TAXAP/140220/2007 1/64 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL Nos. 1402 to 1405 of 2007 with TAX APPEAL Nos.1322, 1434, 1872 of 2005 with TAX APPEAL Nos.46 To 51, 701, 702, 1348, 1419, 1496, 1501 of 2006, with TAX APPEAL Nos.231, 279, 280, 295, 375, 395, 402, 410, 411, 465, 477, 499, 511, 533, 543, 545, 547, 548, 550, 635, 638, 684, 687, 688, 689, 702, 703, 704, 743, 744, 747, 798, 835, 893, 899, 909, 946, 950, 958, 978, 1092, 1134, 1135, 1138, 1139, 1140, 1141, 1142, 1143, 1144, 1145, 1146, 1147, 1209, 1212, 1240, 1261, 1263, 1360, 1375, 1379, 1409, 1441, 1442, 1472, 1506, 1508, 1514, 1518, 1548,1559, 1620, 1658, 1637, 1659, 1660, 1664, 1665, 1666, 1667, 1668, 1669, 1677, 1678, 1683, 1648 of 2007 with TAX APPEAL Nos.65, 68, 203, 217, 218, 242, 244, 256, 257, 258, 261, 262, 264, 267, 275, 276, 279, 290, 322, 323 of 2008 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ HONOURABLE MR.JUSTICE BANKIM.N.MEHTA ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? TAXAP/140220/2007 2/64 JUDGMENT 5 Whether it is to be circulated to the civil judge ? ========================================================= THE COMMISSIONER OF INCOME TAX- I - Appellant(s) Versus CONCORD PHARMACEUTICALS - Opponent(s) ========================================================= Appearance : MR MANISH R BHATT, MRS MAUNA M BHATT, MR BB NAIK, MR PRANAV G DESAI AND MR KETAN M PARIKH for Appellant(s) : 1, MR SN SOPARKAR, MR SN DIVETIA, MR RAJU K PATEL, MR BD KARIA, MR MANISH J SHAH, MR TUSHAR P HEMANI, MR SUDHIR MEHTA, MR TANVISH BHATT for Opponent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Date : 05/08/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ) 1. The Revenue has filed Tax Appeals Nos.1402 to 1405 of 2007 under Section 260A of the Income-Tax Act 1961 for assessment year 1995- 96 and 1996-97 proposing to formulate the following substantial question of law for determination and consideration of this Court. The same question is formulated in all the four Tax Appeals. TAXAP/140220/2007 3/64 JUDGMENT “Whether the Appellate Tribunal is right in law and on facts and in dismissing the appeal filed by the Revenue without adjudicating the same on merits on the ground that since in the appeal, tax effect was below Rs.2 lakh, the revenue could not have preferred the same in view of the instructions of the CBDT, thereby entitling the Appellate Tribunal not to decide the same on merits?” 2.Alongwith these four Appeals, several other Appeals involving identical question of law were heard by this Court and learned counsels appearing for the parties have made their submissions in great detail. On behalf of the Revenue Mr.Manish R. Bhatt, Mr.B.B.Naik, Mrs.Mauna Bhatt, Mr.Pranav Desai and Mr. Ketan Parikh, learned Standing Counsels have made their submissions, whereas on behalf of the assessees Mr.S.N.Soparkar, Mr. S.N.Divetia, Mr. R.K.Patel, Mr. Manish J. Shah, Mr. B.D.Karia, Mr. Tushar Hemani, Mr. Tanvish Bhatt and Mr. Sudhir Mehta have made TAXAP/140220/2007 4/64 JUDGMENT their submissions. Since purely a legal question arise in all these Appeals, the Court does not go into the facts of each and every Appeal and considered the respective submissions of the parties in the present Appeals. However, for the sake of convenience, the facts in brief are taken from the Tax Appeal No.1402 of 2007. 3.In the present case the order of the Assessing Officer was challenged in appeal before CIT(A) who allowed depreciation on Rs.17,69,953/- i.e. on pre-operational expenses of Phase-I and on Rs.59,05,497/- i.e. being cost of assets in Phase-II. In further appeal, the Appellate Tribunal, considering the fact that the assessed income in assessment year 1995-96 was Nil and that there was a loss of Rs.34,28,460/- for assessment year 1996-97, held that both the appeals of revenue are not maintainable and dismissed in limine relying on the decision TAXAP/140220/2007 5/64 JUDGMENT of the Appellate Tribunal, Special Bench, Calcutta, in the case of JCIT V/s.Peerless Developers Ltd., 104 TTJ 741, wherein it was held that tax effect being Nil as there are losses, the appeals of revenue are not maintainable. 