R.chitra v. The Vice Chairman, Income Tax Settlement Commission, Additional Bench, 640 Anna Salai, Nandanam, Chennai-600 035

IN THE HIGH COURT OF JUDICATURE AT MADRAS Reserved on : 27.08.2019 Pronounced on : 24.09.2019CORAM THE HONOURABLE MR. JUSTICE M.S.RAMESH W.P.No.34786 of 2015andM.P.No.1 of 2015 R.Chitra... Petitioner Vs. 1.The Vice Chairman, Income Tax Settlement Commission, Additional Bench, 640 Anna Salai, Nandanam, Chennai-600 035. 2.The Principal Commissioner of Income Tax, Central 2, Chennai-34.3.The Deputy Commissioner of Income Tax, Central Circle 2, Coimbatore.... Respondents PRAYER: Writ Petition is filed under Article 226 of theConstitution of India, praying for a Writ of Certiorari, callingfor the records comprised in File No.TN/N-53/2013-14/45/ITdated 14.09.2015 on the file of the first respondent and toquash the same insofar as it relates to determination of deemeddividend as the income of the petitioner for the assessmentyears 2009-10 to 2013-14. The order of the Income Tax Settlement Commission dated14.09.2015, insofar as it includes the deemed dividend for thepurpose of determining the total income of the petitioner for https://hcservices.ecourts.gov.in/hcservices/ the assessment years 2009-10 to 2013-14 is concerned, is underchallenge in the present Writ Petition. 2. Heard Mr.Jehangir D.J.Mistri, learned Senior counselfor the petitioner and Mr.ANR. Jaya Prathap, JSC & Mr.A.P.Srinivas, learned Senior Standing Counsel appearing on behalf ofthe respondents. 3. The brief facts of the case are as follows: a) M/s. Rasi Seeds Private Limited and Rasi Tex PrivateLimited are two Private Limited Companies in both of which, Mrs.Chitra, the petitioner herein, is a shareholder. On 10.01.2013,search and seizure operations were carried out in theresidential and business premises of the petitioner, by theIncome Tax Department under Section 132 of the Income Tax Act(hereinafter referred to as 'the Act'). During the course of thesearch, the Department seized cash to the extent of Rs.35 lakhsfrom the residential premises of the petitioner. In pursuance tothe search, the jurisdictional Assessing Officer issued a noticedated 30.09.2013 to the petitioner under Section 153A, r/w.Section 153 C of the Act, for the assessment years 2007-2008 to2012-2013. The petitioner had responded to the said notices byfiling the Returns of Income for each of these years on28.02.2014. The petitioner had also filed the Returns of Incomefor the assessment years 2013-2014 under Section 139 of the Acton 30.09.2013. b) Pending the assessment of her income for the assessmentyears 2007-2008 to 2012-2013 under Section 153 C and for theassessment year 2013-2014 under Section 143 of the Act, thepetitioner had made an application under Section 245 C of theAct for settlement of her cases. The petitioner offered theincome of Rs.35 lakhs seized from her residence as additionalincome for the assessment year 2013-2014 and also disclosed thatthe said income was derived out of the sale of Silver Oak treeswhich were felled at her agricultural lands. The application forsettlement was claimed to have been made since the petitionerwas not able to prove that the seized cash is out of the sale ofsuch trees. c) In the application before the Income Tax SettlementCommission (hereafter referred to as ‘Commission’), thepetitioner had disclosed that she was a shareholder, holdingmore than 20% of equity share capital in each of the twoCompanies namely, M/s. Rasi seeds Private Limited (RSPL) andM/s. Rasi Tex India Private Limited (RTPL) and that RSPL hadadvanced monies in the ordinary course of its business as intercorporate loans to RTPL. d) The second respondent submitted a report under Rule 9 ofthe Income Tax Settlement Commission Procedure Rules, requestingthe Commission to hold that the petitioner is liable to be taxedon the deemed dividend under Section 2 (22) (e) of the Act andalternatively to treat the application is invalid. c) In the application before the Income Tax SettlementCommission (hereafter referred to as ‘Commission’), thepetitioner had disclosed that she was a shareholder, holdingmore than 20% of equity share capital in each of the twoCompanies namely, M/s. Rasi seeds Private Limited (RSPL) andM/s. Rasi Tex India Private Limited (RTPL) and that RSPL hadadvanced monies in the ordinary course of its business as intercorporate loans to RTPL. d) The second respondent submitted a report under Rule 9 ofthe Income Tax Settlement Commission Procedure Rules, requestingthe Commission to hold that the petitioner is liable to be taxedon the deemed dividend under Section 2 (22) (e) of the Act andalternatively to treat the application is invalid. e) The Commission, through the impugned order dated14.09.2015 held that the sum of Rs.137,19,75,000/- advanced byRSPL to RTPL is to be assessed as deemed dividend in the handsof the petitioner, along with the income returned in each of theyears and the additional income offered in the application. Thisorder is put under challenge in the present Writ Petition. 