Analysis of Section 119 of the Income Tax Act, 1961

The Scope, Binding Nature, and Judicial Interpretation of Powers under Section 119 of the Income Tax Act, 1961

Introduction

Section 119 of the Income Tax Act, 1961 (hereinafter "the Act")[1], occupies a significant position within the administrative framework of India's direct tax system. It empowers the Central Board of Direct Taxes (CBDT), the apex body for direct tax administration, to issue orders, instructions, and directions to subordinate income-tax authorities for the "proper administration" of the Act. This provision is crucial for ensuring uniformity in the application of tax laws, providing clarifications on ambiguous provisions, mitigating undue hardships for taxpayers, and managing the efficient assessment and collection of revenue. The powers conferred by Section 119 are extensive but not unfettered, being subject to specific limitations enshrined within the section itself and as interpreted by the judiciary. This article undertakes a comprehensive analysis of Section 119, examining its legislative contours, the binding nature of circulars and instructions issued thereunder, the scope and ambit of the CBDT's powers, the inherent limitations, and the role of judicial review in shaping its application. The analysis draws upon statutory provisions, landmark judicial pronouncements, and the reference materials provided.

Legislative Framework of Section 119

Section 119 of the Act has evolved over time. As noted in F.C Agarwal v. Commissioner Of Income-Tax[2], the section was substituted by the Taxation Laws (Amendment) Act, 1970, expanding the Board's powers. The current provision, primarily under sub-section (1), authorizes the CBDT to issue orders, instructions, and directions to other income-tax authorities as it may deem fit for the proper administration of the Act. These authorities are mandatorily required to observe and follow such directives.

Sub-section (1) contains provisos that limit this power:

  • The CBDT cannot issue instructions requiring an income-tax authority to make a particular assessment or dispose of a particular case in a particular manner.
  • The CBDT cannot interfere with the discretion of the Commissioner (Appeals) in the exercise of his appellate functions.

Sub-section (2) of Section 119 further elaborates on the Board's powers, without prejudice to the generality of sub-section (1). Clause (a) of sub-section (2) allows the CBDT, for the proper and efficient management of assessment and collection of revenue, to issue general or special orders for any class of incomes or cases. These orders can involve the relaxation of provisions of specified sections (such as Sections 139, 143, 144, 147, 148, 154, 155, 201(1A), 210, 211, 234A, 234B, 234C, 271, and 273) or otherwise set forth directions or instructions (not prejudicial to assessees) regarding guidelines, principles, or procedures. Clause (b) empowers the Board to authorize income-tax authorities to admit applications or claims for any exemption, deduction, refund, or other relief after the expiry of the period specified under the Act, to avoid genuine hardship in any case or class of cases. Clause (c) pertains to orders for laying before Parliament.

The Income Tax Appellate Tribunal in Income-tax Officer v. Bir Engg. Works[14] succinctly summarized that sub-section (1) refers to general orders binding on authorities, while sub-section (2) deals with specific orders, including relaxations for certain provisions or classes of income/cases.

The Binding Nature of Circulars Issued under Section 119

Binding on Tax Authorities

A consistent line of judicial pronouncements has firmly established that circulars, orders, and instructions issued by the CBDT under Section 119 are binding on all income-tax authorities. The Supreme Court in Uco Bank, Calcutta v. Commissioner Of Income Tax, W.B.[4], emphasized that CBDT circulars provide guidelines for consistent and fair administration and must be adhered to by the Income Tax Department. This principle was robustly reaffirmed in Union Of India And Another v. Azadi Bachao Andolan And Another[3], where the Supreme Court upheld the validity of CBDT Circular No. 789 concerning the India-Mauritius Double Taxation Avoidance Convention (DTAC), stating that Section 119 empowers the CBDT to issue such directives for the proper administration of the Act, which are binding on the revenue authorities.

The binding nature on the department extends to the point where the department itself cannot challenge these circulars. The Andhra Pradesh High Court in The Commissioner Of Income-Tax-Iii, Hyderabad v. Shri Kishen Chand Others[6] and Commissioner Of Income-Tax v. A. Raajendra Prasad[7], relying on Azadi Bachao Andolan[3], held that the department has no right to challenge a circular issued by the Board on any ground, including alleged inconsistency with statutory provisions. This view is echoed in cases concerning analogous provisions in other fiscal statutes, such as Section 151-A of the Customs Act, 1962, and Section 37-B of the Central Excise Act, 1944, as seen in Commissioner Of Customs, Calcutta And Others v. Indian Oil Corpn. Ltd. And Another[8] and Union Of India And Others v. Arviva Industries India Limited And Others[9].

