Interpretation of Statutes
(32) Binding Nature of Circulars
1. Introduction:
The chapter on the “Binding Nature of Circulars” delves into a critical aspect of tax administration — the legal force and enforceability of circulars issued by the Central Board of Direct Taxes (CBDT) under Section 119 of the Income-tax Act, 1961. In a legal framework where legislative provisions are interpreted and administered by revenue authorities, circulars function as instruments of guidance to ensure consistency, clarity, and administrative efficiency. The judiciary has had occasion to interpret the extent to which these circulars are binding — on tax authorities, tribunals, courts, and taxpayers — thereby laying down a complex yet coherent jurisprudence. This chapter explores key judicial pronouncements which have reaffirmed that while circulars are not binding on courts or assessees, they are unquestionably binding on departmental officers and are enforceable against the revenue in a manner consistent with their stated objectives. The discussion spans both benevolent and clarificatory circulars, highlighting their indispensable role in tempering the rigour of the law and ensuring uniformity in its implementation.
2. Description:
(i) Addl. CIT v. Avtar Mohan Singh (Mrs.) (1982) 136 ITR 645 (Del):
Though the circulars of the Central Board are not binding on the court, yet general circulars are binding on the I.T. authorities. Through them the Board cannot impose a burden on the taxpayer greater than what the statute provides but it can relax the rigour of the law. Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC) followed.
(ii) State of Kerala & Ors Vs. M/s Kurian Abraham Pvt. Ltd. & Anr (Appeal (civil) 7965-7966 of 2004) (SUPREME COURT OF INDIA) (DATE OF JUDGMENT: 08/02/2008)
(1) Tax administration is a complex subject. It consists of several aspects. The Government needs to strike a balance in the imposition of tax between
collection of revenue on one hand and business-friendly approach on the other hand.
(2) Exemption is a matter of policy. If the Government, acting through the Central Board of Revenue has conferred an administrative exemption, it is not open to the Revenue to challenge the same.
(3) Circulars issued by the Board are binding on the officers though not on the assessees or on the courts. An argument that the circulars are not binding on the revenue is unsustainable in law. If such a contention was to be accepted, it would lead to chaos and indiscipline in the administration of tax laws.
(4) Whenever such binding circulars are issued by the Board granting administrative relief (s) business arranges its affairs relying on such circulars. Therefore, as long as the circular remains in force, it is not open to the subordinate officers to contend that the circular is erroneous and not binding on them.
Note: The judgement in Azadi Bachao Andolan 263 ITR 706 (SC) was followed.
(iii) Addl. CIT v. Sarvaraya Textiles Ltd. (1982) 137 ITR 369 (AP):
A circular issued by the CBDT is binding on the authorities exercising statutory power under the Income-tax Act. Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC) and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC) followed.
(iv) CIT v. Malayala Manorama and Co. Ltd. (1983) 143 ITR 29(Ker):
Tax and equity are strangers and an equitable construction cannot be put upon the words of a taxing statute.
Circulars of general directions issued by the Central Board of Direct Taxes are binding under section 119 of the Income-tax Act, 1961, on all officers and persons employed in the execution of the Act. While the Board can relax the rigour of law or grant relief which is not to be found in the terms of the statute, such circulars making for a just and fair administration of the law, no instruction which will ultra vires the provisions of the statute could be issued. The court will have to put its own construction upon the provisions of the Act regardless of the practice of the Development and the directions for the guidance of the officials. When an interpretation of a fiscal enactment is open to doubt, and even where a literal construction would defeat the obvious intention of the legislation and produce a wholly unreasonable result, the court must try its best to achieve the obvious intention and produce a rational construction.
(v) CWT v. Balbhadradas Bangur (1984) 148 ITR 149 (Cal):
Circulars issued by CBDT are not binding on Tribunal or assessee but bind only revenue authorities. (CBDT circular dated 15-9-1973 stating that valuation of shares of investment companies should be based on "asset backing")
Rule 1D of W.T. Rules does not apply to investment companies. In valuing shares the yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation.
Circulars issued by the Central Board of Direct Taxes are binding on the revenue authorities but they are not binding on the Tribunal or on the assessee.
(vi) CIT v. Ramanaiah & Sons (T.V.) (1986) 157 ITR 300(AP):
Circulars binding on Income-tax Department--Court can compel Income-tax Department to follow circular.
