Validity of administrative guidance (re) visited by SC
November, 03rd 2008
Administration of fiscal laws is often a complex process and its success is measured by effective implementation serving the dual purpose of government and the citizens charter. Courts step in if demand is made where rights of either the government or a citizen is impacted. Although, the rights and duties of the three pillars of the Constitution (the Executive, Legislature and Judiciary) have been enshrined in the Constitution, fiscal law by itself may draw the operative boundaries for the executive and judicial authorities.
Administrative circulars are binding on Revenue
In the context of Indian tax laws, the Board of Revenues, being the apex administrative authority, has powers to issue instructions and directions to the executive for administration and interpretation of law. Under the direct and indirect tax laws, such powers are given to the Central Board of Direct taxes and Central Board of Excise and Customs (CBEC), respectively. The guidance issued by the respective Boards is binding on the Revenue officers.
The validity of such Board circulars has been upheld in several judicial decisions including the most celebrated decisions of the apex court in the cases of Navneetlal Jhaveri and KP Vargheese. The apex court has consistently held that Board circulars are binding on Revenue to the extent directives in such circulars are beneficial to the tax payer. However, the circulars are neither binding upon the Courts nor on the tax payer. Further following the rule of liberal interpretation, such guidance cannot impose any hardship on the tax payer.
Recent decision adds a new dimension
A recent decision of the Supreme Court, though in the context of the Central Excise Law, has added a new feature to this proposition. Hearing a consolidated reference in the case of Ratan Melting and Wire Industries, a five-member Constitution bench has held that even though the Boards circular is binding on Revenue, it cannot prevail over the decision of the apex court, which interprets the law under the Constitution.
Interestingly, in its earlier decision in the case of Dhiren Chemical, the court held that regardless of the interpretation, if circulars issued by the CBEC place a different interpretation, such interpretation would be binding upon Revenue. This decision created ambiguity as the law declared by the apex court is the supreme law of the land and circulars issued by an administrative authority can not be given primacy over the former.
To clarify the confusion arising from Dhiren Chemicals case, the court subsequently clarified that the observation was intended to preclude re-opening of cases by Revenue, denying benefits of benevolent circulars to the taxpayers.
Impact of the recent decision
The recent decision of the Supreme Court has laid down some key principles insofar as validity of administrative circulars is concerned. Though the court has not disputed binding nature of the Board circular, to a considerable extent, it has made light of the established principle by holding that the Boards circular cannot prevail over Supreme Courts decision.
Another important principle is that whilst the Boards circulars can not override the legislative framework established by the decision of the apex court, assessments made by Revenue by granting exemption /benefits, cannot be re-opened, post the courts decision. This is welcome relief for tax payers.
My view is that the decision is likely to result in fall-outs in cases where tax benefits /exemption notifications are disputed by Revenue and such matter is sub-judiced. The tribunals and courts would not be able to interpret the binding nature of the circular to give a supreme and prevailing effect to the Boards circular over the decision of the Supreme Court. Alternatively, a position can be taken that circulars are binding on Revenue and it is not open to the Revenue to take a view which is contrary to such instructions. The position can be taken on the basis that the observations made by the Constitution bench in the recent case were obiter and therefore is not a declared law.
In conclusion, the tax payer seemingly has to bear the brunt of two (possible) conflicting objectives. On one hand, the legislature has ample latitude to delegate (to the executive) to work out details of tax policy. On the other hand, delegated legislation is open to the scrutiny of courts and liable to be held invalid.