4. Mr.Jehangir D.J.Mistri, learned Senior Counsel for thepetitioner assailed the impugned order on the following grounds: a. While Circular No. 19 of 2017 directs that deemed dividendunder Section 2(22) (e) of the Act cannot apply wheretransactions entered are in the nature of commercialtransactions, Circular No. 495 of 1987 directs that deemeddividend will be taxable in the hands of the concern wereloan/advances is made by a company to concern with commonshareholder. These circulars of the CBDT are binding in natureand are required to be followed, even where they mitigaterigors of the act. b. There is no dispute that the current account transactionsbetween RSPL and RTPL are in the normal/ordinary course ofbusiness and thus, deemed dividend should not apply. c. Even assuming that assessment of dividend under Section 2(22)(e) can be made in the hands of the shareholders, eventhen, dividend is not taxable as per the provisions of Section10 (34). d. Since there were more than two shareholders in theassessment years 2012-2013 and 2013-2014 namely, thepetitioner and M. Ramasamy, the provisions of Section 2(22)(e)cannot be applied for those years as the computation mechanismfails. e. Even assuming that the amount advanced for the first timeby RSPL to RTPL is treated as deemed dividend, any transfer ofmoney by RTPL to RSPL and subsequent repayment by RSPL to RTPLthereafter should not be taxed as deemed dividend. As such byadjusting such payments by RTPL to RSPL, deemed dividend oughtto have been limited to Rs.35,47,20,422/- as againstRs.137,19,75, 000/-. f. No incriminating material was found during search inrelation to the deemed dividend and thus the proceedings underSection 153 A r/w. 153 C are not valid. Though this argument was advanced before the Commission, the issue was notadjudicated. 5. In support of all the aforesaid contentions, the learnedSenior counsel for the petitioner relied on various decisions,which I shall address while discussing such contentions. 6. Substantiating the findings of the Commission in theimpugned order, Mr.A.P. Srinivas, learned Senior Standingcounsel for the Department countered the aforesaid submissionsof the petitioner, in the following manner: a. The Circulars of the CBDT will not bind the Courts,especially, when it is against the provisions of law. Evenotherwise, without explaining how the transactions between thetwo Companies constitute ordinary commercial transactions, thepetitioner cannot rely on the circulars. was advanced before the Commission, the issue was notadjudicated. 5. In support of all the aforesaid contentions, the learnedSenior counsel for the petitioner relied on various decisions,which I shall address while discussing such contentions. 6. Substantiating the findings of the Commission in theimpugned order, Mr.A.P. Srinivas, learned Senior Standingcounsel for the Department countered the aforesaid submissionsof the petitioner, in the following manner: a. The Circulars of the CBDT will not bind the Courts,especially, when it is against the provisions of law. Evenotherwise, without explaining how the transactions between thetwo Companies constitute ordinary commercial transactions, thepetitioner cannot rely on the circulars. b. The case of the petitioner does not fall within theexclusion as defined in Section 2(22)(e)(ii) of the Act. Thereis a factual finding of fact by the Commission in the impugnedorder that lending of money was not a substantial part of thebusiness of RSPL. According to the Department, the wordordinary course of business is qualified by the words “wherethe lending of money is substantial part of the business”. c. The exemption under Section 10 (34) will apply only whendividend distribution tax is paid under Section 115-O.Further, the definition of Income under Section 2 (24)includes dividend and Section 2(22)(e) applies to deemeddividend. Section 8 is the basis of the charge and Section115-O is relating to special provisions of tax on distributedprofits of domestic Companies. d. The other shareholder, Mr. Ramasamy, was not the petitionerbefore the Settlement Commission. Initially, it was projectedby the petitioner as if she was the only one having more than20% shareholding. The argument raised by the petitioner offailure of the computation mechanism is hypothetical sinceMr.Ramasamy is not taxed on the same income. e. Even when an advance of loan is subsequently repaid in itsentirety during the relevant years, still deemed dividend isapplicable. f. The plea of lack of incriminating material will not arisesince the petitioner himself had filed an application beforethe Settlement Commission to adjudicate the issue of deemeddividend. During the course of search, a specific question inrelation to applicability of deemed dividend was put toSenthil Nathan. 7. By distinguishing the decisions relied upon by thelearned Senior counsel for the petitioner, the learned Standingcounsel for the Department also relied upon a various decisions, which I shall deal with later. 8. I have given careful consideration to the submissionsmade by the respective counsels and have carefully perused allthe materials placed before me. MAINTAINABILITY OF WRIT PETITION AGAINST ORDER OF SETTLEMENTCOMMISSION 9. Before addressing the various submissions put forth bythe petitioner, it would be necessary to address a preliminaryobjection raised by the learned Standing counsel for therespondent on the jurisdiction of this Court under Article 226of the Constitution of India to deal with an order passed by theSettlement Commission under Section 245 D (4) of the Act. 10. By relying on the decisions of the Hon’ble Apex Courtin the case of Jyotendrasinhji Versus S.I. Tripathi and othersreported in (1993) 201 ITR 611 (SC); C.A. Abraham V. ACIT in 255ITR 340; and Mathurbhai Bhimjbhai Rudani V. ITSC in 37Taxman.com 333 Gujarat High Court, the learned Standing counselsubmitted that the decision making process alone can bechallenged and not the decision itself. Even otherwise,piecemeal acceptance of the Settlement Commission’s order and achallenge to the remaining portion is impermissible. 