Wherever instructions given by the Central Board of Direct Taxes to relieve hardship are issued in exercise of the powers vested in the Central Board of Direct Taxes under section 119 of the Act, it is certainly open to this court to compel the Income-tax Officer to follow the instructions of the Central Board of Direct Taxes. This is not to say that this court is bound by the instructions of the Central Board of Direct Taxes. All that is required to be said is that, so far as the officials of the Income-tax Department are concerned, it is not open to them to say that they would not follow the instructions of the Central Board of Direct Taxes and carry matters in appeals and references.
(vii) CIT v. Soundararaja Finance Ltd. (2006) 283 ITR 559(Mad):
It is not open to the Department to raise a contention which is contrary to the circulars and instructions validly issued by the Board.
The first proviso to section 32 of the Income-tax Act, 1961, was omitted by the Finance Act, 1995, with effect from April 1, 1996. Prior to the omission, the first proviso as inserted by the Finance Act, 1966 with effect from April 1, 1966 and amended by the Finance Act, 1983, with effect from April 1, 1984 provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of its business or profession. 100 per cent. depreciation on the actual cost of items of machinery or plant, the cost of which had not exceeded Rs. 5,000 was available to the assessee by virtue of that proviso. The restriction put on the basis of user is not made applicable to the items of this category.
This issue is clarified by the Central Board of Direct Taxes Circular No. 591 dated January 30, 1991. Circulars are binding on the Department and it is not open to the Department to raise a contention which is contrary to the circulars and instructions validly issued by the Board.
(viii) Bharat Construction Co. v. CiT (2002) 258 ITR 140 (Raj):
The Central Board of Direct Taxes has a power to issue circulars and they are binding on the income-tax authorities.
For the assessment year 1992-93, the assessee-firm carrying on construction business, had shown a net profit of 5.6 per cent. on total contract receipts of Rs. 64,30,344. As most of the expenses including the labour payments were unvouched, the assessing authority applied the provisions of section 145 of the Income-tax Act, 1961, and determined the income of the assessee by applying a net profit rate of 8 per cent. on the total receipts. It was contended before the Tribunal that in a construction business, whenever a net profit rate is applied, it is always subject to a further deduction of depreciation. The assessee relied upon some of the circulars of the Board to the same effect. The assessing authority had not allowed depreciation separately because in his view, if it was so done, the net profit would fall to as low as 5.63 per cent. He had, therefore, applied the rate of 8 per cent. The Commissioner of Income-tax (Appeals) brought the net profit rate down to 7.44 per cent. The Tribunal without giving any reason brought the rate down to 7 per cent. On a reference:
_Held, _ that section 40(b) of the Act was not attracted in the case. The reference pertained to the assessment year 1992-93. The amendment of section 40(b) of the Act by the Finance Act, 1992, came into effect from April 1, 1993. Thus, it applied in relation to the assessment year 1993-94. The Tribunal had not taken into consideration the circulars of the Central Board of Direct Taxes and simply ordered that the net profit rate of 7 per cent. would cover the allowance of depreciation and interest. The Tribunal was wrong in treating the claim of depreciation as covered in the rate of net profit of 7 per cent. [Matter remained.]
(ix) CIT v. Blaze Advertising (Delhi) Pvt. Ltd. (2002) 255 ITR 460(Del):
When the Supreme Court or the High Court has 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.
The order of the Tribunal is a basic document. The questions of law which are required to be answered must be on the basis of the finding of fact arrived at finally by the Tribunal. The questions which have been referred to the court for its opinion are to be answered in the facts and circumstances of the case. For an effective answer to the questions, it is essential to know the findings of the Tribunal.
Circulars issued under section 119 of the Income-tax 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.
For the assessment year 1974-75, the Assessing Officer did not allow the claim of the assessee of Rs. 18,823 on the ground that the claim was not relevant to the accounting period. The Tribunal allowed the claim. On a reference, it was contended on behalf of the assessee that in the absence of the order of the Tribunal, the court could not effectively answer the question ; that the amount of tax would be small and the matter was pending for more than twenty years and, in terms of the circular issued by the Central Board of Direct Taxes, the matter ought not to have been referred to the court for its opinion:
_Held,_(i) that, in the absence of the order of the Tribunal, it was not possible for the court to answer the question. An opinion of the court on the question referred would largely depend upon the facts involved. In this case, the amount involved was small and the time lag had also to be taken into account. Even if the court directed to refer the question the same would take several more years for getting an answer. Hence, the court would decline to answer the question. [However, the court clarified that it did not intend to lay down a law that in no case the court in a situation of this nature would decline to answer the question referred to it for its opinion. It would depend upon the fact situation obtaining in a particular case.]
