Deputy Commissioner of Income TaxSpecial Range-II, Coimbatore v. Sree Janardhana Mills, UpplipalayamCoimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 09.08.2007CORAMTHE HONOURABLE MR.JUSTICE D.MURUGESANANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJATax Case (Appeal) No.267 of 2004Deputy Commissioner of Income TaxSpecial Range-II, Coimbatore..Appellant-vs-Sree Janardhana Mills, UpplipalayamCoimbatore..RespondentMemorandum of Grounds of Tax Case Appeal filed under Section 260A ofthe Income Tax Act, 1961 against the order of the Income Tax AppellateTribunal, Madras Bench 'C' dated 18.6.2001 made in ITA No.2019/Mds/1994for the assessment year 1991-92 against the order of the Income Tax Appealdated 13.07.1994 and made in ITA.No.96-C/94-95 and against the AssessmentOrder 1991-1992, dated 31.1.1994, by Dputy Commissioner of Income Tax,Special Range – II, Coimbatore.For Appellant::Mr.N.Murali KumaranFor Respondent::Mr.Raghul BalajiJUDGMENTD.MURUGESAN, J.The above Tax Case Appeal raises the following substantial question oflaw:-“Whether the Tribunal was right in holding that CircularNo.683 dated 8.5.1994 is prospective only not to affectassessment pending in appeal?2. The respondent-mill filed its return of income on 26.12.91admitting a loss of Rs.8,37,24,609/- for the assessment year 1991-92. Anotice under Section 143(2) of the Income Tax Act, 1961 (for short,“I.T.Act”) was issued to the assessee and in response to the same, theassessee has stated that the mill had remained closed since August, 1983to 21.8.90, as it became sick. It went before BIFR and had ultimatelyrestarted its operation with effect from 22.8.90 in pursuance to the orderof AAIFR dated 13.6.90. Hence for the assessment year 1991-92, theassessee quantified the total loss as shown above which included thedepreciation claimed for the assessment years 1985-86 to 1990-91 amountingto Rs.1,15,96,862/- and carry forward loss from the assessment years 1981-82 to 1990-91 amounting to Rs.6,81,88,117/-. https://hcservices.ecourts.gov.in/hcservices/

3. The Deputy Commissioner of Income Tax, Special Range-II, Coimbatorefinalised the assessment determining net loss for the year atRs.1,38,842/- and disallowed in toto the claim of carry forward loss ofthe earlier years. Aggrieved by that, the assessee preferred an appealbefore the Commissioner of Income Tax (Appeals), Coimbatore. Placingreliance on the Circular No.523 dated 5.10.1988, the Commissioner by hisorder dated 13.7.1994 found that the assessee was entitled to the benefitof carry forward loss of the earlier years in terms of the said Circularand the said order was also confirmed by the Income Tax Appellate Tribunalin its order dated 18.6.2001. Aggrieved by the orders of the Commissionerof Income Tax (Appeals) and the Income Tax Appellate Tribunal, the Revenuehas preferred the above tax case appeal on the above substantial questionof law. 4. The Government considering the ill effects of sickness inindustrial companies such as loss of production, loss of employment, lossof revenue to the Central and State Governments and locking up ofinvestible funds of banks and financial institutions are of seriousconcern to the Government and the society and the alarming increase in theincidence of sickness in industrial companies and in order to provide fortimely determination by a body of experts of the preventive, ameliorative,remedial and other measures that would need to be adopted with respect tosuch companies and for enforcement of the measures considered appropriatewith utmost practicable despatch came out with the said Act. The Act alsoprovided for establishment of Board consisting of experts in variousrelevant fields with powers to enquire into and determine the incidence ofsickness in industrial companies and devise suitable remedial measuresthrough appropriate schemes or other proposals and for properimplementation thereof. It also provided the constitution of an AppellateAuthority consisting of persons who are or have been Supreme Court Judges,senior High Court Judges and Secretaries to the Government of India, etc.,for hearing appeals against the order of the Board. 