4.It is urged on behalf of the revenue that the decision of Appellate Tribunal is erroneous on this ground as the CBDT Instruction No.2 of 2005 dated 24.10.2005 on which heavy reliance is placed, is only an administrative instruction and the same does not take away the statutory right to appeal under I.T.Act, 1961. It is also contended that the CBDT Instruction No.1985 dated 29.6.2000 clarifies the Instruction No.1979 / F.No.279/126/98-ITJ dated 27.3.2000 and explains that the monetary limit in the context of “each case taken singly” would mean each assessment year for each assessee. In the case of assessee for assessment year TAXAP/140220/2007 6/64 JUDGMENT 1995-96 and 1996-97, the monetary limit as prescribed in Instruction No.1979 would apply taking together the assessment year 1995-96 and 1996-97. Further, in Instruction No.2 of 2005 dated 24.10.2005 the CBDT, in partial modification of instruction No.1979 dated 27.3.2000 and Instruction No.1985 dated 29.6.2000, has stipulated that the Board has also decided that the cases involving substantial question of law of importance as well as in cases where the same question of law repeatedly arises, either in the case concerned or in similar cases, should be separately considered on merits without being hindered by the monetary limits. While dismissing the department's appeals, the Tribunal has not considered this aspect of the matter. 5.The broad submissions made on behalf of the Revenue are that; TAXAP/140220/2007 7/64 JUDGMENT (i) The instructions contained in the circular are not absolute. There are exceptions and the Tribunal is required to examine the matter in the light of the exceptions. (ii) Even as per the circular, Appeals are maintainable in a case where circular is required to be interpreted. As, in this case also, the circular was required to be interpreted, the Appeal was maintainable. (iii) The judgment reported in 267 ITR 272 (SC) is required to be read in the context in which it was rendered. (iv) The assessee concedes that circular is not binding on the appellate authority. As per the say of the assessee, circular is issued by the CBDT directing the Assessing Officer not to file Appeal and, therefore, as per the say of the assessee, Appeal filed in TAXAP/140220/2007 8/64 JUDGMENT Tribunal is not a valid Appeal. This contention is misconceived as the requirements of a valid Appeal are enumerated in Section 253(2) of the Act read with Rule 47 of Income-Tax Rules, read with Rules 6 to 15 of Appellate Tribunal Rules, 1963. (v) In the event, directions of the CBDT are not obeyed by a Revenue Officer, it may, at the most, tantamount to dereliction of duty but would not tantamount to the Appeal being treated as an invalid Appeal. (vi) The ITAT does not have writ jurisdiction to hold that the Assessing Officer had acted beyond the CBDT instructions and, therefore, his action is wrong. (vii) The consequences of Appeal not being filed in a recurring issue will have disastrous consequences. If in the main matter due to low tax effect Appeal is not TAXAP/140220/2007 9/64 JUDGMENT preferred and in the subsequent matter where the tax effect is substantial, Appeal is preferred, relying upon the judgment of the Hon'ble Supreme Court reported in 254 ITR 606 (SC), the appellate authority may reject the subsequent Appeal on the ground that in the main matter Appeal has not been preferred by the Revenue. 6.To substantiate the above grounds of challenge, the learned counsel has referred to and relied upon certain circulars and/or instructions issued by CBDT on the issue in question. The Instruction No.1328 dated 5.4.1980 refers to the prevailing practice on that day and observes that the Board is generally reluctant to advise reference unless the tax effect is more than Rs.10,000/- or a general question of law affecting a large number of cases is involved. In supercession of previous instructions on the subject, the Board has TAXAP/140220/2007 10/64 JUDGMENT taken a fresh decision vide Instruction No.1382 dated 5.4.1980. In para 3.1 it is stated that the present monetary limits of Rs.10,000/- for reference to the High Court and of Rs.30,000/- for Appeal to the Supreme Court laid down in Instruction No.284 dated 10.1.1975 will continue. The limit of Rs.10,000/- for reference to the High Court however shall be relaxed where the question of law is repetetive and the cumulative tax effect in a number of cases is bound to be substantial. 7.Instruction No.1777 dated 4.11.1987 states that filing of departmental appeal/reference should be selective. Guidelines were issued laying down monetary limits of revenue effect of Rs.10,000/- for filing appeals before ITAT, Rs.30,000/- for reference before High Court and Rs.60,000/- for appeals to Supreme Court (Instruction No.1573 dated 12.7.84 and 1612 dated 6.4.1985). The Board has, however, TAXAP/140220/2007 11/64 JUDGMENT clarified that these guidelines should be adhered to subject to the exceptions given below. For the purpose of working out monetary limit, the cumulative revenue effect of the issue in the assessee's case for all the years upto the year for which returns have been filed should be taken into consideration. Where the same issue is involved in different cases of a group (e.g. Industrial house, family, connected cases etc.), the revenue effect of the group and not the individual case should be taken into account for the purpose