The Supreme Court has held that circulars issued by the Board are binding in law on all tax authorities and assessees can rely on them for securing whatever relief they are entitled to under the circular. This has been held in Navnit Lal C. Javeri v. KK Sen, AAC of IT (56 ITR 198); Ellerman Lines Ltd. v. CIT (82 ITR 913) and KP Varghese v. ITO (131 ITR 597).

In a recent decision in Hindustan Aeronautics Ltd. v. CIT (243 ITR 808), the Supreme Court reiterated the point that circulars or instructions given by the Board are no doubt binding in law on the authorities under the Act.

However, when the Supreme Court or a High Court has declared the law on the question arising for consideration, it will not be open to a Court to direct that a circular should be given effect to and not the view expressed in the decision of the Supreme Court or the High Court.

Further, in Banque Nationale De Paris v. CIT (237 ITR 518), the Bombay High Court considered the question whether a circular can override or detract from the provisions of the Act. According to the Court, what section 119 has empowered the Board is to issue orders, instructions or directions for the `proper administration' of the Act or for such other purposes specified in sub-section (2) of the section. Such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the parliament.

In taking this view, the Bombay High Court relied on the decision of the Supreme Court in State Bank of Travancore v. CIT (158 ITR 102) wherein it was expressly held that circulars cannot detract from the Act. The subsequent judgment of the apex Court in Kerala Financial Corporation v. CIT (210 ITR 129) has affirmed the view in State Bank of Travancore's case that circulars cannot deviate from the Act.

The principle of law that circulars cannot overrule the provisions of the Income-tax Act has also been upheld by the Andhra Pradesh High Court in the case of Venugopala Constructions v. ITO (227 ITR 164).

In CIT v. Hero Cycles Pvt. Ltd. (228 ITR 463), the Supreme Court laid down the important proposition that while circulars would bind the officers of the Income-tax Department, they cannot bind the Court or even the tax-payer.

In other words, a circular cannot make a provision which can put an assessee in a disadvantageous position than what the law provides.

The Allahabad High Court in Indo-Gulf Fertilisers and Chemicals Corporation Ltd. v. Union of India (195 ITR 485) has also taken the view that circulars and directions of the Central Board of Direct Taxes are binding on the departmental authorities but they do not bind Courts. So far as Courts are concerned, they would only examine whether the orders passed by the departmental authorities are in accordance with the provisions of the Act or not. If the directions of the Board are beyond the scope of the provisions of the Income-tax Act, they will not hold good and the authorities can very well be asked to act according to law.

The Madhya Pradesh High Court in the case of CIT v. Hiralal Agrawal (218 ITR 21) has also considered this point. In this case, the High Court held that so far as the legal sanctity of circulars is concerned, there are no two opinions that they are binding on the authorities of the income-tax department as these circulars are issued under section 119 of the Income-tax Act. They have legal value and they cannot be disputed, but at the same time, section 187(2) had been interpreted by the Madhya Pradesh High Court as well as by the Allahabad High Court and the law had been laid down by the Madhya Pradesh High Court.

Therefore, the circulars are not binding to that extent unless a new circular has been issued, keeping in view that decision of the Madhya Pradesh High Court as well as the Allahabad High Court. The Madras High Court in Saroja Mills Ltd. v. CIT (220 ITR 626) relied on its earlier decision in CWT v. VT Ramalingam (201 ITR 839, 849) where the Court held as follows:

"In yet another decision of the Supreme Court in Keshavji Ravji and Co. v. CIT (183 ITR 1 (SC)), it had been pointed out that the Board, by its circulars, cannot pre-empt a judicial interpretation of the provisions of the Act and the Tribunal, much less the High Court, is not bound by the circulars and that though such circulars might have departed from the tenor of the statutory provision and give benefits to the assessees, that is not the same as saying that such circulars either have a binding effect on the interpretation of the provisions of the Act or that the Tribunal and the High Court are supposed to interpret the law in the light of the circulars."

In view of the aforesaid decisions, there can be no doubt that while circulars are binding on tax officers administering the law, they would not be binding on Courts who would be free to give such interpretation to the law as they think fit. Further, where there is a Court decision which is contrary to the circulars interpreting the statute, it is the Court's decision which will prevail and the circulars cannot be relied on by a tax payer even if the circulars are beneficial to them.