10. By relying on the decisions of the Hon’ble Apex Courtin the case of Jyotendrasinhji Versus S.I. Tripathi and othersreported in (1993) 201 ITR 611 (SC); C.A. Abraham V. ACIT in 255ITR 340; and Mathurbhai Bhimjbhai Rudani V. ITSC in 37Taxman.com 333 Gujarat High Court, the learned Standing counselsubmitted that the decision making process alone can bechallenged and not the decision itself. Even otherwise,piecemeal acceptance of the Settlement Commission’s order and achallenge to the remaining portion is impermissible. 11. The various arguments advanced by the learned Seniorcounsel for the petitioner, which have been extracted above, areto the effect that the impugned order of the Commission is notin accordance with the provisions of the Act. Among the variousgrounds raised by the petitioner, two primary grounds are to theeffect that advances in the nature of commercial transactionswould not fall within the ambit of Section 2 (22) (e) and thatdividend is not taxable as per the provisions of Section 10 (34)of the Act. These grounds are predominantly to the effect thatthe findings rendered by the Settlement Commission in theimpugned order are not in accordance with the provisions of theAct. 12. In Jyotendrasinhji (supra), the Hon'ble Apex Court hadheld that the only ground upon which the Court could interfereagainst the order of the Commission is that when such order iscontrary to the provisions of the Act and that suchcontravention had prejudiced the appellant. This proposition hasbeen reiterated in various other subsequent decisions of variousHigh Courts. In the said decision, the Hon'ble Apex Court hadalso referred to the decision of the Hon'ble Supreme Court inR.B. Shreeram Durga Prasad & Fatechand Nursing Das Vs SettlementCommission [(1989) 176 ITR 169], wherein it was held thatjudicial review is permissible, not with the decision, but withthe decision making process. Nevertheless, it was ultimatelyheld that the order of the Settlement Commission could beinterfered with, if it is in contrary to the provisions of the “Indeed, it would be difficult topredicate the reasons and considerations whichinduce the commission to make a particularorder, unless of course the commission itselfchooses to, give reasons for its order. Evenif it gives reasons in a given case, the scopeof enquiry in the appeal remains the same asindicated above viz., whether it is,contraryto any of the provisions of the Act. In thiscontext, it is relevant to note that theprinciple of natural justice (and alterampartem) has been incorporated in Section 245-Ditself. The sole overall limitation upon tireCommission thus appears, to be that it shouldact in accordance with the provisions of theAct. The scope of enquiry, whether by HighCourt under Article 226 or by this Courtunder Article 136 is also the same whether theorder of the Commission is contrary to any ofthe provisions of the Act and if so, has itprejudiced the petitioner/appellant apart fromground of bias, fraud & malice which, ofcourse, constitute a separate and independentcategory. Reference in this behalf may be hadto the decision of this Court in Sri Ram DurgaPrasad v. Settlement Commission 176 I.T.R.169, which too was an appeal against theordersoftheSettlementCommission.Sabyasachi Mukharji J., speaking for the Benchcomprising himself and S.R. Pandian, J.observed that in such a case this Court is "concerned with the legality of procedurefollowed and not with the validity of theorder.' The learned Judge added 'judicialreview is concerned not with the decision butwith the decision-making process." Reliancewas placed upon the decision of the House ofLords in Chief Constable of the N.W. Police v.Evans, [1982] 1 W.L.R.1155. Thus, theappellate power under Article 136 was equatedto power of judicial review, where the appealis directed against the orders' of theSettlement Commission. For all the abovereasons, we are of the opinion that the onlyground upon which this Court can interfere inthese appeals is that order of the Commissionis contrary to the provisions of the Act and that such contravention has prejudiced theappellant The main controversy in theseappeals relates to the interpretation of thesettlement deeds though it is true, somecontentions of law are also raised. Thecommission has interpreted the trust deeds inaparticularmanner,Eveniftheinterpretation placed by the commission thesaid deeds is not correct, it would not be aground for interference in these appeals,since a wrong interpretation of a deed oftrust cannot be said to be a violation of theprovisions of the Income Tax Act. it isequally clear that the interpretation placedupon the said deeds by the Commission does notbind the authorities under the Act inproceedings relating to other assessmentyears.” 