held that the Circular No.789 dated 13,   2000,   issued   by   the   Central   Board   of Direct Taxes falls well within the parameters of   the   powers   exercisable   by   the   Central Board of Direct Taxes under Section 119. The Circular does not in any way crib, cabin or confine the powers of the Assessing Officers with regard to any particular assessment : it merely   formulates   broad   guidelines   to   be applied   in   the   matter   of   assessment   of assessees   covered   by   the   provisions   of   the Indo­Mauritius   Double   Taxation   Avoidance Convention, 1983. (xi)   In  Berger   Paints   India   Ltd.,   Vs. Commissioner of Income­tax, reported in (2004)

TAXAP/140220/2007 49/64 266 ITR 99, it is held that if the Revenue judgment of the Hon'ble Supreme Court in the Customs (2003) 5 SCC 528, the Hon'ble Supreme Court   laid   down   the   following   ratio;   (1) although a circular is not binding on a court or an assessee, it is not open to the Revenue to raise a contention that is contrary to a

TAXAP/140220/2007 50/64 binding circular issued by the Board. When a circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid nor that it is contrary to the terms of the statute. (2) despite the decision of this Court, the Department cannot be permitted to take a stand contrary to the instructions issued by the Board. (3) a show cause notice and demand contrary to existing circulars of the Board are ab initio bad. (4) it is not open to the Revenue to advance an argument or file an appeal contrary to the circulars. (xiii)   In  Commissioner   of   Gift­Tax,  Gujarat Vs. Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai, reported in (1988) 170 ITR 144, this Court while accepting the contention of the department, that the shares had to be valued on the basis of the dividend or profit method of valuation, but that the valuation made by the Tribunal and approved

TAXAP/140220/2007 51/64 by the High Court ought not to be disturbed in   view   of   the   matter   being   two­and­a­half decades old and of the smallness of the tax involved. (xiv)   In  Nandkishore   Shantilal   Parekh   Vs. Commissioner of Income­tax, reported in (1993) 110 CTR Reports 109, this Court has held that the Tribunal having omitted to consider the relevant

circumstances,

i.e.

affluent background of assessee and multiple sources of income, in coming to its conclusion that household   expenses   were   understated,   matter deserved   to   be   remitted   back;   however,   tax effect   being   small,   reference   was   not answered. (xv)   In  Commissioner   of   Income­tax   Vs. Dineshchandra   S.   Shah,   decided   on   9.7.2008, this Court had an occasion to consider the provisions contained in Section 268A of the Income­tax   Act,   1961   while   deciding   the

TAXAP/140220/2007 52/64 application   moved   by   the   Revenue   seeking leave   to   appeal   to   Supreme   Court.   Section 268A(1) says that the Board may, from time to time,   issue   orders,   instructions   or directions   to   other   income­tax   authorities, fixing such monetary limits as it may deem fit, for the purpose of regulating filing of appeal   or   application   for   reference   by   any income­tax authority under the provisions of this Chapter. The Court took the view that the tax effect in each of the three years is very   low   and   is   below   the   monetary   limit prescribed by the Board and in this view of the   matter,   apart   from   the   fact   whether MCA/SLP is filed by the Revenue in any other cases, as per the Board's instructions no MCA could   have   been   filed   in   assessee's   case, looking   to   the   tax   effect   being   very   low. Accordingly, application for leave to appeal filed by the revenue was rejected.

TAXAP/140220/2007 53/64 for   the   respective   parties   and   having   gone through   the   relevant   statutory   provisions, judgments   of   various   Courts   and   Circulars issued by the Board from time to time, we are of   the   view   that   subject   to   certain directions, which are issued hereinafter, all these Tax Appeals deserve to be dismissed and they are accordingly dismissed as no question of law, much less, any substantial question of   law   arises   out   of   the   order   of   the Tribunal.   In   almost   all   cases   the   Tribunal has dismissed the appeals only on the ground of   low   tax   effect,   without   entering   into merits   of   the   matter.   While   dismissing   the appeals,   the   Tribunal   has   referred   to   the Circular   issued   by   the   Central   Board   of Direct Taxes prescribing the monetary limit. The   appeals   filed   by   the   Department   in contravention   of   such   Circulars   prescribing the   monetary   limit   were   ordered   to   be dismissed. Almost all Courts are agreeable on this issue.

