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No taxation by circulars
June, 23rd 2007
Circulars can be issued to remove any unintended hardship to the taxpayer or to resolve a procedural problem. But in no case can a circular place the assessee in a worse position...

A recent circular of the Central Board of Direct Taxes (CBDT) on the difference between shares held as stock-in-trade and as investment has once again underscored the urgent need for examining the jurisdiction of the CBDT and the CBEC (Central Board of Excise and Customs) to issue circulars that leave taxpayers with a higher burden of tax.

Article 265 of the Constitution stipulates that no tax can be levied or collected except by authority of law, which means that only a legislation passed either by Parliament or a State Legislature can impose a tax. As a general rule, the levy of tax is not permissible even by a notification, rule or regulation unless the legislature expressly authorises imposition of such levy. One of the disturbing features in the administration of both direct and indirect taxes is the indiscriminate issue of circulars by both the CBDT and the CBEC.

For uniformity

The power to issue circulars is contained in Section 37B of the Central Excise Act, 1994 and similar provisions are contained in Section 151A of the Customs Act, 1962 and Section 119 of the Income-Tax Act, 1961. A circular can be issued only for the purpose of uniformity, either for classification or valuation of goods. If different collectorates have taken different views, the Board can issue instructions or directions to ensure uniformity in assessment. Thus, circulars can be issued to remove any unintended hardship to the taxpayer or to resolve a procedural problem. But in no case, can a circular place the assessee in a worse position than he is under the statute.

In classification disputes arising under the Central Excise Act or the Customs Act, the department may claim a classification which results in a higher levy while the assessee, typically, claims classification which results in a lower rate of duty. If the classification is required to be resolved through adjudication, then the Board cannot issue a circular which pre-judges the issue making the hearing before the departmental authorities meaningless.

Apex court decision

Almost 40 years ago, the Supreme Court severely criticised the issuance of such circulars. The dispute was whether M.G. poster-paper was "printing and writing paper" or "packing and wrapping paper". The Board issued a direction that poster paper should be assessed only as "packing and wrapping paper". The apex court held that such directions were invalid as they completely vitiate the adjudication proceedings and make a "mockery of the judicial process." (Orient Paper Mills Ltd vs Union of India AIR 1969 SC 48)

Despite the Supreme Court decision, the CBEC and the CBDT have continued to issue such circulars. Recently, a notification granted concessional rate of duty to cellular telephones. Cellular telephones include not only mobile telephones but also tabletop models which can be moved from place to place.

The main feature of cellular technology is that telephone signals are sent through transmission towers and not through any land connection. The Board issued a circular that "cellular telephones" would include only handheld mobile telephones and would not apply to other types of telephones. This circular was challenged before the Andhra Pradesh High Court which struck it down. On appeal, the Supreme Court upheld the view of the AP High Court. The court made it clear that these are matters that required adjudication and appreciation of oral and documentary evidence. A circular could not pre-judge the issue and frustrate the adjudication process. (Tata Teleservices Ltd vs Union of India 2006 (194) ELT 11 SC).

Similar views have been taken by almost all High Courts. But such circulars continue to be issued leading to unnecessary litigation. The assessees are left with no choice but to challenge such circulars before the High Court under Article 226.

After the circular is quashed, the matter is back to the adjudicating authority for decision on merits. The power to issue circular is only for administrative guidance of the officers and not to take decisions that are in the realm of judicial or legislative functions.

Exercise restraint

It is necessary for the CBDT and the CBEC to exercise restraint while issuing circulars. If a circular is going to preclude adjudication of a particular dispute or increase the quantum of tax, it should not be issued at all.

In any case, the Board must indicate the reason for issuing any circular setting out the lack of uniformity that requires a circular. To use the words of Lord Denning, the CBDT and the CBEC can, at best, iron out the creases but cannot alter the fabric of a legislative enactment or statutory notification.

The two Boards cannot arrogate to themselves the functions of the legislature.

Arvind P. Datar
(The author is a Senior Advocate of Madras High Court.)

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