5. Section 15 of the Act contemplates that when an industrial companyhas become sick, the Board of Directors of the company, shall, withinsixty days from the date of finalisation of the duly audited accounts ofthe company for the financial year as at the end of which the company hasbecome a sick industrial company, make a reference to the Board fordetermination of the measures which shall be adopted with respect to thecompany.6. Section 16 of the Act contemplates the inquiry into working ofsick industrial companies. 7. Section 17 of the Act relates to the powers of Board to makesuitable orders on the completion of inquiry. Sub-section (1) of Section17 of the Act contemplates that if after making an inquiry under section16, the Board is satisfied that a company has become a sick industrialcompany, the Board shall, after considering all the relevant facts andcircumstances of the case, decide, as soon as may be, by order in writing,whether it is practicable for the company to make its net worth exceed theaccumulated losses within a reasonable time. https://hcservices.ecourts.gov.in/hcservices/

8. As per sub-section (3) of Section 17 of the Act, if the Boarddecides under sub-section (1) that it is not practicable for a sickindustrial company to make its net worth exceed the accumulated losseswithin a reasonable time and that it is necessary or expedient in thepublic interest to adopt all or any of the measures specified in section18 in relation to the said company, it may, as soon as may be, by order inwriting, direct any operating agency specified in the order to prepare,having regard to such guidelines as may be specified in the order, ascheme providing for such measures in relation to such company. 9. The above provisions show that as and when a reference is made tothe Board by a sick industrial company for determination of the measuresthat shall be adopted in respect of a company, the Board may make inquiryfor determining whether such industrial company shall become a sickindustrial company. Once the Board decides that the company has becomesick but it is practicable for reviving the company, it may appoint anoperating agency. 10. Section 18 contemplates preparation and sanction of Schemes bythe operating agency for the financial reconstruction of the company etc.11. By virtue of the operation of the provisions of sub-section (1)of Section 32 of the said Act, the provisions of the Act and of any rulesor schemes made thereunder shall have effect notwithstanding anythinginconsistent therewith contained in any other law except the provisions ofthe Foreign Exchange Regulation Act, 1973 and the Urban Land (Ceiling andRegulation) Act, 1976. 12. In the light of the enactment of the Sick Industrial Companies(Special Provisions) Act, 1985 (for short, “SICA”) which received theassent of the President on 8.1.1986, the Central Board of Direct Taxesissued the following Circular No.523, dated 5.10.1988. ToAll Commissioners and Directors General of Income Tax Subject: Effect of the order passed by the Board forIndustrial and Financial Reconstruction under a schemefor the rehabilitation of sick units.The Sick Industrial Companies (Special Provisions)Act, 1985, was passed by the Parliament and received theassent of the President on the 8th of January, 1986. TheAct was introduced with a view to securing timelydetection of sick units and speedy determination by theBoard for Industrial and Financial Reconstruction (BIFR)of remedial and other measures required to be taken fortheir rehabilitation.2. Under section 17(3) of the Sick IndustrialCompanies (Special Provisions) Act, 1985, in cases whereit is not practicable for a sick industrial company tomake its net worth positive within a reasonable time, theBIFR is empowered to sanction a scheme providing for suchremedial measures in relation to the said sick companyfor its rehabilitation. Section 32(1) of this Act readsas follows:- https://hcservices.ecourts.gov.in/hcservices/ “The provisions of this Act and of any rulesor schemes made thereunder shall have effectnotwithstanding anything inconsistent therewith inany other law except the provisions of the ForeignExchange Regulation Act, 1973, and the Urban Land(Ceiling and Regulation) Act, 1976, for the timebeing in force or in the memorandum or articles ofassociation of an industrial company or in anyother instrument having effect by virtue of anylaw other than this Act.”The Central Board of Direct Taxes have been