of the monetary limit. While applying the monetary limits, the effect of carry forward, effect of consequential addition/deletions in other years should be kept in view. In cases of firms/AOP the revenue effect in cases of partners/members be also taken into account. The Board has also clarified that where a question of law arises for the first time before the High Court concerned, it should be TAXAP/140220/2007 12/64 JUDGMENT contested irrespective of revenue involved. Where an adverse judgment is delivered by a High Court in such cases, stay of the operation of the judgment should be obtained either from the High Court itself or from the Supreme Court. Other adverse judgments which need to be contested irrespective of the revenue effect. (a) Where prosecution proceedings are contemplated against the assessee; (b) Where strictures have been passed against the Department or its officers. (c) Where Revenue audit objection in the case has been accepted by the department. (d) Where board's order, notification, instruction or circular is the subject matter of adverse order. (e) Where in respect of one assessment year the order is contested in the case of an assessee for any reason, the adverse judgment for other years in the issue in that case should also be contested irrespective of the TAXAP/140220/2007 13/64 JUDGMENT amount involved so that department's case on the issue is not prejudiced on the ground that in respect of some year the department has already accepted the assessee's case. 8.In Instruction No.1985 dated 29.6.2000, the Board has revised the monetary limits for filing department appeals/reference before various appellate authorities and certain clarifications were made in respect of Instruction No.1979 dated 27.3.2000. The following clarifications were made by the Board. (i) the monetary limits in the context of “each case taken singly” would mean each assessment year for each assessee. For instance, in the case of XYZ Limited for the assessment years 1995-96 and 1996-97, the monetary limit as prescribed in Instruction No.1979 would apply taking together the assessment years 1995-96 and 1996-97. TAXAP/140220/2007 14/64 JUDGMENT (ii) even if the issues involved in an appeal under consideration are already pending in appeal before the appellate authorities, all subsequent appeals will, now, be filed for particular assessment year only as indicated in (i) above, if the tax effect exceeds the prescribed monetary limit. 9.Vide Instruction No.2 of 2005 dated 24.10.2005 the Board has made partial modification and appeals will be filed only in cases where the tax effect exceeds the revised monetary limits as under; (i) Appeal before Appellate Tribunal Rs.2,00,000/-. (ii) Appeal under Section 260A Rs.4,00,000/-. (iii) Appeal before the Supreme Court Rs.10,00,000/-. The Board has, however, clarified that cases involving substantial question of law of importance as well as cases where the same TAXAP/140220/2007 15/64 JUDGMENT question of law will repeatedly arise, either in the case concerned or in similar cases, should be separately considered on merits without being hindered by the monetary limits. 10.The Board has further clarified the issue vide Instruction No.5 dated 16.7.2007 that the tax effect means the tax only, i.e. tax excluding interest. The Board has further clarified that cases where the questions of law involved or raised in appeal are of a recurring nature to be decided by the Court, should be separately considered on merits without being hindered by the monetary limits. 11.The Board has issued Instruction No.5 of 2008 dated 15.5.2008 superceeding all previous instructions and deciding monetary limits and conditions specified below. (1) Appeals will henceforth be filed only in TAXAP/140220/2007 16/64 JUDGMENT cases where the tax effect exceeds monetary limits given hereunder;- (i) Appeal before Appellate Tribunal Rs.2,00,000/-. (ii) Appeal under Section 260A Rs.4,00,000/-. (iii) Appeal before the Supreme Court Rs.10,00,000/-. (2) For this purpose, 'tax effect' means the difference between the tax on which such total income be reduced by the amount of income in respect of the issue against which appeal is intended to be filed ( i.e. the disputed issues). However, the tax will not include any interest thereon. Similarly, in loss cases notional tax effect should be taken into account. In the case of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in the case to be appealed against. (3) The Assessing Officer shall calculate the TAXAP/140220/2007 17/64 JUDGMENT tax effect separately for every assessment year in respect of the disputed issue in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal shall be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issue exceeds the monetary limit specified above. No appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified. In other words henceforth, appeals will be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or appellate authority, which involves more than one year, appeal shall be filed in respect of all assessment years even if the 'tax effect' is less than the prescribed monetary limits in any of the year, if it is decided to file appeal in respect of the year in which 'tax TAXAP/140220/2007 18/64 JUDGMENT effect' exceeds the monetary limit prescribed. 