13. In C A Abraham, (supra) the Madras High Court hadobserved in paragraph 16 that it cannot be said that theSettlement Commission has followed any legal procedure so as toenable this Court to interfere with the order of the Commission.Likewise, in Mathurbhai Bhimjbhai Rudani (supra), the GujaratHigh Court had relied upon Jyotendrasinhji (supra) and concurredthat interference can be made to the order of the SettlementCommission, if the order is contrary to the provisions of theAct and such contravention prejudices the appellant. As statedearlier, the various legal propositions put forth before thisCourt, assailing the orders of the Settlement Commission, are tothe effect that the impugned order of the Commission is not inconformity with the provisions of the Act and by applying theratio laid down in Jyotendrasinhji’s case (supra), it can besaid that the present Writ Petition is maintainable. 14. Likewise, this is not a case where the petitioner hadaccepted a portion of the impugned order and challenged therest. As stated earlier, the petitioner offered the income ofRs.35 lakhs seized as additional income for the assessment year2013-2014 and also disclosed that the said income was derivedout of the sale of Silver Oak trees which were felled at heragricultural lands. The application for settlement was madesince the petitioner was not able to prove that the seized cashwas out of the sale of such trees. Apprehending that the amountsadvanced by RSPL to RTPL may be assessed as deemed dividend isin the hands of the petitioner, a mention was made in theapplication that the petitioner is a shareholder, holding morethan 20% of equity share capital in both the Companies and thatRSPL had advanced the money in the ordinary course of itsbusiness as corporate loans to RTPL. It is nobody’s case that the petitioner claimed a portion of the sum of Rs.35 lakhsoffered as income, to be taxable. Hence the contention of thelearned Standing counsel for the Department that a piecemealchallenge to the Settlement Commission’s order is notmaintainable, cannot be sustained. As such, this Court is of theview that the challenge to the impugned order of the SettlementCommission by invoking Article 226 of the Constitution of Indiain this Writ Petition, is maintainable. 15. I shall now address the various grounds raised anddeliberated by the respective counsels. RELEVANCE AND VALIDITY OF CDBT CIRCULARS: 16. The learned Senior counsel for the petitioner, wouldplace reliance on two Circulars issued by the Central Board ofDirect Taxes (CBDT). While Circular No. 19 of 2017 directs thatadvances in nature of commercial transaction would not fallwithin the ambit of Section 2(22)(e) and that no appeals befiled by the Department on this ground and those already filedshall be withdrawn or not pressed upon, Circular No. 495 of 1987directs that deemed dividend will be taxable in the hands of theconcern were loan/advances are made by a Company to concern withcommon shareholder. Reliance was placed on the decisions in UCOBank V. CIT [(1999) 237 ITR 889 (SC)]; Navnit Lal C. Javeri VsACIT [(1965) 56 ITR 198 (SC)]; KP Verghese V. ITO [(1981) 131ITR 597 (SC)]; and Keshavji Ravji and Company V. CIT [(1990) 183ITR 1 (SC)] in this regard. 17. The learned Standing counsel for the Department wouldoppose this proposition stating that without explaining how thetransactions between the two Companies constitute ordinarycommercial transaction, the petitioner cannot rely on theCirculars. The learned counsel also contended that the Circularswill not bind the Courts, especially when it is against theprovisions of law. According to the learned counsel, proceedingsunder Section 245 L of the Act before the Settlement Commissionis deemed to be judicial proceedings and therefore, theseCirculars will have no binding effect. For such a proposition,the learned Standing counsel relied upon the decisions inHindustan Aeronautics Limited V. CIT reported in (2000) 243 ITR808 (SC) and CEEE V. Rattan Melting and Wire Industries reportedin (2008) 231 ELT 22 (SC) and submitted that the Hon'ble SupremeCourt had distinguished the applicability of the decision in KPVerghese and Navnit Lal relied upon by the petitioner. 18. Two issues that arise for consideration at thisjuncture are as to whether the Circulars of the CBDT are bindingon the Settlement Commission and if so, whether the contents ofthese two Circulars would allure to the benefit of thepetitioner? 18. Two issues that arise for consideration at thisjuncture are as to whether the Circulars of the CBDT are bindingon the Settlement Commission and if so, whether the contents ofthese two Circulars would allure to the benefit of thepetitioner? 19. Three Hon’ble Judges of the Hon'ble Supreme Court haddealt with the relevance and binding nature of the CBDT’scirculars in UCO Bank (supra) and held that these Circulars arelegally binding on the revenue, even if they be found not inaccordance with the correct interpretation of the Section andthey depart or deviate from such construction. The following arethe relevant portions of the judgment: “... there is really little probabilityof the loans being repaid. It is considereddesirable to extend this principle to bankswhich, instead of transferring the doubtfuldebts to a suspense account, credit theinterest on such debts to that accountprovided the Income-tax Officer is satisfiedthat recovery is practically improbable." Thiscircular was in force till 20th of June, 1978when the Central Board of Direct Taxes issueda circular dated 20th of June, 1978withdrawing with immediate effect the earliercircular of 6th of October, 1952. The reasonfor the withdrawal of the circular of 1952 isset out in the circular of 20th of June, 1978.The reason is stated thus: "the Board has beenadvised that where accounts are kept onmercantile basis, interest thereon is taxableirrespective of whether