advisedthat if a scheme is sanctioned in pursuance of section17(3) of the Act, it will have an overriding effect overthe provisions of the Income Tax Act, by virtue ofsection 32 of the Act.3. Consequently, if the BIFR sanctions a schemeunder section 17(3) of the Act, specifically excluding orlimiting the application of sections 41(1), 79 and 115Jor of any one or more of these sections of the Income TaxAct, 1961, in respect of assessment years which are alsospecified, then the Assessing Officer will have to takedue cognizance of this order and give effect to the same.Such a situation my arise in the case of a sickindustrial company which has debited its account inrespect of its interest liability in a particularassessment year. Subsequently, if, in a schemesanctioned by the BIFR, banks are directed to eitherwaive or reduce the interest liability, this remissionwill become chargeable to tax under section 41(1) of theIncome Tax Act, in the year of reduction or waiver by thebanks. It is possible that for speedier rehabilitation,the BIFR in its scheme provides that section 41(1) of theIncome Tax Act, would not apply in the case of the sickcompany. The Assessing Officer, in these circumstances,will not subject to tax the remission or cessation ofinterest, liability under section 41(1) of the Income TaxAct.4. It may, however, be clarified that section 32(1)of the Sick Industrial Companies (Special Provisions)Act, 1985 refers only to the “Provisions of this Act, andof any rules or schemes” made thereunder and not toorders passed under section 17(2). Therefore, orderspassed by BIFR under section 17(2) will not have theeffect of overriding the provisions of the Income TaxAct.5. The contents of this circular may be brought tothe notice of all the officers working under you.(Sd) Vijay MathurDirector (TPL-II)(F.No.133/9/88-TPL) https://hcservices.ecourts.gov.in/hcservices/

13. By virtue of the above provisions, the Central Board of DirectTaxes (for short, “CBDT”) was of the opinion that in the event the Boardor AAIFR, as the case may be, decides that a company had become sick andan operating agency could be appointed, the provisions of the Income TaxAct shall be excluded or limited to the application of sections 41(1), 79and 115J. With the above opinion in mind, it issued the circular dated5.10.1988. The power of CBDT to issue such circular is traceable tosection 119 of the Income Tax Act, which contemplates that the CBDT mayfrom time to time issue such orders, instructions and directions to otherincome tax authorities as it may deem fit for proper administration of theAct and such authorities and all other persons employed in the executionof the said Act shall observe and follow such orders, instructions anddirections of the CBDT. 14. It appears that later on it was brought to the notice of the CBDTthat unless and until the scheme prepared and sanctioned by the operatingagency is consented by the financial institutions in terms of sub-section(2) of Section 19 of the SICA, a mere decision of the Board to appoint anoperating agency will not give rise the assessee any benefit of witheither excluding or limiting the application of Sections 41(1), 79 and115J of the Income Tax Act. Hence, the Circular No.523, dated 5.10.1988and Circular No.576, dated 31.8.1990 were withdrawn by a letter dated30.12.1993. Thereafter, by yet another Circular No.683, dated 8.6.1994,the earlier Circulars dated 5.10.1988 and 31.8.1990 were clarified. TheCircular No.683, dated 8.6.1994 reads as under:-"Subject: Withdrawal of Circulars Nos.523 and 576-New procedure for representation before Board forIndustrial and Financial Reconstruction and theAppellate Authority for Industrial and FinancialReconstruction.The Board had issued two circulars, CircularNo.523, dated October 5, 1988, and Circular No.576,dated August 31, 1990, in connection with the procedureto be followed in respect of grant of “consent” by theCentral Government in cases involving financialassistance to be given under the Direct Tax Laws forrehabilitating sick industries under the Sick IndustrialCompanies (Special Provisions) Act, 1985 (SICA).2. While issuing the two circulars, the provisionsof section 19(2) of the SICA were not considered.According to section 19(2), all parties concerned withgiving “financial assistance” for