TAXAP/140220/2007 54/64

TAXAP/140220/2007 55/64 of exception and the Tribunal was directed to hear appeal on the merits.

In A Rajendra Prasad & Ors., case (Supra), the   A.P.   High   Court   took   the   view   that   in

TAXAP/140220/2007 56/64 case the Department finds a certain matter to be agitated by way of an appeal although it falls   within   the   monetary   limits   of   the circulars,   the   department   should   clearly plead in the memo of appeal itself that the appeal   falls   under   the   exceptions.     In absence   of   such   a   pleading   in   the   memo   of appeal,   normally   appeal   should   not   be entertained.

In  Kurian Abraham Pvt. Ltd.'s case (Supra) the Hon'ble Supreme Court took the view that whenever   any   binding   circular   is   issued   by the Board granting administrative relief, as long as such circular remains in force, it is not   open   to   the   subordinate   officers   to contend   that   the   circular   is   erroneous   and not binding on them.  If such a contention is to be accepted, it would lead to chaos and indiscipline   in   the   administration   of   tax laws.

TAXAP/140220/2007 57/64 In Indian Oil Corporation case (Supra) the Hon'ble   Supreme   Court   laid   down   certain propositions   of   law   in   relation   to   the binding   nature   of   circulars   issued   by   the Board.     The   Court   held   that   despite   the decision of this Court, the Department cannot be permitted to take a stand contrary to the instructions issued by the Board and that it is   not   open   to   the   Revenue   to   advance   an argument or file an appeal contrary to the circulars.

TAXAP/140220/2007 58/64 of appeal and not on the date of the decision of   the   appeal. In  Chhager   Packaging   & Plastics (P) Ltd.'s case (Supra)  the Bombay High

Court

took

the view

that circulars/instructions   issued   by   the   Board are   applicable   only   prospectively   and   if there is no reference to their applicability to the pending matters, such pending matters cannot   be   decided   on   the   basis   of circulars/instructions.

In  Pithwa Engineering Works' case (Supra) the   Bombay   High   Court   took   the   view   that taking   judicial   notice   of   the   money   value having   gone   down   and   cost   of   litigation expenses   having   gone   up   as   well   as   huge pendency of cases, the Board should evolve a policy of applying the circulars even to the old   references   which   are   still   undivided. The Department should not have proceeded with the appeals/references wherein the tax impact is   minimal,   irrespective   of   their   date   of

TAXAP/140220/2007 59/64 filing.

TAXAP/140220/2007 60/64 without dealing with those objections if the Tribunal has dismissed the appeal only on the ground of low tax effect, in such matter, an indulgence is required to be shown by this Court   and   for   this   limited   purpose,   the Department   is   permitted   to   move   an appropriate   application   before   the   Tribunal for deciding the appeal on merits.

TAXAP/140220/2007 61/64 such Circular. It is true that filing of an appeal   is   a   statutory   right   but   it   can certainly   be   regulated   by   the   Board   by issuance   of   orders,   instructions   or Circulars.   This   would   not   amount   to   taking away the right of filing of appeal or that such   right   is   prohibited   by   executive instructions. Section 268A(1) of the Act now recognizes   such   right   of   the   Board   to regulate the filing of appeal or application before the Tribunal or the Court. It is also true that when the Hon'ble Supreme Court or the territorial High Court have declared the law   on   a   question,   it   is   not   open   to   the Tribunal to direct that the Circular issued by the Board prescribing the monetary limit should   be   given   effect   to   and   not   the decision   of   Hon'ble   Supreme   Court   or   the territorial   High   Court.   It   is,   however, equally   true   that   the   Tribunal's   attention must   be   drawn   by   the   departmental representative   to   such   decision   of   the

TAXAP/140220/2007 62/64 Hon'ble Supreme Court or the High Court. An objection must be raised by the Departmental representative.

TAXAP/140220/2007 63/64 548, 550 and 704 of 2007 are concerned, this Court   while   admitting   all   these   appeals   on 10.10.2007   has   also   framed   one   more substantial   question   of   law   which   is   as under:­ “Whether in the facts and circumstances of the case, the Tribunal was justified in holding that the excise duty levied on closing stock should not be taken into account for valuation of the closing stock ?

all these

appeals

are

accordingly dismissed without any order as to costs.

TAXAP/140220/2007 64/64 (K. A. PUJ, J.) ( B. N. MEHTA, J.) kks