the interest iscredited to suspense account or to interestaccount. The Kerala High Court has alsoexpressed the same view in the case of StateBank of Travancore v. Commissioner of Income-tax, Kerala [110 ITR 336]. The amount of suchinterest is, therefore, includible in thetaxable income." The withdrawal of thecircular of 6th of October, 1952 which hadbeen in force for thirty six years was onaccount of the decision of the Kerala HighCourt in State Bank of Travancore v.Commissioner of Income-tax, Kerala (Supra).The Central Board of Direct Taxes, however,issued another circular of 9th of October,1984 under which the Central Board of DirectTaxes decided that "interest in respect ofdoubtful debts credited to suspense account bythe banking companies will be subjected to taxbut interest charged in an account where therehas been no recovery for three consecutiveaccounting years will not be subjected to taxin the fourth year and onwards. However, ifthere is any recovery in the fourth year or later the actual amount recovered only will besubjected to tax in the respective years. Thisprocedure will apply to assessment year 1979-80 and onwards. The Board's InstructionNo.1186 dated 20.6.78 is modified to thisextent." The same circular has also furtherclarified that upto assessment year 1978- 79the taxability of interest on doubtful debtscredited to suspense account will be decidedin the light of the Board's earlier circulardated 6.10.1952 as the said circular waswithdrawn only in June, 1978. The newprocedure under the circular of 9th ofOctober, 1984 will be applicable for and fromthe assessment year 1979-80. All pendingdisputes on the issue should be settled in thelight of these instructions. Therefore, uptothe assessment year 1978-79, the Central Boardof Direct Taxes' circular of 6th October, 1952would be applicable; while from the assessmentyear 1979-80, the Central Board of DirectTaxes' circular of 9th of October, 1984 ismade applicable. In the present case, theassessment was made on the basis of theCentral Board of Direct Taxes circular of 9thof October, 1984, since the assessmentpertains to assessment year 1981-82 to whichthe circular of 6th October, 1984 isapplicable.What is the status of these circulars? Section119(1) of the Income-tax Act, 1961 providesthat, "The Central Board of Direct Taxes may,from time to time, issue such orders,instructions and directions to other income-tax authorities as it may deem fit for theproper administration of this Act and suchauthorities and all other persons employed inthe execution of this Act shall observe andfollowsuchorders,instructionsanddirections of the Board. Provided that no suchorders, instructions or directions shall beissued (a) so as to require any income-taxauthority to make a particular assessment orto dispose of a particular case in aparticular manner; or (b) so as to interferewith the discretion of the Appellate AssistantCommissioner in the exercise of his appellatefunctions". Under sub-section (2) of Section119, without prejudice to the generality of the Board's power set out in sub-section (1),a specific power is given to the Board for thepurpose of proper and efficient management ofthe work of assessment and collection ofrevenue to issue from time to time general orspecial orders in respect of any class ofincomes or class of cases setting forthdirections or instructions, not beingprejudicial to assessees, as the guidelines,principles or procedures to be followed in thework relating to assessment. Such instructionsmay be by way of relaxation of any of theprovisions of the sections specified there orotherwise. The Board thus has power, interalia, to tone down the rigour of the law andensure a fair enforcement of its provisions,by issuing circulars in exercise of itsstatutory powers under Section 119 of theIncome-tax Act which are binding on theauthorities in the administration of the Act.Under Section119(2)(a),however,thecirculars as contemplated therein cannot beadverse to the assessee. Thus, the authoritywhich wields the power for its own advantageunder the Act is given the right to forego theadvantage when required to wield it in amanner it considers just by relaxing therigour of the law or in other permissiblemanners as laid down in Section 119. The poweris given for the purpose of just, proper andefficient management of the work of assessmentand in public interest. It is a beneficialpower given to the Board for properadministration of fiscal law so that unduehardship may not be caused to the assessee andthe fiscal laws may be correctly applied. Hardcases which can be properly categorised asbelonging to a class, can thus be given thebenefit of relaxation of law by issuingcirculars binding on the taxing authorities. The question whether interest earned, on whathave come to be known as "sticky" loans, canbe considered as income or not until actualrealization, is a question which may arisebefore several income tax officers exercisingjurisdiction in different parts of thecountry. Under the accounting practice,interest which is transferred to the suspenseaccount and not brought to the profit and loss account of the company is not treated asincome. The question whether in a given casesuch "accrual" of interest is doubtful or not,may also be problematic. If, therefore, theBoard has considered it necessary to lay downa general test for deciding what is a doubtfuldebt, and directed that all income taxofficers should