ORDER
Sri I. S. Verma, J.M.
1. ITA No. 7027/B/90 is assessee’s appeal whereas ITA No. 7382/B/90 is Revenue’s appeal. Both the appeals being for the same assessment year and in case of same assessee, for the sake for convenience, are disposed of by this common order.
2 to 10. [These paras are not reproduced here as they involved minor issues.]
11. ITA No. 7382/Bom./90 (Revenue’s appeal) :
The Revenue has taken six grounds of appeal which we proceed to decide after hearing both the parties as under :
12. Ground No. 1; it is as under :
“On the facts and in the circumstances of the case and in law the learned CIT (Appeals) erred in directing the Assessing Officer to allow deduction of interest paid by the assessee to the seller of securities for the broken period Rs. 5,94,41,072.”
The learned D.R. has submitted that the issue relating to allowability of interest on securities for the broken period in view of the binding nature of the Supreme Court decision over the Board’s circular, is covered in Revenue’s favour as per the decision of the Supreme Court in the case of Vijaya Bank Ltd. v. CIT [1991] 187 ITR 541/57 Taxman 152 in which the interest paid for broken period has been held to be not allowable as revenue expenditure. The learned D.R. has further submitted that as far as the Board’s circular is concerned it is in the nature of clarification and the same having been withdrawn only as a result of the decision of the Hon’ble Supreme Court in the case of Vijaya Bank Ltd. (supra), the assessee is not entitled to the benefits available under that circular. The assessee’s counsel on the other hand has submitted that in view of the Board’s Circular No. 599, dated 24-3-1991, which was issued after the Supreme Court decision the assessee is entitled to the deduction of the interest as revenue expenditure. Accordingly to him, the circular is applicable always retrospectively, however, its withdrawal is prospective and not retrospective. In support of this submission the assessee’s counsel has relied on the decision of the Tribunal in its own case for assessment years 1985-86 and 1986-87 in ITA No. 5645/B/89 and in ITA No. 1183/B/90 respectively as well as the Tribunal’s decision in the case of Bank of America in IT Appeal No. 4097 (Bom.) of 1989, dated 29-5-1992.
13. We have considered the rival submissions and have gone through various Tribunal’s orders as well as the case laws referred to therein. From the Tribunal’s order in the assessee’s case for assessment years 1985-86 and 1986-87 (supra) it is noticed that the Revenue’s ground relating to disallowability of interest for the broken period has been decided by considering the same as covered by Tribunal’s order in the assessee’s own case for assessment year 1984-85 and from the Tribunal’s order for assessment year 1984-85 it is noticed that the issue was decided by following the Tribunal’s order in assessee’s case for assessment years 1978-79, 1979-80, 1981-82 and 1983-84. From the Tribunal’s order in Revenues appeal for assessment year 1983-84 in ITA No. 978/B/87 decided on 9-3-1992 in the assessee’s favour it is reproduced as under :
“That takes us to the appeal filed by the Department. The first ground is that the CIT (Appeals) was in error in holding that the interest paid by the assessee-company for the broken period on purchase of securities is admissible as deduction in the computation of the taxable profits. We find that this issue was agitated before the Tribunal in the assessee’s own case for the assessment year 1981-82. The Tribunal after considering the arguments of the parties to the dispute had decided the matter in favour of the assessee. Following that order of the Tribunal, we shall uphold the order of the CIT (Appeals).”
14. From the Tribunal’s order for assessment year 1984-85 it is noticed that the issue was decided in the following words :-
“Now, taking up the Department’s appeal, first ground reads follows :-
‘On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in directing the IAC (Asst.) to allow deduction for the interest paid by the assessee to the sellers of the securities for the broken period of Rs. 9,51,935.’
Corresponding grounds for the assessment years 1978-79, 1979-80, 1981-82, 1983-84 and 1982-83, have been rejected by the Tribunal, vide its orders listed in para 4 hereinabove. For the detailed reasons given in those orders, Department’s ground for this year is also rejected.”