12.Based on the above instructions issued by the Board from time to time, the learned counsels strongly urged that the tax effect is not the only criteria for deciding the maintainability of appeal. The circular issued by the Board from time to time will have to be read in light of the exceptions contained in such circulars or instructions. The Tribunal has committed a grave error in blindly applying the monetary limit only without considering the fact as to whether the exceptions are applicable to the facts of each case. It is, therefore, submitted that the orders passed by the Tribunal in all these appeals are required to be quashed and set aside and the matter will have to be sent back to the Tribunal for deciding as to whether matters on hand fall within the scope of exceptions contained in applicable TAXAP/140220/2007 19/64 JUDGMENT circulars. 13.In support of their submissions, the learned counsels for the Revenue relied on the following judgments. (i) In Commissioner of Income-Tax Vs. Hero Cycles Pvt. Ltd. and others, reported in 228 ITR 463 (SC) it was held that Circular can bind the Income-tax Officer but will not bind the appellate authority or the Tribunal or the Court or even the assessee. (ii) In Commissioner of Income-Tax Vs. Rajasthan Patrika Ltd., reported in 258 ITR 300 (Raj) it was held that if, inspite of administrative instructions in a circular of the Central Board of Direct Taxes to the effect that no appeal should be filed when the tax effect is not more than Rs.50,000/-, the Department prefers to file an appeal or take a reference to the High Court, on such TAXAP/140220/2007 20/64 JUDGMENT administrative instructions the High court ought not to dismiss the appeal or reject the reference. There is no infirmity in disposing of the appeal or reference on the merits. (iii) In Commissioner of Income-Tax Vs. Shivaji Works Ltd., reported in 295 ITR 542 (Bombay), the facts were to the effect that the Revenue filed an appeal against the order of the Tribunal holding that repairs to the guest house was not an expenditure incurred on the maintenance of the guest house under Section 37(4) of the Income-tax Act, 1961, and was therefore an admissible deduction. The assessee challenged the maintainability of the appeal considering the valuation for the purpose of filing appeal and the notifications by the Central Board of Direct Taxes. The Court further held that under paragraph 3 of the circular dated October 24,2005, cases involving substantial question of law of importance as well as cases TAXAP/140220/2007 21/64 JUDGMENT involving a question of law which would repeatedly arise, should be separately considered on the merits without being hindered by the monetary limits. Therefore the circular itself makes out an exception, when appeals could be preferred. The question raised being covered in favour of the Department by the Supreme Court decision in Britannia Industries Ltd., (2005) 278 ITR 546, the appeal was to be allowed. The Court further held that the supervisory jurisdiction of the High Court is always available to correct errors of law apparent on the face of record. The mere fact that there is a circular prescribing monetary limits for litigation by the Department would not stand in the way of the High Court exercising its jurisdiction. The Court also held that in those cases where the issue is not covered by a judgment of the Supreme Court or of the High Court, the Circular will TAXAP/140220/2007 22/64 JUDGMENT apply and the Revenue would be bound by the Circulars and the appeals as filed will have to be rejected, unless they fall within the exceptions as contained in the circular. In all those matters where appeals have been preferred and the issue of law arising therein is covered either by a judgment of the High Court or of the Supreme Court, it will be open to the High Court to exercise its jurisdiction and dispose of the appeals in terms of the law declared by the Supreme Court or by the High Court. (iv) In Rani Paliwal Vs. Commissioner of Income-Tax, reported in 268 ITR 220 (P & H) it was held while dismissing the appeals, (i) that the Board's Circular No.F/279/126/98-IT dated March 27,2000, was only an instruction issued to the income-tax