treat such amounts as notforming part of the income of the assesseeuntil realized, this direction by way of acircular cannot be considered as travellingbeyond the powers of the Board under Section119 of the Income Tax Act. Such a circular isbinding under Section 119. The circular of 9thof October, 1984, therefore, provides a testfor recognising whether a claim for interestcan be treated as a doubtful claim unlikely tobe recovered or not. The test provided by thesaid circular is to see whether, at the end ofthree years, the amount of interest has, infact, been recovered by the bank or not. If itis not recovered for a period of three years,then in the fourth year and onwards the claimfor interest has to be treated as a doubtfulclaim which need not be included in the incomeof the assessee until it is actuallyrecovered.In the case of Navnitlal C. Javeri v. K.K.Sen, Appellate Assistant Commissioner ofIncome-Tax, 'D' Range, Bombay (1965 (1) SCR909), the legal effect of such circulars is,inter alia, considered by a Bench of fivejudgesofthisCourt. Section2(6A)(e) and Section 12(1B) were introduced inthe Income-tax Act by the Finance Act 15 of1955 which came into force on 1st of April,1955. The Government, however, realised thatthe operation of Section 12(1B) would lead toextreme hardship because it would have coveredthe aggregate of all outstanding loans of pastyears and would impose an unreasonably highliability on the shareholders to whom theloans might have been advanced. The Minister,therefore, gave an assurance in Parliamentthat outstanding loans and advances which areotherwise liable to be taxed as dividends inthe assessment years 1955-56 will not besubjected to tax if it is shown that they hadbeen genuinely refunded to the respective companies before 30th of June, 1955.Accordingly, a circular was issued by theCentral Board of Revenue on 10th of May, 1955pointing out to all income tax officers thatit was likely that some of the companies mighthave advanced loans to their shareholders as aresult of genuine transactions of loans, andthe idea was not to affect such transactionsand not bring them within the mischief of thenew provision. The officers, therefore, wereasked to intimate to all the companies that ifthe loans were repaid before 30th of June,1955 in a genuine manner, they would not betaken into account in determining the taxliability of the shareholders to whom they mayhave been advanced despite the new section.This circular was held by this court asbinding on the Revenue, though limiting theoperation of Section 12(1B) or excludingcertain transactions from the ambit of Section12(1B). It was so held because the circularwas considered as issued for the purpose ofproper administration of the provisionsof Section 12(1B) and the court did not lookupon this circular as being in conflictwith Section 12(1B).A similar view of CBDT circulars has beentaken in the case of K.P. Varghese v. IncomeTax Officer, Ernakulam and Ors. (1981 (4) SCC173 [at page 188]), by a Bench of two judgesconsisting of P.N. Bhagwati and E.S.Venkataramiah, JJ. The Bench has held thatcirculars of Central Board of Direct Taxes arelegally binding on the Revenue and thisbinding character attaches to the circularseven if they be found not in accordance withthe correct interpretation of the section andthey depart or deviate from such construction.Citing the decision of Navnitlal C. Javeri v.K.K. Sen (Supra), this Court observed thatcirculars issued by the Central Board ofDirect Taxes under Section 119 of the Act arebinding on all officers and persons employedin the execution of the Act even if theydeviate from the provisions of the Act. InKeshavji Ravji and Co. v. Commissioner ofIncome-Tax (1990 [183] ITR 1) a Bench of threejudges of this Court has also taken the viewthat circulars beneficial to the assessee which tone town the rigour of the law and areissued in exercise of the statutory powersunder Section119 arebindingontheauthorities in the administration of the Act.The benefit of such circulars is admissible tothe assessee even though the circulars mighthave departed from the strict tenor of thestatutory provision and mitigated the rigourof the law. This Court, however, clarifiedthat the Board cannot pre-empt a judicialinterpretation of the scope and ambit of aprovision of the Act. Also a circular cannotimpose on the tax-payer a burden higher thanwhat the Act itself, on a true interpretation,envisages. The task of interpretation of thelaws is the exclusive domain of the courts.However, the Board has the statutory powerunder Section 119 to tone down the rigour ofthe law for the benefit of the assessee byissuing circulars to ensure a properadministration of the fiscal statute and suchcirculars would be binding on the authoritiesadministering the Act. In the case of C.B. Gautam v. Union of Indiaand Ors. (1993 (199) ITR 530 at page 546) aBench of five judges of this Court consideredas enforceable, Instruction No.1A88 issued bythe Central Board of Direct Taxes relating tothe enforcement of the provisions of ChapterXX-C of the Income-tax Act. The Central Boardpointed out in the said instruction that inadministering the provisions of the saidChapter, it has to be ensured that noharassment is caused to bona fide and honestpurchasers or sellers of immovable propertyand that the power of pre-emptive purchase hasto be exercised by the appropriate authorityonly when it has good reason to believe thatthe