15. Reference to the aforesaid order has been made only to find out as to whether the decision of the Hon’ble Supreme Court in the case of Vijaya Bank Ltd. (supra) was ever considered or not but none of the order suggests that it was ever considered. However, we will decide the issue on the basis of both the possibilities.
16. (A)(i) In case the Supreme Court decision was not referred to or considered by the Tribunal then there is no question of following the Tribunal’s order and (ii) presuming that the Supreme Court decision referred to by the D.R. in the case of Vijaya Bank Ltd. (supra) was referred and considered by the Tribunal then on the basis of this assumption as well as the fact that the Supreme Court decision has been considered by the Tribunal in the case of Bank of America (supra) for asst. year 1984-85 decided on 29-4-1992, we are of the considered opinion that none of the Tribunal’s decisions are liable to be followed because of the reasons stated hereinafter, but, before discussing the issue we would like to extract some of the facts of present case, which, in our opinion, have a vital bearing on the outcome of our discussion in the subsequent paragraphs.
(B) Facts :
I. 11-12-1989 : Assessment was completed and interest paid for
broken period on purchase of securities was
disallowed by the Assessing Officer by holding the
securities as capital asset and payment as capital
expenditure.
II. 9-7-1990 : The order of the CIT (Appeals) allowing the
assessee’s claim by following the Tribunal’s order
in the assessee’s case for assessment year 1977-78
[para-3 of the order of the CIT (Appeals)].
III. 19-9-1990 : Supreme Court decision in the case of Vijaya Bank
Ltd. (supra) was decided.
IV. 24-4-1991 : Board’s Circular No. 599 issued.
V. 31-7-1991 : Board's circular No. 599 withdrawn in view of the
Supreme Court decision in the case of Vijaya Bank
Ltd. (supra).
17. It is in the light of these facts and circumstances of the case that we are to decide the issue relating to the allowability of the interest for the broken period paid by the assessee on purchase of securities. The decision on this issue depends purely on the legal proposition relating to the binding nature of a decision of the Supreme Court and that of a circular issued by the CBDT – under the peculiar circumstances narrated above.
18. The assessee’s case is that a circular once issued, being benevolent one; has a binding precedence over the decision of the Supreme Court under all the circumstances i.e., according to the assessee even if the circular has been withdrawn after having been found to be contrary to the law as pronounced by the Supreme Court then also the benefits available under the circular cannot be denied. The other submission of the counsel for the assessee is that the circular cannot be withdrawn retrospectively – the withdrawal is prospectively.
19. In view of all these facts and circumstances of the case we are of opinion that question before us is not as to whether a circular can be withdrawn retrospectively or prospectively. Neither there is the question before us regarding the binding nature of the circular on the Income-tax authorities, because, it is settled law that a benevolent circular is binding on the income-tax authorities but not on the Tribunal and Courts and also the proposition that it cannot be withdrawn retrospectively.
20. The question before us is of the precedent value i.e., when on one side there is a decision of the Hon’ble Supreme Court laying down a legal proposition and on the other side there is a Board’s circular, issued after the completion of the assessment and the decision of the CIT (Appeals) but is withdrawn before the issue comes up before the Tribunal and the withdrawal is on the basis of that very decision of the Supreme Court itself; then which of the two has precedent value i.e., whether the Tribunal should follow the Supreme Court order or should follow the Board’s circular since withdrawn.
21. It is well settled that though the effect of Supreme Court decision by virtue of Article 141 of the Constitution is that the Supreme Court declares the law of the land and it must be held to have been always the law of the land, once it is so declared, though, of course, it cannot be placed on the same footing as a retrospective piece of legislation and the legal fiction, which goes with the retrospective legislation cannot arise in the case of decision of the Supreme Court declaring what the law of the land is, and, therefore, it cannot render invalid an action of the Assessing Officer which was valid when it was taken.
