Tax planning in the context of administrative legislation:

It is a common feature of modern legislative enactment to lay down in the section of the Act, the principles and the policy of the Legislature leaving out details to be filled in or worked out by rules or regulations made either by the Government or by some other authority as may be empowered in the legislation. This kind of subordinate or administrative legislation is justified and even necessitated by the fact that the Legislature has neither the time nor the material to consider and enact rules relating to various details as they may not be acquainted fully with the facts and circumstances relating to the subject matter and may have no time to consider such details. Section 295(1) of the Income-tax Act, 1961 vest with the CBDT, the power to make rules for carrying out the requirements of these Acts. This power also enables the Board to give retrospective effect to any of the rules in such a way as not to prejudicially affect the interests of any taxpayer.

The various matters in respect of which the rules may be framed are specified in the relevant sections. Rules are made by the appropriate authority in exercise of the powers conferred on it under the provisions of the Act. Therefore, they have statutory force and fall within the scope of the law made by the Legislature itself. Thus, they are a part of the enactment which imposes the tax. Since the rules are meant only for the purpose of carrying out the provisions of the Act, they cannot take away what is conferred by the Act nor whittle down its effect. Therefore, rules can only be made in consonance with the provisions of the Act. They must be interpreted in the light of the section under which they are made. If there is an irreconcilable conflict between a rule and a provision in the Act, the provision in the Act is to prevail and the rule which is subordinate to the Act must give way.

Similarly, notifications are also issued in exercise of a valid authority bestowed under the statutes. Such notifications, when validly made within proper right and in exercise of the authority provided for in the law, are binding on all concerned and may be enforced. As for Press Notes, although they have no statutory force behind them, they are binding on the officers.

The following principles emerging from various rulings are relevant in this context.

1. The rule making authority cannot frame a rule which is contrary to the object and provisions of the Act from which its rule making power is derived.

2. A rule cannot over-reach the subject-matter relevant to the particular provision in the Act.

3. A rule cannot whittle down, negate or take away (directly or by implication or causation) the right, privilege, advantage or benefit granted by the section or the enactment relevant to it.

4. A rule cannot create any disability, limitation or other condition not sanctioned by the Act to which it is relevant or not consistent with the Act.

5. A subordinate authority cannot seek to sit in judgement over the rights of the subject nor decide questions of law and fact or otherwise usurp the functions of a Court.

6. No rule can be framed nor regulation promulgated contrary to the rules of natural justice.

7. A rule cannot seek to impose a tax which the Legislature has not thought it fit or expedient to impose.

8. A rule has to strictly confine itself to the subject-matter for which the rule-making authority has been empowered by the enactment.

9. In providing for a rule-making power, however wide the terms of that power be, as long as the Legislature has laid down the necessary guidelines for exercise of such rule – making power of the subordinate authority and as long as the Legislature has clearly laid down in the enactment the legislative object and policy and has retained in itself the ultimate legislative power, the enactment delegating power to a subordinate authority cannot be said to be ultravires the Legislature or the enactment.

10. Both a rule and a provision of law are equally bound to respect the constitutional protection and fundamental right of the citizen enshrined in Article 14 of the Constitution.

11. Merely because a rule is subsequently laid before the Parliament, it cannot be given the status of a law of Parliament.

12. As in the case of an enactment, if a rule classifies persons and objects into identifiable classes and such classification is relevant to the purpose of the enactment and for carrying out the provisions of the Act, it cannot be called in question.

13. A rule has no retrospective operation unless the Act to which it is relevant specifically provides for the making of rules having retrospective operation.

14. The power to notify or to exempt also carries with i t necessarily the power to denotify, rescind or withdraw the notification or exemption.

The above principles may be kept in mind while deciding about embarking on tax -planning.

Section 119(1) enacts that all officers and other persons employed in the execu tion of that Act shall observe and follow the orders and instruction or direction of the Board, provided that no such orders, instructions or directions shall be given so as to interfere with the discretion of the Commissioner (Appeals) in the exercise of his appellate functions. It is judicially settled that the Circulars issued by the Board would be binding under Section 119 on all the officers and persons employed in the execution of the Act [Navnilal vs. Sen (1965) 56 I.T.R. (198 SC)]. Consequently, if the Assessing Officer contravenes any circular issued by the Board in respect of, say, non-eligibility to tax of a certain item of receipt, he can be called upon by the appellate authority [the Commissioner (Appeals) or the Appellate Tribunal] to obey such a circular. The circular is not such a law that it should be taken judicial notice of; but after the circular has been brought to the notice of appellate authority, it would be competent to the appellate authority to direct the Assessing Officer to correct his mistakes in his not giving effect to the circular. However, it may be noted that opinions expressed by the Board in its individual communication to the assessee on issues affecting (for example, as to when the new industrial undertaking established by the assessee began to manufacture or produce articles within the meaning of Section 80-IA) cannot be considered as directions binding on the Income-tax authorities under Section 119. The Board is not competent to give directions regarding the exercise of any judicial power by its subordinate authorities [J.K. Synthetics Ltd. and other vs. Central Board of Direct Taxes (1972) 83 ITR 335 (SC)].

The various judicial rulings which considered the legal aspects of Circulars under the Incometax Act, 1961 point out the following.

1. The instructions of the Board are binding on the Department but not on the assessee.

2. The instructions in favour of the assessee should be followed by the Department, irrespective of the question of their legality; but the instruct ions adverse to the assessee can be challenged by the assessee.

3. Instructions adverse to the assessee cannot be issued with retrospective effect, while instructions favourable to the assessee can be so issued.

4. Instruction withdrawn subsequently should be given effect to by the Assessing Officer for the assessment year for which they were in force even though they are withdrawn at the a time he makes the assessment.

5. In the exercise of its power, the Board cannot impose a burden or put the assessee in a worse position but the Board can grant relief or relax the rigour of the law.

6. No instruction or circular can go against the provisions of the Act. While the Board can relax the rigours of the law or grant relief which is not to be found in the terms of the statute, no instruction which will be ultra vires of the provisions of the statute could be issued.

7. Circulars and instructions of the Board are envisaged only in regard to administrative aspects and cannot restrict the judicial power or the discretion of an officer -ALA Firm vs. CIT 102 ITR 622 (Madras), Sirpur Paper Mills Ltd. vs. CWT 77 ITR 6 (SC).

8. No such orders, instructions or directions shall be issued — (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner or (b) so as to interfere with the discretion of the Deputy Commissioner (Appeals) or the Commissioner (Appeals) in the exercise of his appellate functions.

In making an assessment or levying a penalty, the Assessing Officer exercises a quasijudicial power conferred on him by the Statute and has to act independently. He cannot act on advice of a stranger even though that person may be an authority superior to him in official hierarchy — Sheo Shankar Sitaram 95 ITR 523 (All).

9. Administrative instructions cannot also override the statutory rules. In view of this position, the tax planner, while planning his affairs or that of his clients must take into account not only the relevant legal provisions which affect him but also all relevant rules, notifications, circulars, etc. As for circulars, since they are in the nature of administrative or executive instructions, the possibility that they might be withdrawn by the Board at any time, should also be taken into account. They may be challenged in the Courts although, otherwise they are binding at the administrative level (i.e., below thee High Court or the Tribunal). In case where the circulars are based on erroneous and untenable footings, they are also liable to be quashed by the Court/Government.