the rehabilitationscheme should give their “consent”.3. The Board had withdrawn with immediate effectthe above Circulars Nos.523 and 576, vide its letter ofeven number dated 30.12.1993. The said letter to AAIFRand BIFR clarified that each case of fiscal concessionor “financial assistance” under the Direct Tax Laws willnow be considered in each individual case on the meritsfor the purpose of consent as contemplated in section 19(2) of the SICA, 1985, and consent or denial of consentwill be conveyed to BIFR by the Central Government. The https://hcservices.ecourts.gov.in/hcservices/ nodal agency for co-ordination between the Board forIndustrial and Financial Reconstruction (BIFR) and theCentral Board of Direct Taxes and Appellate Authorityfor Industrial and Financial Reconstruction (AAIFR) andthe Central Board of Direct Taxes will be the DirectorGeneral of Income Tax (Admn.), 7th Floor, Mayur Bhavan,New Delhi 110 001. Cases already decided in accordancewith the Circulars Nos.523 and 576 were, however, notrequired to be reopened.4. The contents of this circular may be brought tothe notice of all officers working under you.(Sd) K.Vasudevan Director (A&PAC)Central Board of Direct Taxes(F.No.246/115/95-A&PAC-I)15. The case of the assessee was considered by the Assessing Officerand his claim of carry forward loss of the earlier years was disallowed.However, both the Commissioner of Income Tax (Appeals) and the Income TaxAppellate Tribunal placing reliance on Circular No.523, dated 5.10.1988found that the assessee was entitled to the benefit of carry forward lossof the earlier years in terms of the said circulars. 16. On the above factual background, the Revenue has preferred theappeal by raising the substantial question of law as to whether theTribunal was right in holding that Circular No.683, dated 8.6.1994 isprospective only not to affect assessment pending in appeal.17. The above substantial question of law gives rise to an incidentalissue, a decision on the same shall have relevance, as to whether thebenefit given to an assessee in Circular No.523, dated 5.10.1988 requiresa pre-condition of framing a scheme and the consequential consent from thefinancial institution for its revival. The above consideration occasionsin view of the submission of the standing counsel for the Revenue that thecircular dated 5.10.88 itself was without reference to sub-section (3) ofSection 19 of SICA and therefore the benefit arising out of such circularcannot be claimed as a matter of right and the CBDT is entitled towithdraw the said circular giving retrospective effect. The source ofpower of CBDT to issue circular is traceable to Section 119 of the IncomeTax Act. That section empowers the CBDT to issue such orders, instructionsand directions to other income tax authorities for proper administrationof the Act, with a further direction that such authority should observeand follow such orders, instructions and directions. Apparently, adecision of the Board declaring an industry as sick had weighed the mindof the CBDT to issue circular giving tax benefit to an assessee, when theassessee company approaches the Board for declaration that the company issick and the Board declares the company sick. Such benefit is only withreference to the sickness of the company and the CBDT had correctlyunderstood while issuing the said circular. The subsequent appointment ofan operating agency, the preparation and framing of schemes and financialassistance by the institution are all only the measures to revive thecompany. The circular dated 5.10.1988 was issued laying down the just andfair method of approach to a situation, when an assessee company facedfinancial or other crisis forcing such company to close the establishment https://hcservices.ecourts.gov.in/hcservices/ itself. A plain reading of the circular shows that it has no relevance asto the appointment of operating agency, preparation of framing of schemesand making provisions for financial assistance for extension of benefit.18. Keeping the above discussion in mind, the substantial question oflaw should be considered. In Navnit Lal C. Jhaveri Vs. K.K. Sen (1965) 56ITR 198 (SC), the Supreme Court had an occasion to examine the statutorybasis and background of the circulars issued by the Central Board ofRevenue under