(ii) That the statutory right of the Tribunal for making a reference to the court cannot be taken away by the Central Board of Direct Taxes by issuing a circular.
(x) Unit Trust of India v. P.K. Unny; Harshendu Upendre Kaka v. ITO (2001) 249 ITR 612 (Bomb):
Benevolent circulars are binding on the Department, even if they are based on deviations.
Interpretations given by the Central Board of Direct Taxes (CBDT) in favour of the assessee are binding on the Department. The Department is estopped from raising any argument contrary to the interpretation placed by the CBDT.
The withdrawal of benevolent circulars cannot operate retrospectively. In that sense, circulars under section 119 of the Income-tax Act, 1961, do not constitute law. They are in the nature of instructions and/or guidelines.
The entire concept of chargeable interest, the scope of chargeable interest and the computation of the chargeable interest under the Interest-tax Act, 1974, shows that it is not a tax on income but it is a tax on gross receipts of interest. Section 32 of the Unit Trust of India Act, 1963, (UTI Act) which exempts the UTI from payment of taxes on income has no application to the Interest-tax Act because the interest tax is not a tax on income.
Held:
(iii) That the circular issued by the CBDT on October 11, 1991, was a benevolent circular vis-a-vis the unit holders. It contained an interpretation which favoured a large number of small investors on whom the ultimate burden would fall. Therefore, the Department was estopped from now contending that the interpretation of the CBDT was wrong from October 11, 1991. The Department was not entitled to take the contention that the circular dated October 11, 1991, was illegal and, therefore, not binding on the Assessing Officer.
(xi) Gujarat Gas Co. Ltd. v. JCIT (Assessment) (2000) 245 ITR 84 (Guj):
CBDT cannot direct any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner.
The Central Board of Direct Taxes has power under section 119 of the Income-tax Act, 1961, to issue general circulars which are binding on the Department. But it cannot direct any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner.
The assessment under section 143(3) of the Act has to be made on all relevant materials and on evidence and the assessee ordinarily has the fullest right to inspect the records and all documents and materials that are to be used against him. The proceedings before the Assessing Officer are “judicial proceedings” and all the incidents of such judicial proceedings have to be observed before the result is arrived at. The quasi-judicial proceedings must conform to the rules of natural justice. The Assessing Officer must proceed without bias and give sufficient opportunity to the assessee to place his case before him, he must conduct the proceedings in accordance with principles of justice, equity and good conscience.
The Assessing Officer exercises quasi-judicial functions and a duty is cast upon him to act in a judicial and independent manner. Other authorities cannot control or affect his judgment in the matter of assessment. If a circular is issued then, the subordinate officer is bound to act accordingly and he will be in a helpless situation and will not be in a position to exercise his own independent judgment. No authority howsoever high can control the administration of judicial or quasi-judicial authority, that being the essence of our judicial system. If his discretion is influenced by the dictation of others, he acts ultra vires. When he does not apply his mind and take action, it would amount to non-exercise of power by the authority and the action would be bad.
(xii) UCO Bank v. CIT; Tamil Nadu Industrial Investment Corporation Ltd. v. CIT (1999) 237 ITR 889 (SC):
The Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961, has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act.
Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities.
In order to aid proper determination of the income of money lenders and banks, the Central Board of Direct Taxes issued a circular dated October 6, 1952, providing that where interest accruing on doubtful debts is credited to a suspense account, it need not be included in the assessee's taxable income, provided the Income-tax Officer is satisfied that recovery is practically improbable. Twenty-six years later, on June 20, 1978, in view of the judgment of the Kerala High Court in State Bank of Travancore v. CIT [1977] 110 ITR 336, the Board by another circular, withdrew with immediate effect the earlier circular.
However, by circular dated October 9, 1984, the Board decided that interest in respect of doubtful debts credited to suspense account by banking companies would be subjected to tax but interest charged in an account where there has been no recovery for three consecutive accounting years would not be subjected to tax in the fourth year and onwards. The circular also stated that if there is any recovery in the fourth year or later, the actual amount recovered only would be subjected to tax in the respective years. This procedure would apply to assessment year 1979-80 and onwards.
Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. Such circulars are meant for ensuring proper administration of the statute and, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question.
The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or "sticky" loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received.
(xiii) Grindlays Bank P.L.C. v. CIT (1993) 201 ITR 148 (Cal):
The circulars may be binding on the Revenue in executing the provisions of the Act. But these are not binding either on the Tribunal or on the court
CBDT circulars are not in the nature of contemporanea expositio furnishing legitimate aid in construction. The circulars may be binding on the Revenue in executing the provisions of the Act. But these are not binding either on the Tribunal or on the court.