But at the same time, it is a settled law that the effect of a Supreme Court decision holding an Act to be void is to render the Act non-existent and is tantamount to saying that the statute did not exist in the statute book at all. This proposition is supported by the decision of the Hon’ble Supreme Court in the case of M. P. V. Sundararamier & Co. v. State of Andhra Pradesh [1958] 9 STC 298 and Behram Khurshid Pesikaka v. State of Bombay AIR 1955 (SC) 123-145. Similarly, the effect of Supreme Court decision upholding the vires of a particular provision is that, that provision is a valid piece of legislation at all times.
22. In view of Article 141 of the Constitution the law declared by the Supreme Court being binding on all courts within the territory of India, the law interpreted by the Supreme Court is also binding on all courts and Tribunals in India – See Aluminium Corpn. of India Ltd. v. CIT [1972] 86 ITR 11 (SC). As far as the present case is concerned it is admitted fact that the Supreme Court decision in the case of Vijaya Bank Ltd. (supra) was delivered on 19-9-1990 well before the issue of Circular No. 599 and secondly, though the decision was rendered after the order of the Assessing Officer but his action being in consonance with the law laid down by the Supreme Court, there is no reason for not following the decision of the Supreme Court. In view of these facts and circumstances of the case, we are of opinion that the Tribunal is bound to follow the decision of the Supreme Court in the case of Vijaya Bank Ltd. (supra) and we decide to follow the same.
23. Coming to the decision in the case of Bank of America (supra) relied upon by the assessee the issue in this case was decided by the Tribunal in the following terms :-
“We have heard the parties to the dispute and in our view the broken period interest has to be treated as a revenue outgoing. The Supreme Court, no doubt, in the case reported in 187 ITR 541 has taken a contrary view, but in view of the beneficial Circular No. 599, dated 24-4-1991, the claim of the assessee cannot be resisted. The circular has a retrospective operation is a matter which is not in serious doubt and in this connection reference can be made to the decisions relied upon by the assessee. It is also well settled, especially in the light of the decision of the Supreme Court reported in 158 ITR 102, that beneficial circulars could be withdrawn only prospectively. Thus, the position of the assessee is quite secured during the period the circular was in operation. We also do not accept the argument of the learned D.R. that the decision of the Supreme Court reported in 177 ITR 193 has given a decent burial to the proposition that a circular which deviates from the written test of law has to be ignored. As rightly contended by the assessee, the reference to the Board’s circular is only a casual one. The relevant observations could be seen at page 197 of 177 ITR and for the sake of convenience they are reproduced below :
‘We have carefully considered the matter and we do not think that the circulars affect the true position in law.’
Even if we regard that this decision is an authority for the proposition that the Board is not vested with the power to issue benevolent circulars, the departmental case will have to be rejected that is because in the case of Navnit Lal Jhaveri (supra) a Bench of the Supreme Court constituted by five judges had held that a benevolent circular would be binding on all the field officers. This decision cannot be considered as being overruled by a smaller Bench decision though the same is more recent. This is the view taken by the Patna High Court in the case reported in 161 ITR 302. We may in this connection refer to the decision of the Supreme Court in the case of State of U.P. v. Ramchandra A. [1976] (SC) 2547 (para-22). The Supreme Court in that case has laid down the method for resolving the conflict between the two decisions of the Supreme Court itself. The court has held that in case of a conflict, it would be the latest pronouncement which would be binding upon the inferior courts unless the earlier was by a larger Bench. In the light of this decision, the claim of the assessee that five judges decision of the Supreme Court would have to be followed has to be accepted. The Supreme Court in 82 ITR 913 has clearly held that in the five judges decision the Supreme Court had taken the view that benevolent circulars are binding on the field officers. In the light of the above discussion, we are of the view that the order passed by the CIT (Appeals) has to be upheld and we, accordingly, do so.”
24. It is clear from the Tribunal’s order that the issue in this case was decided in the assessee’s favour after giving precedence to the Board’s circular over the decision of the Supreme Court, which in our opinion was not the correct application of proposition relating to the precedent value of a decision of the Supreme Court and, therefore, we are unable to follow the proposition laid down in this decision.