the provisions of the Income Tax Act, and the scope and theeffect of such circulars. In that case, the CBDT was empowered to issuecirculars under section 5(8) of the Income Tax Act, 1922 and the SupremeCourt observed that the circular issued by the CBDT is binding on allofficers and persons employed in the administration of the Act. 19. In Ellerman Lines Ltd., vs. CIT (1971) 82 ITR 913 (SC), theobservation made in Navnit Lal C. Jhaveri vs. K.K. Sen (1965) 56 ITR 198(SC), was quoted with approval.20. In State of Trivancore vs. CIT (1986) 158 ITR 102, the SupremeCourt once again reiterated the law that the circulars, which are in thenature of concessions, could always be withdrawn prospectively.21. In Keshavji Ravji & Co., vs. CIT (1990) 183 ITR 1 (SC), a Benchof three Judges of the Supreme Court had also taken the view thatcirculars beneficial to the assessee which tone down the rigour of the lawand are issued in exercise of the statutory powers under Section 119 arebinding on the authorities in the administration of the Actretrospectively.22. The same view was taken by the Supreme Court in CWT vs. VasudeoV. Dempo (1992) 196 ITR 216, that circulars issued by the department arenormally meant to be followed and accepted by the authorities.23. In K.P.Varghese vs. ITO (1981) 131 ITR 597 (SC), the SupremeCourt had gone one step further and observed that circulars issued by theCBDT are legally binding on the revenue and this binding characterattaches to the circulars even if they are found not in accordance withthe correct interpretation of a statutory provision and they depart ordeviate from such construction. 24. The above dictum of law laid down by the Supreme Court show thatalthough the circulars are not binding on the courts or an assessee, theyare certainly binding on the revenue and it is not open to the revenue toadvance an argument or filing an appeal contrary to the circulars. Infact, the department cannot even take contrary stands to the circulars aswell. 25. In UCO Bank vs. Commissioner of Income Tax (1999) 237 ITR 889,the Supreme Court while considering the circulars issued in exercise ofpower under Section 119 of the Income Tax Act regarding the interest on“sticky” advances has held that the circulars were in the nature ofconcessions, which could always be prospectively withdrawn. 26. The above discussion leads us to the only conclusion that so longas a circular issued under Section 119 of the Income Tax Act is appliedand enforced, it would be binding on the departmental authorities to https://hcservices.ecourts.gov.in/hcservices/ ensure a uniform and proper administration and application of the IncomeTax Act. Such circulars cannot be withdrawn retrospectively as they couldoperate only prospectively. That apart, the benefit conferred by circulardated 5.10.1988 relates to only extension of benefit to an assessee on thebasis of the sickness of the company as decided by AAIFR. Withdrawal ofsuch benefit by issue of circulars giving retrospective effect wouldresult in hardship to the assessee as well. In the light of categoricalpronouncement of the Supreme Court in UCO Bank case, circulars in thenature of concession can be withdrawn prospectively only. By the circulardated 5.10.88, a procedure was laid down for extension of benefit evenbefore the consent was obtained from the financial institution. In thecircular dated 8.6.1994 the CBDT had only laid a new procedure forextension of benefit namely the benefit could be given only after theconsent as contemplated under section 19(2) of the SICA is obtained andconveyed to BIFR by the Central Government. Such a procedure could alwaysbe prospective operation only. Accordingly, the substantial question oflaw is answered against the Revenue. 27. In view of the above, the tax case appeal is dismissed. Nocosts.Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.ss/kbTo1. The Deputy Commissioner of Income Tax Special Range-II, Coimbatore2. The Commissioner of Income Tax (Appeals) Coimbatore3. The Income Tax Appellate Tribunal Madras Bench 'C'4. The Assistant Registrar,Income Tax Appellate TribunalBench (B)Rajaji Bhavan, 3rd Floor,Besant Nagar, Chennai – 90.1 CC To Mr.N.Muralikumaran, Advocate, SR NO.49778.1 CC To Mr.Satish Parasaran, Advocate, SR NO.50283.T.C.(A) No.267 of 2004 GK(CO)RVL 21.08.2007