The Supreme Court in State Of Kerala And Others v. Kurian Abraham (P) Ltd. And Another[10], while dealing with a similar provision under the Kerala General Sales Tax Act, noted that the Board is entrusted with providing "fair and just administration" and can grant administrative relief, and the State cannot contend that such circulars are not legal.

Not Binding on Assessees if Adverse; Beneficial Circulars

While circulars are binding on the Revenue, they do not bind the assessee if they are adverse to them. Assessees are entitled to contest the validity or legality of such instructions if they transgress the scope of the Act or are prejudicial. Conversely, circulars that are beneficial to the assessee, for instance, by toning down the rigour of the law, are generally considered admissible and can be relied upon by the assessee. The Supreme Court in Keshavji Ravji And Co. And Others v. Commissioner Of Income Tax[11] observed that circulars can relax the strictness of the law. This principle is also affirmed in cases like Commissioner Of Central Excise v. Ingersoll Rand India Ltd.[12] and ATUL LIMITED v. DAMAN[13], which note that while the department is bound, assessees can challenge adverse circulars.

Not Conclusively Binding on Courts/Tribunals for Statutory Interpretation

Although binding on tax authorities, CBDT circulars do not fetter the judiciary's power to interpret statutory provisions. Courts and tribunals retain the ultimate authority to expound the law. While circulars can provide valuable insight into the CBDT's understanding and administrative practice, they cannot override clear statutory language or judicial interpretations. As observed in Keshavji Ravji And Co.[11], circulars cannot alter the provisions of the Act nor can they be used to detract from the law. The ITAT in Income-tax Officer, Ward 11(2), New Delhi v. Ethno Financial Research (P.) Ltd.[22] noted that a CBDT clarification is not binding upon the courts and cannot run counter to the legislative position.

Scope and Ambit of Powers under Section 119

Proper Administration of the Act

The core objective of Section 119 is to enable the "proper administration of this Act." This phrase grants the CBDT broad powers to issue directives that ensure the smooth, uniform, and fair implementation of tax laws. The Supreme Court in Azadi Bachao Andolan[3] recognized this enabling power as crucial for the functioning of income tax authorities. The power extends to issuing guidelines, principles, or procedures to be followed in assessment, collection of revenue, or initiation of penalty proceedings, as highlighted by the ITAT in Income-tax Officer v. Bir Engg. Works[14] and Income-tax Officer v. Motilal Rakhabchand[23].

Toning Down Rigour of Law and Providing Administrative Relief

One of the significant aspects of Section 119 is the CBDT's power to "tone down the rigour of the law" and ensure fair enforcement. This was explicitly recognized by the Supreme Court in Uco Bank[4]. The Chhattisgarh High Court in M/s Aarti Sponge And Power Ltd. v. The Assistant Commissioner Of Income Tax-2(1)[15] reiterated this, citing Uco Bank[4]. This power is particularly evident in Section 119(2)(a) and (b), which allow for relaxation of certain procedural provisions and condonation of delays to avoid genuine hardship. For instance, in M/S. DE SOUZA HOTELS PVT. LTD. v. CCIT[16], the Bombay High Court dealt with a CBDT order under Section 119(2)(a) authorizing Chief Commissioners to reduce or waive interest under Sections 234A, 234B, or 234C in specified classes of cases. This power to grant relief is also acknowledged in Commissioner Of Income Tax, Mumbai v. Anjum M.H Ghaswala And Others[5], where the Supreme Court, while holding that the Settlement Commission cannot independently waive statutory interest under Sections 234A, 234B, and 234C, recognized that such relief could be granted to the extent provided by circulars issued under Section 119 of the Act.

Application in the Context of Double Taxation Avoidance Conventions (DTACs)

The judgment in Azadi Bachao Andolan[3] is a seminal authority on the CBDT's power under Section 119 in relation to DTACs. The Supreme Court upheld Circular No. 789, which clarified the acceptance of a certificate of residence issued by Mauritian authorities as sufficient evidence for claiming benefits under the India-Mauritius DTAC. The Court rejected the Delhi High Court's view in (1) Shiva Kant Jha v. (2) Azadi Bachao Andolan[17] (which had quashed the circular as ultra vires), affirming that the circular was within the CBDT's administrative powers under Section 119 and consistent with Section 90 of the Act (which empowers the Central Government to enter into DTACs).