25. Coming to the real issue in the present appeal after carefully considering the rival submissions in the light of the case laws relied upon by both the parties, we are of the view that the department has to succeed. The issue is one directly covered by the decision of the Supreme Court in the case of Vijaya Bank Ltd. (supra). Vijaya Bank Ltd. claimed the following two sums as deduction under sections 19, 20 and 37 of the Income-tax Act, 1961 :-
“(a) Rs. 58,568, interest accrued on securities taken over by the assessee bank from Jayalakshmi Bank Ltd.; and
(b) Rs. 11,630, interest accrued upto the date of purchase in the case of securities purchased by the assessee bank from the open market.”
The Assessing Officer declined to grant the deduction. The Tribunal accepted the assessee’s claim. On a reference at the instance of the Revenue, it was contended on behalf of the assessee that the amount paid for the expectation of interest must be treated as expenditure falling within the scope of section 19(1) of the Act and the same was, therefore, liable to be treated as an expenditure incurred for the purpose of realisation of interest which ultimately came to be paid to the assessee on the due date. The Hon’ble High Court of Karnataka in the case of Addl. CIT v. Vijaya Bank Ltd. 1976 Tax LR 524 did not agree with such contention. The observation in this regard by the Hon’ble High Court reads as under :-
“On the plain language of section 19(1), it is seen that the word ‘realising’, in the context in which it appears, means nothing more than ‘collection’ of something that has already existed as a fact, which in the case on hand is the accrued ‘interest on securities’. It is also manifest that the entire clause (1) relates to deductions claimable after the ‘interest on securities’ as accrued due, which is possible only after the acquisition of the securities themselves. Hence any amount spent anterior to the accrual of the ‘interest on securities’ cannot fall within the purview of section 19(1) of the Act and this means that it will not include the amount paid for the acquisition of the asset itself. Hence this contention has to fail.
17. The next question that arises for consideration is whether the interest for the broken period prior to the date of purchase of the securities by the assessee, can be construed as ‘interest’, within the meaning of section 18 of the Act and, therefore, allowable as a deduction from ‘interest on securities’. That the answer to this ought to be in the negative, can be gathered from the case of Wigmore v. Thomas Summerson & Sons [1925] 9 Tax Case 577 (K.B.)”.
The Hon’ble High Court further went on to observe in relation to the nature of the expenditure as under :-
“21. In our opinion, the above enunciations would be equally applicable to the facts of the present case. Viewed in the light of the said enunciations, it would be clear that the amount paid and separately specified as representing interest, that might be attributable to the broken period, prior to the purchase of securities, is only an amount paid for the acquisition of an income bearing asset forming part and parcel of the total consideration paid for the purchase of the securities, and, therefore, cannot at all be termed as ‘interest’ as such or as an amount spent for acquiring it as an independent asset. It is also clear that such interest for the broken period had not accrued or crystallised into a debt, and thus had not become due and payable, to be characterised as income chargeable to tax in the hands of the transferor, and hence could not be said as deductible in the hands of the assessee-transferee. The contention of the Revenue in this behalf has clearly to be sustained.
22. Before proceeding to consider the authorities cited on behalf of the assessee, it is apposite to refer to the case of IRC v. Pilcher [1949] 31 Tax Case 314, which has been referred to in B. D. Sassoon’s case. That was a case where a cherry orchard was purchased with the current crop. The assessee had valued the fruits separately for the purpose of such purchase. The realisations from the sale of cherries were brought into the profit and loss account as a trading receipt. It was contended by him that he was entitled to deduct the cost of such cherries as separately assessed by him at the time of purchase of the orchard, from out of the receipts from their sale. This contention was negatived and it was observed by Jenkins L.J., at page 332, thus :
‘It is a well-settled principle that outlay on the purchase of an income-bearing asset is in the nature of capital outlay, and no part of the capital so laid out can, for income-tax purposes, be set off as expenditure against income accruing from the asset in question.”