The Supreme Court considered the effect of the CBDT circular dated October 6, 1952, and laid down in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) that if interest has accrued by crediting it to a suspense account upon the assessee's own ipse dixit, the assessee cannot escape liability from taxation.
_Held,_ that, in the instant case, there was no clear assertion on the part of the assessee to give up the interest on sticky advances. The assessee kept alive its claim for interest. It had credited the interest to a suspense account. Hence, the sum of Rs. 2,40,77,729, being the interest on sticky advances and/or debts doubtful of recovery credited during the accounting year relevant to assessment year 1978-79 was rightly treated as income.
(xiv) CIT v. Jain Steel Rolling Mills (1989) 178 ITR 369 (P&H):
Certain minors were admitted to the benefits of a partnership. Application for registration was rejected on the ground that the deed of partnership was not signed by the guardian of the minors.
The Tribunal allowed registration on the ground that by circular CBDT No. 210/ 13/74/ITA(II) dated 19-3-1976, the Central Board had issued directions that the assessee need not be denied registration for lack of signatures of the guardian unless such guardian refused to verify or sign the document if required to do so.
On an application for reference under section 256(2):
_Held,_ that in the Supreme Court judgments K.P. Varghese v. ITO [1981] 131 ITR 597 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, it was clearly laid down that such circulars were binding on the Department and, therefore, the Circular No. 210/13/74/ITA(II) dated 19-3-1976 should have been taken notice of and opportunity should have been granted to the guardian to sign the partnership deed on behalf of the minors. Since this procedure was not followed, the Income-tax Officer could not refuse registration. Therefore, no question of law arose from the Tribunal's order.
(xv) Addl CIT v. General Industries Corporation (1985) 155 ITR 430 (Del):
The assessee had purchased machinery under a hire purchase agreement with the National Small Scale Industries Corporation (NSIC) for the purpose of its plaster of paris unit for Rs. 3,28,020, property in which under such an agreement remained with the NSIC until the last instalment was paid. The Income-tax Officer reopened the assessments of the assessee for the assessment years 1966-67 to 1968-69 and withdrew the depreciation and development rebate allowed thereon in the original assessment and, for the assessment year 1969-70, the ITO refused to allow depreciation and development rebate.
Under a circular dated March 23, 1943, the Central Board had directed that the periodical payments made under a hire purchase agreement should be treated as (a) the consideration for hire to be allowed as a revenue deduction, and (b) a payment on account of purchase to be treated as a capital outlay; and that depreciation should be allowed on the initial value, i.e., the amount for which the hired object could be purchased in cash on the date of the agreement. The same view was reiterated in subsequent circulars dated June 26, 1959, and July 15, 1963.
Following the decisions of the Supreme Court in Navnit Lal C. Javeri's case [1965] 56 ITR 198 and Ellerman Lines' case [1971] 82 ITR 913, the Tribunal held that the circulars were binding on the ITO and directed the ITO to dispose of the claim of the assessee regarding admissibility of depreciation and development rebate in conformity with the instructions in the circulars of the Board. On a reference:
_Held,_ that the Tribunal was legally correct in directing the ITO to follow the instructions in the circulars of the Board.
Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC) and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC) applied.
(xvi) Parek Brothers v. CIT (1984) 150 ITR 105 (Ker):
The Circulars are binding on the Department which will include the head of the Department, the Commissioner.
The circular issued by the Board of Direct Taxes No. 14(XL-35) of 1955, dated April 11, 1955, states that officers of the Department must not take advantage of the ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every way particularly in the matter of claiming and securing relief. The Circulars are binding on the Department which will include the head of the Department, the Commissioner.
Accordingly, where an assessee claimed weighted deduction in an application under s. 264, although he had not claimed it in the original assessment proceedings or in appeals therefrom.
3. Conclusion:
In conclusion, circulars issued by the CBDT play a pivotal role in the administration of tax laws by acting as binding directions to income-tax authorities, thereby ensuring predictability and uniformity in tax enforcement. While such circulars cannot override statutory provisions or judicial pronouncements, they remain binding on the revenue, and departmental officers are obligated to comply with them in letter and spirit. The courts have consistently held that even if a circular errs in interpretation, revenue authorities cannot disregard it so long as it remains in force. However, these circulars are not binding on the courts or on the assessee, who may contest their validity or applicability. The jurisprudence reflects a careful balance between administrative necessity and judicial independence, reinforcing the principle that statutory circulars serve as effective tools for fair and efficient tax governance without compromising the supremacy of law.