Tax dept can’t use new circular to revive dismissed appeals - no retrospective effect

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Case Name

Principal Commissioner of Income Tax vs Anand Natwarlal Sharda (High Court of Gujarat)

R/Special Civil Application No. 7520 of 2021

Date: 24th June 2021

Key Takeaways

• CBDT circulars on monetary limits don’t automatically have retrospective effect - new circulars only apply to future appeals unless explicitly stated otherwise
• Special CBDT orders are mandatory - for penny stock scam cases to bypass monetary limits, the Board must issue specific special orders for each case or category
• Section 254(2) (of Income Tax Act, 1961) has limited scope - rectification under this provision only covers “mistakes apparent from the record,” not changes in law or policy
• Timing matters in tax appeals - appeals dismissed before a circular’s issuance cannot be revived simply because new exceptions are created later

Issue

Whether the CBDT Circular No. 23/2019 dated 06.09.2019 and Office Memorandum dated 16.09.2019 (which exempted penny stock scam cases from monetary limits) had retrospective effect and could be used to recall appeals that were already dismissed before these circulars were issued?

Facts

1. The Appeals: The Principal Commissioner of Income Tax filed ITA No. 1274/2019 and 627 other appeals challenging various CIT(Appeals) orders
2. First Dismissal: On 14.08.2019, the Income Tax Appellate Tribunal dismissed all these appeals because the tax effect in each case was below Rs.50,00,000, as per the CBDT circular dated 08.08.2019
3. New Circulars Issued:

• On 06.09.2019, CBDT issued Circular No. 23/2019 creating exceptions for organized tax evasion cases involving penny stocks
• On 16.09.2019, an Office Memorandum clarified that monetary limits wouldn’t apply to bogus LTCG/STCL through penny stocks

1. Revival Attempt: The tax department filed Miscellaneous Application No. 77/AHD/2020 under Section 254(2) (of Income Tax Act, 1961) seeking to recall the dismissal order, arguing the case fell under the new penny stock exception
2. Second Dismissal: On 09.09.2020, the Tribunal dismissed the miscellaneous application, holding there was no mistake apparent from the record

Arguments

Tax Department’s Arguments (Petitioner):

• The CBDT Circular No. 23/2019 dated 06.09.2019 was clarificatory in nature and should apply retrospectively to all pending appeals
• The case involved organized tax evasion through penny stocks, which fell under the exception carved out in the new circular
• The Office Memorandum dated 16.09.2019 being clarificatory would apply retrospectively to all pending appeals
• The Tribunal committed an error by not entertaining their application in light of these subsequent circulars

Tribunal’s Position (Respondent):

• The circular and office memorandum were not in existence when the original dismissal order was passed on 14.08.2019
• No mistake apparent from record existed that could be rectified under Section 254(2) (of Income Tax Act, 1961)
• The new circulars required specific special orders by CBDT for each case or category of cases
• The circulars applied only to appeals filed on or after 16.09.2019

Key Legal Precedents

The judgment doesn’t cite specific case law precedents, but it heavily relies on:

Statutory Provisions:

• Section 254(2) (of Income Tax Act, 1961): Allows rectification of “mistake apparent from the record” within six years
• Section 268A (of Income Tax Act, 1961): Empowers CBDT to prescribe monetary limits for filing appeals

CBDT Circulars Referenced:

• Circular dated 11.07.2018: Original circular prescribing Rs. 20,00,000 as minimum monetary limit
• Circular No. 17/2019 dated 08.08.2019: Revised monetary limit to Rs. 50,00,000
• Circular No. 23/2019 dated 06.09.2019: Created exception for organized tax evasion cases
• Office Memorandum No. 279 dated 16.09.2019: Clarified application to penny stock cases

Judgement

The High Court dismissed the petition, upholding the Tribunal’s decision. Here’s the court’s reasoning:

Key Findings:

1. No Retrospective Effect: The court found “nothing to suggest in the said Circular/Office Memorandum that they shall have retrospective effect”
2. Future Application Only: The circular “speaks about the Appeals that may be filed with the special order of the Board in future, and hence could not be construed to have retrospective effect”
3. Special Order Requirement: The court agreed with the Tribunal that “a specific requirement of issuance of special order by CBDT is a must” for each case or category
4. Proper Application Timeline: The circulars “shall apply to all the appeals filed on or after 16.09.2019 by the revenue”
5. No Mistake Apparent: Since the appeals were dismissed before the new circulars existed, there was no “mistake apparent from the record” that could be rectified under Section 254(2) (of Income Tax Act, 1961)

Final Order: “The Court does not find any illegality or infirmity in the impugned order dated 09.09.2020 passed by the Tribunal dismissing the Miscellaneous Application filed by the petitioner. The petition being devoid of merits is dismissed in limine.”

FAQs

Q1: Can the tax department still file appeals in penny stock scam cases despite low tax amounts?

A: Yes, but only for new cases filed after 16.09.2019, and only if the CBDT issues a specific special order for that case or category of cases.

Q2: What does “clarificatory” nature of a circular mean in tax law?

A: While the tax department argued the circular was clarificatory (meaning it just clarified existing law and should apply retrospectively), the court rejected this argument, holding that the circular created new exceptions and applied only prospectively.

Q3: Can dismissed appeals be revived if new favorable circulars are issued later?

A: Generally no. This case establishes that new CBDT circulars don’t automatically revive previously dismissed appeals unless they explicitly state retrospective application.

Q4: What constitutes a “mistake apparent from the record” under Section 254(2) (of Income Tax Act, 1961)?

A: It must be an obvious error that can be corrected without detailed examination. Changes in law or policy after an order is passed don’t constitute such mistakes.

Q5: How should the 2019 circular be applied in practice?

A: The CBDT Circular No. 23/2019 should be read with the Office Memorandum dated 16.09.2019, and applies only to appeals filed on or after 16.09.2019 where the CBDT has issued specific special orders.

Q6: What’s the significance for future tax litigation?

A: This judgment clarifies that taxpayers and the department cannot rely on subsequently issued circulars to challenge or revive already-decided cases, providing certainty and finality to tax litigation.

1. The petitioner- The Principal Commissioner of Income Tax (Central) Ahmedabad, has filed the present petition under Article 226/227 of the Constitution of India challenging the order dated 09.09.2020 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench, Ahmedabad (hereinafter referred to as “the Tribunal”) in M.A. No. 77/AHD/2020 in ITA No. 1274/AHD/2019 (Annexure A) filed by the petitioner under Sections 254(2) (of Income Tax Act, 1961) (hereinafter referred to as “the said Act”), seeking prayer to recall the order dated 14.08.2019 passed by the

Tribunal in ITA No. 1274 of 2019 and others. The Tribunal vide the

impugned order dated 09.09.2020 has dismissed the said M.A. No. 77 of 2020 filed in ITA No. 1274 of 2019 along with the other Miscellaneous Applications filed by the petitioner (original applicant) holding that there was no mistake apparent on the face of record which could be rectified within the narrow compass of Sections 254(2) of the Income Tax Act, 1961.

2. The petitioner had filed the appeal being ITA No. 1274 of 2019 challenging the order dated 01.05.2019 passed by the CIT (Appeals), by which the CIT (Appeals) had allowed the Appeal filed by the respondent -assessee challenging the assessment order dated 24.12.2018 passed by the Assessing Officer. The Tribunal vide the order dated 14.08.2019 dismissed the said Appeal along with other 627 Appeals on the ground that the Tax Effect involved in all the said appeals did not exceed Rs.50,00,000/- in each of the Appeals, in view of the circular issued by the CBDT on 08.08.2019,

with clarification that the appellant (i.e. the petitioner herein) shall

be at liberty to point out the cases which were wrongly included in

the Appeals so summarily dismissed, either owing to wrong computation of tax effect or owing to such cases being covered by the permissible exceptions or for any other reason. The petitioner filed Miscellaneous Applications including M.A. No. 77 of 2020 in case of the respondent, under Section 254(2) of the Income Tax Act, 1961, on the ground that the case was covered under the exception carved out under the CBDT Circular No. 23 of 2019 dated 06.09.2019. The Tribunal vide the impugned order dated 09.09.2019 dismissed the said Miscellaneous application along with the other Miscellaneous Applications.