In the light of this, the High Court reversed the order of the Tribunal. The Supreme Court has affirmed the decision of the Karnataka High Court. Therefore, the issue would have been decided by us in the above manner in the light of the Supreme Court decision. Our decision would have to be in no way different because of some clarification issued by the Board reported in [1991] 189 ITR 126 (St.). It would be of interest to reproduce Circular No. 599, dated 24th April, 1991, which reads as under :-
“Clarifications on the following issues have been sought by banks from the Central Board of Direct Taxes :-
(i) Whether the securities held by the banks constitute their stock-in-trade or investment, and consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits ?
(ii) Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits ?
2. The matter has been considered by the Board and it has been decided that the securities must be regarded as stock-in-trade by the banks. Therefore, the claim of loss, if debited in the books of account would be given the same treatment as is normally given to the stock-in-trade. As far as the second issue is concerned, both the interest payment and receipts must be regarded as revenue payments/receipts, and only the net interest on securities shall be brought to tax as business income.”
The above circular, although after the decision of the Supreme Court Vijaya Bank Ltd.’ case (supra), seems to have been issued without taking into consideration the existing decision of the Supreme Court on the issue as the said circular nowhere in its body refers to the decision of the Supreme Court, about the hardship faced by the assessee as a result of the Supreme Court decision. This is evident from the withdrawal of the circular within about three months of the issue. The circular of the Board withdrawing the aforesaid circular is also reported in 191 ITR 2 (St.). It reads as under :-
Circular No. 610, dated 31st July, 1991
“Consequent to the judgment of the Supreme Court in the case of Vijaya Bank Ltd. v. CIT [1991] 187 ITR 541 (SC), Circular No. 599, dated 24th April, 1991, of the Central Board of Direct Taxes, New Delhi may be treated as withdrawn.”
[F.No. 225/106/91-ITA. II]
It is clear from the Circular No. 610 that the Circular No. 599 was issued without considering the Supreme Court decision cited supra. It is quite possible that the Board when issuing the Circular No. 599 may not be even aware of the Supreme Court decision cited supra. The language of Circular No. 610 makes it clear that circular No. 599 did not have the benefit of going through the Supreme Court decision in the matter. In the light of this clear background, we have to examine the effect of such a circular. Under the provisions of section 119 of the Income-tax Act, 1961, the Board is entitled to issue orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of the Act. In our opinion, the present circular is in the nature of a clarification and what the Board thinks to be the law on the subject. The CIT v. Central Bank of India Ltd., the Bombay High Court held that the contents of a circular explaining the provisions of an Act or Bill cannot be treated as an order, instruction or direction within the meaning of this section. It has also been now admitted that the Board is not entitled to issue any circulars overriding, modifying or, in effect, amending the provisions of the Act. It has also been observed by the Karnataka High Court in Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774/[1983] 15 Taxman 438 and also by the Calcutta High Court in ITO v. Eastern Scales (P.) Ltd. [1978] 115 ITR 323 that a circular cannot override the judicial decisions rendered on the statute. The said section 119 provides that all other authorities under the Income-tax Act subordinate to Board employed in the execution of the Act shall observe and follow such orders, instructions and directions of the Board. But in fields, which are covered by judicial decisions, the circular will not be conclusive even so far as the Assessing Officer is concerned. This was the view expressed by the Delhi High Court in Jeep Industrial Syndicate Ltd. v. CBDT [1987] 166 ITR 88. It has also been held that the circular although binding on the authorities are not binding on the appellate authorities or the courts and the Courts have not their own constructions on the provisions of the Act notwithstanding the contrary views expressed by the Board in relation to any provision of the Act. It is now an accepted position of law that where the instruction seeks to curtail or narrow down the effects of the provisions of the Act, the court will not give effect to such circular. Useful reference may be made in this connection to the decision of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337. It may be mentioned that in the case of Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 (SC), the Court was