Case: Director of Income Tax, Circle 26(1) New Delhi Vs. S.R.M.B. Dairy Farming (P) Ltd

2. The propensity of Government Departments and public authorities to keep litigating through different tiers of judicial scrutiny is one of the reasons for docket explosion. The Income Tax Department of the Government of India is one of the major litigants. There are two departmental scrutinies at the level of the Assessing Officer and the Commissioner of Income Tax (Appeals) and thereafter an independent judicial scrutiny at the Income Tax Appellate Tribunal (hereinafter referred to as the `ITAT) level followed by the legal issue which can be inquired into by the High Courts. The last tier is, of course, the jurisdiction under Article 136 of the Constitution of India before the Supreme Court.3. Mindful of the phenomenon of the docket explosion and the rising litigation in the country, the Union of India in order to ensure the conduct of responsible litigation framed what is today known as the National Litigation Policy, to bring down the pendency of cases and get meaningful issues decided from the judicial forums rather than multiple tiers of scrutiny just for the sake of it. The Government, being a litigant in well over 50 per cent of the cases, has to take a lead in not being a compulsive litigant.4. It is towards the aforesaid avowed object that the Income Tax Department, from time to time, has come out with administrative circulars/notifications for the Department not to litigate where the revenue impact is low.5. In the present proceedings, we are concerned with the implementation of Instruction No.3 of 2011 dated 9.2.2011, providing for appeals not to be filed before the High Court(s) where the tax impact was less than L 10 lakh. It also contains certain other conditions which will be reverted to later, but suffice to say that this Instruction was in supersession of the earlier Instruction No.1979 of 2000 dated 27.3.2000 where the limit of the tax effect was L 4 lakh. The Instruction/Circular in question is stated to have a prospective effect as per the Revenue and, thus, cases which were pending in the High Court(s) and had been filed prior to the Instruction in question (Instruction No.3) but had tax effect of less than L 10 lakh were, thus, required to be determined on their merits and not be dismissed by applying the circular/instruction.6. There has been a divergence of legal opinion on this aspect amongst the High Courts.7. There have also been certain orders passed by this Court which appear to have a divergence of view and we consider it necessary to examine this issue in detail so that conflicting orders do not arise and the High Courts are also guided appropriately. This is also necessary, as in the mean time, a large number of cases have been disposed of on the application of the Instruction/Circular in question though the appeals were preferred by the Revenue prior to the Instruction/Circular being issued as a large number of High Courts took that view.High Courts of the View that the Circular in question would apply to pending appeals as well:A. Karnataka High Court:Commissioner of Income Tax, Bangalore v. Ranka & Ranka, 2013(352) ITR 121. The issue was squarely addressed by the Division Bench of the Karnataka High Court recognizing that the concept of providing the monetary limit was not new and has been invoked from 1992. The limit was raised from time to time. The clause in the circular has explained the meaning of `Tax Effect as the "difference between the tax on total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed without impact of interest." The different clauses protected the interest of the Revenue so as not to have any precedentiary impact. There were, however, certain exclusions from this, i.e., challenge to constitutional validity of an Act or Rule, declaration of any Board Order, Notification, Instruction or Circular being held to be illegal or ultra vires, audit objections of the Revenue Department being accepted by the Department. These Circulars have been given statutory recognition having been issued under Section 268A of the Income Tax Act, 1961 (hereinafter referred to as the `IT Act).8. The judgment took note of the fact that the Madras High Court, Kerala High Court, Chhattisgarh High Court and the Punjab and Haryana High Court had taken a contra view, opining that the existing Circular/Instruction prevailing at the relevant time when the appeal/reference was made would apply and there would be no retrospective application of the circular. On the other hand, the Bombay High Court, Madhya Pradesh High Court, Delhi High Court had taken the view, which was sought to be taken by the Karnataka High Court.

Reasoning:
19. The aforesaid order, in our view, actually should have laid the controversy to rest. The retrospective applicability of the Circular dated 9.2.2011 was not interfered with, but with two caveats(i) Circular should not be applied by the High Courts ipso facto when the matter had a cascading effect; (ii) where common principles may be involved in subsequent group of matters or a large number of matters. It was opined that in such cases, the attention of the High Court would be drawn and the Department was even given liberty to move the High Court in two weeks. In our view this order holds the field and should continue to hold the field.20. Unfortunately, this order was not brought to the notice of the subsequent two Judges Bench of this Court in Commissioner of IncomeNew Delhi v. Suman Dhamija, 2015(16) SCC 176 again arising from a Delhi High Court order, wherein it was simply stated that since the appeals were preferred before 2011 and the Instructions were dated 9.2.2011, the earlier cases would not be covered by the Instruction. This order in turn had been followed by another two Judges Bench in Civil Appeal No.16815/2017 titled The Commissioner of Income Tax Bangalore I & Anr. v. M/s. Gemini Distilleries datedhave already given our imprimatur to the observations made by the Karnataka High Court in a detailed analysis in Ranka & Ranka case (supra), which has dealt with the litigation policy philosophy behind applying the Circular and the benefit being extended in view thereof to all Assessees where appeals have been pending, but below the financial limit, as otherwise an anomalous situation would arise.23.We may also take note of the judgment of this Court in Suchitra Components Ltd. v. Commissioner of Central Excise, Guntur on the general principle of application of Circulars. Reliance was placed on the view expressed in Commissioner of Central Excise, Bangalore v. Mysore Electricals Industries Ltd. opining that a beneficial circular has to be applied retrospectively while an oppressive circular has to be applied prospectively.24.We are of the view that the matter needs to be put to rest and a clarity be obtained in view of the impact of this issue on pending cases before the High Courts as well as the cases which have been disposed of by various High Courts by applying the Circular of 2011 to pending litigations. In our view the matter has been squarely put to rest taking further care of the interest of the Revenue by the order passed by the three Judges Bench of this Court in Surya Herbal Ltd. case (supra), which had put two caveats even to the retrospective application of the Circular.