Venugopala Constructions and Others vs Income Tax Officer and Another

Lingaraja Rath, J.—Mr. Y. Ratnakar, learned counsel for the petitioners strenuously urges in these petitions the inapplicability of Circular No. 737 dt. 23rd February, 1996 Trilok Chandra Garg Vs. Asstt. Director (Investigation) Income Tax, , with retrospective effect issued by respondent No. 2 purporting to clarify/withdraw the earlier Circular No. 684 dt. 10th June, 1994 208 ITR 8], which explained the scope of S. 44AD of the IT Act, 1961. It is submitted that S. 40(b) deals with amounts not deductible from the profits and gains of business of firms and sub-cls. (iv) and (v) provide for payment of interest or remuneration to any partner as not deductible from the profits of the business in computing the income. According to sub-clause (iv) of clause (b), the payment of interest to a partner which is authorised by, and is in accordance with, the terms of the partnership deed and relating to any period falling after the date of the partnership deed insofar as such amount exceeds the amount calculated at the rate of 18 per cent simple interest per annum shall not be deducted. So far as remuneration is concerned, according to sub-clause (v) of clause (b), any remuneration which is paid to a working partner and which is authorised by, and in accordance with, the terms of the partnership deed and is related to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as provided in the section, shall not be deducted. It is the case of the petitioners that S. 44AD was enacted for simplifying the procedure and provided that notwithstanding anything to the contrary contained in Ss. 28 to 43C (S. 40 included), in the case of an assessee engaged in the business of civil construction or supply of labour for civil construction, a sum equal to eight per cent of the gross receipts paid or payable to the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income, shall be deemed to be the profits and gains of such business chargeable to tax under the head "profits and gains of business or profession". A circular was issued by respondent No. 2 on 10th June, 1994, being Circular No. 684, which provided in paras 31.3 and 32.2 as follows :

"31.3. The rate of 8 per cent is comprehensive. All deductions under Ss. 30 - 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the normal deductions to the extent allowed under clause (b) of S. 40 will be allowed.

32.2 : The estimated income is comprehensive. All deductions under Ss. 30 - 38 including depreciation, will be deemed to have been already allowed and no further deduction will be allowed under these sections. The written down value will be calculated, where necessary, as if depreciation as applicable has been allowed. In the case of firms, the normal deductions to the extent allowed under clause (b) of S. 40 will be allowed."

The CBDT later found that the circular dt. 10th June, 1994, had created confusion and ambiguity and hence, issued another Circular No. 737, on 23rd February, 1996, of which paras 3 and 4 are as follows :

"3. A doubt has been raised as to whether deduction(s) on account of salary/interest to the partners of a firm shall be admissible from the income estimated in accordance with Ss. 44AD and 44AE of the Act. The law is clear on this issue and no separate deduction is to be allowed under S. 40(b) in such cases. The doubt has primarily arisen because of the erroneous clarification given in paras 31.3 and 32.2 of the Explanatory Notes on the provisions of the Finance Act, 1994 [Circular No. 684, dt. 10th June, 1994 (supra)]. The relevant portion of the Explanatory Notes reads as under :

''In the case of firms, the normal deductions to the extent allowed under clause (b) of S. 40 will be allowed.''

Clause (b) of S. 40 lays down restrictions on the deduction allowable on account of salary and interest to the partners and is not an enabling section for claiming deduction. The admissible deductions are specifically mentioned under Ss. 30 - 38 of the IT Act. Hence, Ss. 44AD(2) and 44AE(3) only state this obvious position by way of clarification. However, in view of the non obstante clause in sub-s. (1) of Ss. 44AD and 44AE, there is no ambiguity about the intention of the legislation in this matter and the provisions of the Act are quite clear. As already said above, the doubt has primarily arisen because of the error in the Explanatory Notes to the Finance Act, 1994. Therefore, for the sake of clarity and removal of doubts in this regard, the following lines are deleted from paras 31.3 and 32.2 of Circular No. 684, dt. 10th June, 1994 :

''In the case of firms, the normal deductions to the extent allowed under clause (b) of S. 40 will be allowed.''"

Since the earlier circular had in effect given a benefit to the assessee that the permissible deductions under S. 40(b) of the IT Act were also available while calculating the comprehensive rate of 8 per cent under S. 44AD, it is the argument of Mr. Ratnakar, that the latter circular can have only prospective application and could not have any retrospective effect so as to deprive the assessee of the benefit of deductions in respect of the salary and interest as was permissible under S. 40(b) and as had been clarified in Circular No. 684.

No argument has been advanced before us that S. 44AD is amenable to the interpretation that the 8 per cent comprehensive declaration of profits and gains of business is besides the amount which was allowable under S. 40(b) of the Act to the partners and that Circular No. 684, was in consonance with the provisions of S. 40(b). We are not on the question whether independent of the two circulars, the benefit as is claimed by the assessee is available under S. 44AD. The limited question which has been urged before us is that the circulars of respondent No. 2 are binding on all the officers of the IT Department and that being so, a circular must hold good till it is in force and the rights of the assessee must be determined in accordance with it even though the circular may, in effect, be a deviation from the statute and run contrary to it.