Limitations on Powers under Section 119

Statutory Provisos

The explicit limitations are embedded in the provisos to Section 119(1). The CBDT cannot direct an assessing officer to make a particular assessment or dispose of a case in a specific manner, nor can it interfere with the appellate discretion of the Commissioner (Appeals). These provisos safeguard the quasi-judicial independence of assessing officers and first appellate authorities in individual cases. The Supreme Court in Azadi Bachao Andolan[3] and the ITAT in Income-tax Officer v. Bir Engg. Works[14] acknowledged these exceptions.

Cannot Override Statutory Provisions

A fundamental limitation, consistently upheld by courts, is that circulars issued under Section 119 cannot override or contradict the express provisions of the Act. In Kasturi And Sons Ltd. v. Union Of India And Others[18], the Madras High Court, citing the Supreme Court in Kerala Finance Corporation v. Commissioner of Income-tax[19], held that circulars cannot override the provisions of the Act. Similarly, the Bombay High Court in Jalgaon District Central Co-Operative Bank Ltd. v. Union Of India[20] examined a challenge to a CBDT circular alleged to be contrary to Section 194-A(3)(v) of the Act. The Supreme Court in State Bank Of Travancore v. Commissioner Of Income Tax, Kerala[21] (as cited in ITO v. Ethno Financial Research[22]) also held that circulars cannot override statutory provisions. Thus, while the CBDT can interpret and provide guidance for the administration of the Act, it cannot legislate or alter the substantive law laid down by Parliament.

Distinction from Legislative Power and Nature of Explanatory Notes

Circulars are administrative or executive in nature, aimed at the proper implementation of existing law. They cannot create a new levy or impose a tax where the statute does not provide for it. The power under Section 119 is for administration, not for enacting substantive law. Furthermore, not all communications from the CBDT constitute binding circulars under Section 119. For instance, the ITAT in ITO v. Ethno Financial Research (P.) Ltd.[22] drew a distinction between general explanatory notes accompanying legislative amendments and specific orders or directions issued under Section 119(2)(b), suggesting that the former may not carry the same binding force as the latter, especially if they appear contrary to the law.

Judicial Scrutiny and Interplay with Other Provisions

The judiciary plays a crucial role in ensuring that the CBDT exercises its powers under Section 119 within the statutory confines. Courts scrutinize circulars to determine if they are consistent with the Act, do not violate the limitations imposed by Section 119, and are not arbitrary or unreasonable. While Section 119 directly confers power on the CBDT, its circulars can have an indirect bearing on the exercise of discretion by tax authorities under other sections of the Act. For example, in B.M Malani v. Commissioner Of Income Tax And Another[24], which primarily dealt with "genuine hardship" under Section 220(2-A) for waiver of interest, CBDT circulars issued under Section 119 could provide guidelines to Commissioners on how to exercise such discretionary powers, thereby promoting uniformity and fairness, although the case itself did not turn on a Section 119 circular.

Similarly, in contexts requiring adherence to principles of natural justice, such as the direction for a special audit under Section 142(2-A) as discussed in Sahara India (Firm), Lucknow v. Commissioner Of Income Tax, Central-I And Another[25], CBDT circulars could prescribe or reinforce fair procedures. While the Supreme Court in Sahara India[25] mandated a pre-decisional hearing based on natural justice principles inherent in the provision, Section 119 could be a vehicle for the CBDT to issue detailed instructions to ensure such compliance across the board.

Conclusion

Section 119 of the Income Tax Act, 1961, is a cornerstone of India's tax administration, vesting the CBDT with vital powers to ensure the Act's effective and equitable implementation. The judiciary has, through numerous pronouncements, clarified the extensive reach of these powers, particularly emphasizing the binding nature of CBDT's circulars on tax authorities, their role in mitigating legal rigours, and their utility in providing administrative relief and ensuring uniformity. Landmark cases like Uco Bank[4] and Azadi Bachao Andolan[3] have cemented the authority of these circulars, especially when beneficial to taxpayers or for the consistent application of complex provisions like those in DTACs.

However, these powers are not absolute. The explicit provisos within Section 119 and the overarching principle that circulars cannot override the parent statute or judicial interpretations act as crucial checks. The judiciary remains the ultimate arbiter, ensuring that the CBDT's directives align with legislative intent and constitutional principles. Section 119 thus facilitates a dynamic interplay between executive action and judicial oversight, striving to achieve a tax system that is not only efficient in revenue collection but also fair, transparent, and responsive to the complexities faced by taxpayers and administrators alike.

References