property has been sold at an undervalueand there is payment of black money in thetransaction. The instruction that when theproperty is put up for sale by the appropriateauthority, the reserve price should be fixedat a minimum of 15% above the purchase priceshown as the apparent consideration under theagreement between the parties, was held to bebinding on the authority. The ConstitutionBench in the above case also approved of the decision of this Court in K.P. Varghese v.Income Tax Officer (Supra). There are, however, two decisions of thisCourt which have been strongly relied upon bythe respondents in the present case. The firstdecision is the majority judgment in The StateBank of Travancore v. Commissioner of Income-Tax, Kerala (1986 (158) ITR 102) decided by aBench of three Judges of this court by amajority of two to one. This judgment directlydeals with interest on "sticky advances" whichhave been debited to the customer but taken tothe interest suspense account by a bankingcompany. The majority judgment has referred tothe circular of 6th of October, 1952 and itswithdrawal by the second circular of 20th ofJune, 1978. The majority appears to haveproceeded on the basis that by the secondcircular of 20th of June, 1978 the CentralBoard had directed that interest in thesuspense account on "sticky" advances shouldbe includible in the taxable income of theassessee and all pending cases should bedisposed of keeping these instructions inview. The subsequent circular of 9th ofOctober, 1984 by which, from the assessmentyear 1979-80 the banking companies were giventhe benefit of the circular of 9th of October,1984, does not appear to have been pointed outto the Court. What was submitted before theCourt was, that since such interest had beenallowed to be exempted for more than half acentury, the practice had transformed itselfinto law and this position should not havebeendeviatedfrom.Negativingthiscontention, the Court said that the questionof how far the concept of real income entersinto the question of taxability in the factsand circumstances of the case, and how far andto what extent the concept of real incomeshould intermingle with the accrual of income,will have to be judged "in the light of theprovisions of the Act, the principles ofaccountancy recognised and followed, andfeasibility". The Court said that the earliercirculars being executive in character cannotalter the provisions of the Act. These were inthe nature of concessions which could alwaysbe prospectively withdrawn. The Court also observed that the circulars cannot detractfrom the Act. The decision of the ConstitutionBench of this Court in Navnitlal C. Javeri v.K.K. Sen (Supra), or the subsequent decisionin K.P. Varghese v. Income Tax Officer (supra)also do not appear to have been pointed out tothe Court. Since the later circular of9.10.1984 was not pointed out to the Court,the Court naturally proceeded on theassumption that the benefit granted under theearlier circular was no longer available tothe assessee and those circulars could not beresorted to for the purpose of overcoming theprovisions of the Act. Interestingly, theconcurring judgment of the second judge hasnot dealt with this question at all but hasdecided the matter on the basis of otherprovisions of law. The said circulars under Section 119 of theIncome- tax Act were not placed before theCourt in the correct perspective because thelater circular continuing certain benefits tothe assessees was overlooked and the withdrawncircular was looked upon as in conflict withlaw. Such circulars, however, are not meantfor contradicting or nullifying any provisionof the statute. They are meant for ensuringproper administration of the statute, they aredesigned to mitigate the rigours of theapplication of a particular provision of thestatute in certain situations by applying abeneficial interpretation to the provision inquestion so as to benefit the assessee andmake the application of the fiscal provision,in the present case, in consonance with theconcept of income and in particular, notionalincome as also the treatment of such notionalincome under accounting practice. In the premises the majority decision inthe State Bank of Travancore v. Commissionerof Income-Tax (Supra) cannot be looked upon aslaying down that a circular which is properlyissued under Section 119 of the Income-tax Actfor proper administration of the Act and forrelieving the rigour of too literal aconstruction of the law for the benefit of theassessee in certain situations would not bebinding on the departmental authorities. This In the premises the majority decision inthe State Bank of Travancore v. Commissionerof Income-Tax (Supra) cannot be looked upon aslaying down that a circular which is properlyissued under Section 119 of the Income-tax Actfor proper administration of the Act and forrelieving the rigour of too literal aconstruction of the law for the benefit of theassessee in certain situations would not bebinding on the departmental authorities. This would be contrary to the ratio laid down bythe Bench of five judges in Navnitlal C.Javeri v. K.K. Sen (Supra). In fact, StateBank of Travancore v. Commissioner of Income-Tax (Supra) has already been distinguished inthe case of Keshavji Ravji and Co. v.Commissioner of Income-Tax (Supra) by a Benchof three judges in a similar fashion. It isheld only as laying down that a circularcannot alter the provisions of the Act. Itbeing in the nature