Supreme Court: Explanation Empowers Tax Board to Set Offenses Composition

The Supreme Court held that the Explanation introduced by the Finance (No. 2) Act of 1991 empowered the Central Board of Direct Taxes to issue instructions for the proper composition of offenses under section 279(2) of the Income-tax Act. These instructions, including the requirement for the Commissioner's compliance, were deemed mandatory. Consequently, the Court allowed the Revenue's appeals, set aside the High Court judgments, and dismissed the writ petitions filed by the individuals involved in the case. No costs were awarded.

---

---

Issues:
- Whether the Central Board of Direct Taxes can issue instructions to control the discretion of the Commissioner of Income-tax under section 279(2) of the Income-tax Act, 1961.

Analysis:
The case involved M. P. Tiwari and M. L. Passi, who were prosecuted under section 276B of the Income-tax Act for defaults in depositing taxes. Both individuals sought composition of the offenses under section 279(2) of the Act. The issue revolved around the power of the Central Board of Direct Taxes (CBDT) to issue instructions under section 119 of the Act, which could impact the Commissioner's discretion in compounding offenses.

The CBDT issued Instruction No. 1317 providing guidelines for compounding offenses under section 279(2). The High Court quashed these instructions, stating they curtailed the Commissioner's powers and made his decision subject to the Board's approval. The High Court opined that the circular went against the legislative intent of section 279 of the Act.

The Supreme Court referred to past judgments emphasizing the binding nature of CBDT circulars under section 119(1) of the Act. However, the Court noted a significant change brought by the Finance (No. 2) Act of 1991, which introduced an Explanation to section 279. This Explanation clarified that the CBDT had the power to issue instructions for the proper composition of offenses under section 279(2), including directions for obtaining the Board's approval.

The Court held that the Explanation acted as a proviso to section 279(2), making it mandatory for the Commissioner to follow the instructions issued by the Board. Consequently, the appeals by the Revenue against the High Court judgments were allowed, the judgments were set aside, and the writ petitions filed by Tiwari and Passi were dismissed. No costs were awarded in the case.

---