concerned with the Constitutional validity of section 2(66)(e) of the 1922 Act corresponding to section 2(22)(e) of the present Act and an allied provision, section 12(1B) of the 1922 Act. In upholding the validity of the provision, the Court took note of the fact that a circular issued by the Central Board relaxes the rigour of the provision for certain situations and that, as it was binding on the authority, the statutory provisions could be administered only in a particular manner. It may be pointed out that in State Bank of Travancore’s case (supra), the Supreme Court pointed out that circulars which are executive in character, cannot alter the provisions of the Act but where they grant concessions and reliefs, they can always be prospectively withdrawn. The principle of enforceability of beneficial instructions is based on the principle of promissory estoppel, viz., that the department should not be allowed to go behind the representations contained in such instructions. But in the facts before us, Circular No. 599 was neither existing at the time when the Assessing Officer framed the impugned assessments nor was allowed to remain in operation for a considerable period. The said circular is withdrawn as soon as the Board realised that such clarification issued by it was contrary to the principle laid down by the Supreme Court and the Board has rightly withdrawn the circular within about three months from the date of first issue of the circular. The circular issued by the Board is in the nature of clarification or, at best the departmental view on the subject, which is not binding on the Courts. We, therefore, are of the opinion that the decision of the Supreme Court in the case of Vijaya Bank Ltd. (supra) settles the law of the land on the issue and puts to rest all conflicts in this regard. In our considered opinion, in spite of the circular the law laid down by the Supreme Court has to prevail in deciding the issue in dispute.
26. (i) Our aforesaid view is supported by yet another proposition relating to the effect of the decision of the Supreme Court. The Hon’ble Madras High Court in the case of K. S. Gopalaswami Iyer v. Sales Tax Appellate Tribunal [1965] 16 STC 854 has held that a decision of the Supreme Court to the effect that a particular levy was wrong or not in accordance with law means that the levy was at no time good and the law thereabout was a dead law. The Hon’ble Madras High Court in the case of R. Kuppuswamy Mudaliar & Sons v. Board of Revenue [1980] 45 STC 152 has further held that this is so because the law so declared has effect not only from the date of decision but also from the inception of the statutory provisions and this position has been recognised by the CBDT in Circular No. 68, dated 17-11-1971 the relevant part of which is extracted as under :-
“The Board are advised that a mistake arising as a result of subsequent interpretation of law by the Supreme Court would constitute ‘a mistake apparent from the record’ and rectificatory action under section 35/154 of the Income-tax Act, 1922/1961 would be in order. It has, therefore, been decided that where an assessee moves an application under section 154 pointing out that in the light of a later decision of the Supreme Court pronouncing the correct legal position, a mistake has occurred in any of the completed assessments in his case, the application shall be acted upon, provided the same has been filed within time and is otherwise in order. Where any such applications have already been rejected and the assessee files fresh application within the statutory time-limit, the same may also be treated on par with the applications which may either be pending or received after the issue of this circular.”
“The Board desire that any appeals or references pending on the point at issue may please be withdrawn.”
(ii) The Hon’ble Supreme Court in another latest decision in the case of Poothundu Plantation (P.) Ltd. v. Agrl. ITO [1996] 221 ITR 557 has held that if the Supreme Court has construed the meaning of a section then any direction to the contrary given by any authority must be held to be erroneous and as such error must be treated as an error apparent on the records.
27. When the effect of a decision of the Supreme Court is well settled as above, then it is quite pertinent that in the present case where the Assessing Officer’s action has been found to be in accordance with the law laid down by the Supreme Court then how the Tribunal can sustain the assessee’s plea that a circular has binding precedence over the decision of the Hon’ble Supreme Court. We, in view of the above discussion, are of the opinion that the Tribunal is bound by the Supreme Court decision in the case of Vijaya Bank Ltd. (supra) and respectfully following the same we reverse the order of the CIT (Appeals) and allow the Revenue’s ground.
28. [This para is not reproduced here as it involves minor issue.]