authorities not to file appeals where the tax effect is less than Rs.1,00,000/-. The Tribunal was not bound by any such instruction and once the TAXAP/140220/2007 23/64 JUDGMENT Department filed an appeal, the Tribunal was bound to decide the same on merits. The Court therefore held that no substantial question of law arose from the admission of the appeal. (v) In Commissioner of Income-Tax Vs. Kodanand Tea Estates Co., reported in 275 ITR 244 (Madras). The appeal filed by the Revenue before the Tribunal had been dismissed without going into the merits on the basis of Circular Instruction No.1903 dated October 28, 1992 and instruction No.1777 dated November 4,1987 by which a monetary limit for filing of the appeal by the Department before the Tribunal was laid down. Under the Circular, the monetary limit was revised to Rs.one lakh. As the tax effect in these cases was less than Rs.one lakh, the appeal was dismissed relying the instructions. On further appeal to the High Court it was held that the instruction came into force only TAXAP/140220/2007 24/64 JUDGMENT with effect from April 1, 2000. The assessment years involved in these appeals were earlier to the date from which the notification was given effect. Hence, the application of the notification for dismissing the appeal was not legally sustainable. Apart from that clause (ii) of paragraph 3 of Instruction No.1979 provides that where the Board's order, notification, instruction or circular is the subject matter of an adverse order irrespective of the revenue effect, the appeal has to be decided on the merits. When the applicability of the notification, which is given effect from April 1, 2000, is questioned before the Tribunal, the question comes within the ambit of clause (ii) of paragraph 3 of Instruction No.1979. The Tribunal was, therefore, directed to hear appeal on the merits. (vi) In Jugal Kishore Arora Vs. Dy. Commissioner of Income-Tax (2004) 269 ITR 133 TAXAP/140220/2007 25/64 JUDGMENT (Allahbad). The Court held that the instructions of the Central Board of Direct Taxes regarding filing of appeals are only internal matters of the Department and the assessee cannot object to filing of an appeal despite such an instruction. The appeal was clearly maintainable before the Tribunal on behalf of the Department under Section 253(2) of the Income-tax Act and this right to file an appeal was a statutory right and could not be taken away or prohibited by executive instructions. (vii) In Commissioner of Income-Tax Vs. Abhishek Industries Ltd., reported in (2006) 286 ITR 1 (P&H) it was held that the circular issued by the Central Board of Direct Taxes can bind the Income-tax Officer, but will not bind the appellate authority or the Tribunal or the Court or even the assessee. The Court further held that the Tribunal must examine the material on record before rendering a TAXAP/140220/2007 26/64 JUDGMENT decision on any issue raised by the parties. The Tribunal being the last fact finding authority a higher responsibility is cast by the Legislature on it to decide the cases by recording complete facts and assigning cogent reasons. It is the duty of the Tribunal to decide the cases on the basis of the law laid down by the Supreme Court/High Court and not what the Tribunal decides on the particular issue. Every effort must be made by the Tribunal to decide the issue by taking help from the decisions of the Supreme Court and if there is no direct authority of the Supreme Court on the point then of the jurisdictional High Court and lastly of any other High Court. Not taking note of the facts of the case, nor the legal position and not even referring to the facts of the case involved in those decisions on which reliance is placed for deciding the appeal amounts to non-exercise of the appellate powers by the Tribunal. TAXAP/140220/2007 27/64 JUDGMENT (viii) In Bengal Iron Corporation and another Vs. Commercial Tax Officer and others, reported in AIR 1993 SC 2414, it was held that Clarifications/Circulars issued by the Central Government and/or State Government regarding taxability of certain item represent merely their understanding of the statutory provisions. They are not binding upon the Courts. Though those clarifications and circulars were communicated to the concerned dealers but even so nothing prevents the State from recovering the tax, if in truth such tax was leviable according to law. There can be no estoppel against the statute. The understanding of the Government, whether in favour or against the assessee, is nothing more than its understanding and opinion, It is doubtful whether such clarifications and circulars bind the quasi- judicial functioning of the authorities under the Act. While acting in quasi-judicial TAXAP/140220/2007 28/64 JUDGMENT