We are unable to agree with the submission as S. 119 of the IT Act authorises the Board only to issue orders, instructions and directions to the IT authorities for "proper administration of this Act". The proviso to the said section, inter alia, enjoins that no such orders, instructions or directions shall be issued so as to require any IT authority to make a particular assessment or to dispose of a particular case in a particular manner. A reading of the proviso suggests without any ambiguity that the scope of issuance of circulars by the Board is confined to the purpose of proper administration of the Act. The circulars are admittedly executive in character and have to be issued in aid of the functioning of the Act and with the objective that the provisions of the Act are properly administered. The Board may, in issuing a circular, clarify a point of ambiguity in any provision of the law. Such clarification is not only not binding upon the Courts, but also cannot assume a substantial right in itself to run counter to the legislative provisions and create rights or obligations which are contrary to the statute. The Board itself being a creature under the statute, could never issue instructions overruling the statute itself. Thus if a particular impost is either authorised or not authorised under the law, it would not be within the province of the Board either to create such an impost or waive it.

Mr. Ratnakar has brought to our notice a decision of the Supreme Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, , and another decision of this Court in Commissioner of Income Tax Vs. T.V. Ramanaiah and Sons, . So far as Varghese''s case (supra), is concerned, it was observed that the circulars issued by the CBDT under S. 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act. In the decision of this Court the same view is reiterated. While undoubtedly such citations support the proposition advanced by Mr. Ratnakar yet we find a later development of the law. The question was considered by a three Judge Bench of the Supreme Court in State Bank of Travancore vs. CIT (1996) 158 ITR 102 : TC 39R 795. Their Lordships held :

"The question of how far the concept of real income enters into the question of taxability in the facts and circumstances of this case and how far and to what extent the concept of real income should intermingle with the accrual of income will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed and the feasibility. The earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions and could always be prospectively withdrawn. However, on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject-matter to be adjudicated by us and, as rightly contended by counsel for the Revenue, the circulars cannot detract from the Act."

This case, hence, took the view that a circular issued by the Board could not deviate from the provisions of the Act. In Kerala Financial Corporation Vs. Commissioner of Income Tax, , the Supreme Court observed as under :

"The fact that the circular to which Shri Salve has referred is one which had been issued in exercise of the powers conferred by S. 119 of the Act has no significance in so far as the point under consideration, namely, whether the circular can override or detract from the provisions of the Act is concerned, inasmuch as what S. 119 has empowered is to issue orders, instructions or directions for the ''proper administration'' of the Act or for such other purposes specified in sub-s. (2) of the section. Such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provision of law enacted by Parliament. Such a contention cannot seriously be even raised."

While making the observations the Court also referred to Varghese''s case (supra), which had taken a contrary view and held that the later decision of the Bench in C.B. Gautam Vs. Union of India and Others, , had while referring to Varghese''s case (supra), drawn support from it only as regards the conclusions reached by it that the provisions of Chapter XX-C of the Act are to be resorted to only where there is significant undervaluation of the immovable property with a view to evading tax, but did not affirm the observations in Varghese''s case (supra), about the permissibility of circulars to "deviate" from the provisions of the Act. Certain other decisions have been cited by Mr. Ratnakar like Commissioner of Income Tax, Delhi Central Vs. Modi Spinning and Weaving Mills Co. Ltd., , Navnitlal C. Javeri Vs. K.K. Sen, Appellate Assistant Commissioner of Income Tax, ''D'' Range, Bombay, and Ellerman Lines Ltd. Vs. Commissioner of Income Tax, West Bengal, Calcutta, , which are cases where some circulars issued by the CBDT were held by the Supreme Court as having been held to be binding on the Department and allowed benefits in accordance with them. But in all those cases, the questions as to whether circulars can deviate from the provisions of the statute did not arise. Those cases allowed the relief because the circulars were taken to have explained the law in a particular manner.

A resume of the discussion above would show that a later decision of a larger Bench in the State Bank of Travancore''s case (supra), had taken a different view than the Varghese''s case (supra). Later on, another Bench has taken also a contrary view and has distinguished Varghese''s case (supra), after referring to it. Thus, the later decision of the Supreme Court becomes binding rather than the earlier decision and hence, it has to be taken that the later circular of the CBDT in not extending the benefit of the earlier circular has neither tried to deprive the assessee of any right nor has created any liability which was not already existing.

The liability to pay tax arises under the provisions of the statute. The liability starts from the date the statute is enacted. If a wrong circular had been issued giving the impression that the assessee is entitled to the benefits of S. 40 as well as S. 44AD, it is the inherent right of all the authorities to cure their own error. The later circular of the CBDT has only attempted to do that and hence, no exception can be taken to it. These petitions have no merit and are dismissed.

Oral application is made by Mr. Ratnakar for leave to appeal to the Supreme Court. We are not satisfied that the case involves any substantial question of law as to the interpretation of the Constitution or any question of law of general importance which in our opinion needs to be decided by the Supreme Court of India. Leave refused.