of a concession, couldalways be prospectively withdrawn. In thepresent case, the circulars which have been inforce are meant to ensure that while assessingthe income accrued by way of interest on a"sticky" loan, the notional interest which istransferred to a suspense account pertainingto doubtful loans would not be included in theincome of the assessee, if for three yearssuch interest is not actually received. Thevery fact that the assessee, althoughgenerally using a mercantile system ofaccounting, keeps such interest amounts in asuspense account and does not bring theseamounts to the profit and loss account, goesto show that the assessee is following a mixedsystem of accounting by which such interest isincluded in its income only when it isactually received. Looking to the method ofaccounting so adopted by the assessee in suchcases, the circulars which have been issuedare consistent with the provisions of Section145 and are meant to ensure that assessees ofthe kind specified who have to account for allsuch amounts of interest on doubtful loans areuniformly given the benefit under the circularand such interest amounts are not included inthe income of the assessee until actuallyreceived if the conditions of the circular aresatisfied. The circular of 9.10.1984 alsoserves another practical purpose of layingdown a uniform test for the assessingauthority to decide whether the interestincome which is transferred to the suspenseaccount is, in fact, arising in respect of adoubtful or "sticky" loan. This is done byproviding that non-receipt of interest for thefirst three years will not be treated asinterest on a doubtful loan. But if afterthree years the payment of interest is not received, from the fourth year onwards it willbe treated as interest on a doubtful loan andwill be added to the income only when it isactually received. received, from the fourth year onwards it willbe treated as interest on a doubtful loan andwill be added to the income only when it isactually received. We do not see any inconsistency orcontradiction between the circular so issuedand Section 145 of the Income-tax Act. Infact, the circular clarifies the way in whichthese amounts are to be treated under theaccounting practice followed by the lender.The circular, therefore, cannot be treated ascontrary to Section 145 of the Income-tax Actor illegal in any form. It is meant for auniform administration of law by all theincome tax authorities in a specific situationand, therefore, validly issued under Section119 of the Income-tax Act. As such, thecircular would be binding on the Department.The other judgment on which reliance wasplaced by the Department was a judgment of aBench of two judges of this Court in KeralaFinancial Corportion V. Commissioner ofIncome-Tax (1994 (4) SCC 375) where thisCourt, following the majority view in StateBank of Travancore v. Commissioner of Income-Tax (Supra) held that interest which hadaccrued on a "sticky" advance has to betreated as income of the assessee and taxableas such. It is said that ultimately, if theadvance takes the shape of a bad debt, refundof the tax paid on the interest would becomedue and the same can be claimed by theassessee in accordance with law. For reasonsset out above, we are not in agreement withthe said judgment. The relevant circulars ofC.B.D.T. cannot be ignored. The question isnot whether a circular can override or detractfrom the provisions of the Act; the questionis whether the circular seeks to mitigate therigour of a particular section for the benefitof the assessee in certain specifiedcircumstances. So long as such a circular isin force it would be binding on thedepartmental authorities in view of theprovisions of Section 119 to ensure a uniformand proper administration and application ofthe Income-tax Act.” The aforesaid observations are self-explanatory. TheHon’ble Apex Court, while delivering the decision in UCO bank(supra) had also taken note of the findings in Navnit Lal C.Javeri, KP Verghese and Keshavji Ravji (supra). 20. To circumvent the proposition laid in UCO Bank (supra),the learned Standing counsel placed reliance on HindustanAeronautics Ltd (supra) and submitted that the Circulars willnot bind the Courts. It is also his submission that the Hon’bleApex Court in Hindustan Aeronautics Ltd has alreadydistinguished the applicability of the decisions of Navnit LalC. Javeri and KP Verghese (supra), which were relied upon by thepetitioner. 21. Hindustan Aeronautics Ltd (supra) dealt with the scopeof Section 264 of the Act and observed that there is no doubtthat the instructions given by the CBDT are binding on theauthorities under the Act but when the Hon'ble Supreme Court orthe High Court has declared a law on question arising forconsideration, it will not be open to a Court to direct that theCirculars should be given effect to and not the view expressedin a decision of the Hon'ble Supreme Court of the High Court.The ratio that the instructions given by the CBDT are binding onthe authorities had been reiterated in Hindustan Aeronautics Ltd(supra). What has been clarified in the said case is that suchinstructions cannot supersede the law declared by the Hon'bleSupreme Court of the High Court. It is in this background thatreference was made to the decisions in Navnit Lal C. Javeri andKP Verghese (supra) and a perusal of the observations made inthis regard may not be considered of having been distinguishedfrom the position la