3. The learned Senior Advocate Mr. M.R.Bhatt appearing for the

petitioner vehemently submitted that the Tribunal had committed

gross error by not entertaining the Miscellaneous Application filed

by the petitioner under Section 254(2) of the Income Tax Act, 1961 in view of the

subsequent circular No. 23/2019 dated 06.09.2019 as well as the

Office Memorandum No. 279 dated 16.09.2019. According to Mr.

Bhatt, the CBDT had in supercession of the earlier circular dated

11.07.2018 prescribed minimum monetary limit at Rs. 20,00,000/-

for filing Appeal before the Appellate Tribunal, providing certain

exceptions. The said Circular was made retrospectively applicable

to all the pending appeals. The said circular dated 11.07.2018

came to be modified by Circular No. 17/2019 dated 08.08.2019,

whereby the monetary limit for filing the appeal before the

Appellate Tribunal was revised to Rs. 50,00,000/-. Thereafter the

CBDT issued the Circular No. 23/2019 dated 06.09.2019 under

Section 268A of the Income Tax Act, 1961 which provided that the cases

involving organized tax evasion scam through bogus long term

capital gain/ short term capital loss on penny stocks were not made

subject to the monetary limits prescribed for filing the Appeals.

Thus, according to Mr. Bhatt, the said circular dated 06.09.2019

being clarificatory in nature would relate back to the circular dated

11.07.2018 as modified by the circular dated 08.08.2019. He

further drew the attention of the Court to the Office Memorandum

No. 279 dated 16.09.2019 issued by the CBDT and submitted that

the monetary limits fixed for filing appeals before the Tribunals/

High Court/ Supreme Court would not apply in case of assessee

claiming LTCG/STCL through penny stocks. The said Office

Memorandum also being clarificatory in nature would apply

retrospectively to all the pending appeals and hence the petitioner

had filed Miscellaneous Application in case of the respondent and

others, falling under the exception carved out in Circular dated

06.09.2019 and Office Memorandum dated 16.09.2019 seeking

recall of the common order passed by the Tribunal on 14.08.2019.

According to him, the Tribunal without appreciating the

submissions made on behalf of the petitioner-Department in the

right perspective has dismissed the Miscellaneous Application.

4. In order to appreciate the submissions made by the learned

Senior Advocate Mr. M.R.Bhatt it would be beneficial to reproduce

the circular dated 06.09.2019 and Office Memorandum dated

16.09.2019:

“ Circular No. 23 of 2019.

F. No. 279/Misc./ M-93/2018-ITJ(Pt.)

Government of India

Ministry of Finance

Department of Revenue

Central Board of DirectTaxes

Judicial Section

New Delhi, 6th September 2019

Subject: Exception to monetary limits for filing appeals

specified in any Circular issued under Section 268A (of Income Tax Act, 1961) of

the Income Tax Act, 1961-reg.

Reference is invited to the Circulars issued from time to

time by Central Board of Direct Taxes (the Board) under

Section 268A (of Income Tax Act, 1961)( the Act), for

laying down monetary limits and other conditions for filing

of departmental appeals before Income Tax Appellate

Tribunal (ITAT), High Courts and SLPs/appeals before

Supreme Court.

2. Several references have been received by the Board

that in large number of cases where organised tax evasion

scam is noticed through bogus Long Term Capital Gain

(LTCG)/Short Term Capital Loss (STCL) on penny stocks and

department is unable to pursue the cases in higher judicial

fora on account of enhanced monetary limits. It has been

reported that in large number of cases, ITATs and High

Court have recognized the unique modus operandi involved

in such scam and have passed judgements in favour of the

revenue. However, in cases where some appellate fora have

not given due considerations to position of law or facts

investigated by the department there is no remedy available

with the department for filing further appeal in view of the

prescribed monetary limits.

3. In this context, Board has decided that notwithstanding

anything contained in any circular issued u/s 268A (of Income Tax Act, 1961)

specifying monetary limits for filing of departmental appeals

before Income Tax Appellate Tribunal (ITAT), High Courts

and SLPs/appeals before Supreme Court, appeals may be

filed on merits as an exception to said circular, where Board,

by way of special order direct filing of appeal on merit in

cases involved in organised tax evasion activity.

