2004 (12) TMI 31 - HC - Income Tax

Invalid Circular on Ex-gratia Payments under VRS; Assessing Officer Discretion Upheld

Madura Coats Versus Deputy Commissioner Of Income-Tax And Another.

The High Court held that the circular issued by the Central Board of Direct Taxes regarding the allowability of ex-gratia payments under Voluntary ... Circular No. F. No. 200/79/2000-ITA-1 – validity - Petitioner seeks for a writ of declaration declaring Circular No. F. No. 200/79/2000-ITA-1 dated January 23, 2001, as invalid. - first respondent had issued a notice for reopening the completed assessment u/s 148. One of the grounds for reopening is the allowability of the amounts paid by the petitioner to its employees under the Voluntary Retirement Scheme (VRS) by relying on the impugned circular - petitioner contends that the circular thus issued is contrary to the provisions of the Act and also that it is beyond the powers of the Board to issue such a circular against the interests of the assessee – Held that the very reason behind the statutory bar u/s 119(2) to issue any instruction contrary to the interests of the assessee is that a subordinate official (Assessing Officers) is bound to comply with the directions/opinion of a superior authority - In this case there is a positive direction to treat the ex gratia amount as capital expenditure, which direction is certainly adverse to the assessee. Therefore to the extent that the circular is against the interests of the assessees, the same is liable to be held ultra vires. Issues:Challenge to the validity of Circular No. F. No. 200/79/2000-ITA-1 dated January 23, 2001 issued by the Central Board of Direct Taxes regarding the allowability of ex-gratia payments under Voluntary Retirement Scheme (VRS).Analysis:The petitioner, a public limited company, filed a return of income showing a loss for the previous year. The assessment was completed under section 143(3) of the Income-tax Act. Subsequently, the assessment was sought to be reopened under section 148 based on the allowability of payments made under VRS, relying on the circular in question. The petitioner contended that the circular was contrary to the law and beyond the powers of the Board. The respondents argued that the circular was issued as guidelines and the Assessing Officers were free to apply it appropriately. The petitioner challenged the validity of the circular under section 119 of the Income-tax Act, which empowers the Board to issue instructions to subordinate authorities.The High Court analyzed the powers of the Board under section 119 of the Income-tax Act. While section 119(1) allows the Board to issue orders for proper administration, section 119(2) permits the Board to issue instructions for efficient management of assessment and revenue collection, provided they are not prejudicial to the assessees. The Court noted that the circular in question directed the treatment of certain expenditure as capital expenditure, which was considered a positive direction affecting the interests of the assessees. The Court emphasized that Assessing Officers should have the freedom to apply their judgment based on the Act's provisions without being bound by overriding instructions from the Board.The Court held that any instruction contrary to the interests of the assessees would be impermissible under section 119(2). In this case, the positive direction in the circular to treat the expenditure as capital was deemed adverse to the assessee. Therefore, the Court concluded that the circular was ultra vires to the extent it went against the interests of the assessees. Consequently, the Court allowed the writ petition, declaring the circular invalid, and dismissed the appeal, vacating the interim injunction without costs.