(Neetika Bansal)

Director (ITJ)

CBDT, New Delhi.

OFFICE MEMORANDUM

F.No. 279/Misc./M-93/ 2018-ITJ(Pt.)

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

New Delhi, Dated:101’ September, 2019

OFFICE MEMORANDUM

Subject:- Special order of Board exempting cases

involving bogus Long Term Capital Gains (LTCG)/

Short Term Capital Loss (STCL) through penny stocks

from monetary limits specified in any Circular issued

under Section 268A-reg (of Income Tax Act, 1961).

The undersigned is directed to refer to Circular No. 23 of

2019 dated 6th September, 2019 and to say that by virtue of

powers of the Central Board of Direct Taxes u/s. 268A (of Income Tax Act, 1961) of

Income Tax Act, 1961, the monetary limits fixed for filing

appeals before ITAT/HC and SLPs/ appeals before Supreme

Court shall not apply in case of assesses claiming bogus

LTCG/STCL through penny stocks and appeals/ SLPs in such

cases shall be filed on merits.

(Abhishek Gautam)

DCIT(OSD)(ITJ-1),

CBDT, New Delhi. “

5. The petitioner-original applicant having filed the

Miscellaneous Application before the Tribunal under Section 254(2) (of Income Tax Act, 1961)

of the said Act for rectifying the mistake apparent from the record,

it would be also beneficial to reproduce the relevant part of Section

254(2) of the said Act:

“254. Orders of Appellate Tribunal

(1) ***

(2) The Appellate Tribunal may, at any time within

six years from the date of the order, with a view to

rectifying any mistake apparent from the record, amend

any order passed by it under sub-section (1), and shall

make such amendment if the mistake is brought to its

notice by the assessee or the Assessing Officer”

6. So far as the facts of the case are concerned, the Appeal filed

by the petitioner before the Tribunal against the order passed by

the CIT(Appeals) was dismissed by the Appellate Tribunal by a

common order passed on 14.08.2019, in view of the CBDT circular

dated 08.08.2019. Admittedly, at the relevant time when the

Tribunal passed the order dated 14.08.2019, neither the Circular

No. 23 of 2019 dated 06.09.2019 nor the Office Memorandum No.

279 dated 16.09.2019 was in existence. Apart from the fact that the

said circular and the Office Memorandum being not in existence

and therefore not taken into consideration by the Tribunal while

disposing all the Appeals could not be said to be a mistake

apparent from the record as contemplated under sub-section (2) of

Section 254 of the Income Tax Act, 1961, the Court also does not find any

substance in the submission of Mr. Bhatt that the Tribunal should

have recalled the order dated 14.08.2019 in view of the said

Circular dated 06.09.2019 and the Office Memorandum dated

16.09.2019, which had retrospective effect. The Court at this

juncture does not think it appropriate to deal with the facts of the

case, as the main issue that falls for consideration before this Court

in the present petition would be, as to whether the Circular dated

06.09.2019 and the Office Memorandum dated 16.09.2019 had any

retrospective effect as sought to be submitted by learned Advocate

Mr. Bhatt.

7. From the bare reading of the Circular dated 06.09.2019, it

appears that the CBDT had decided that notwithstanding anything

contained in any Circular issued under Section 268A (of Income Tax Act, 1961) specifying

monetary limits for filing of departmental appeals before the

Income Tax Appellate Tribunal (ITAT), High Courts and SLPs/

Appeals before the Supreme Court, appeals may be filed on merits

as the exception to the said Circular, where the Board by way of

special order direct filing of appeals on merits in cases involved in

organized tax evasion activity. The Office Memorandum dated

16.09.2019 was issued pursuant to the said circular dated

06.09.2019 stating inter alia that by virtue of the powers of CBDT

under Section 268A (of Income Tax Act, 1961), the monetary limits

fixed for filing appeals before ITAT/High Court and SLPs/Appeals

before Supreme Court shall not lie in case of assessees claiming

bogus LTCG/STCL through penny stocks and appeals/ SLPs in such

cases appeals shall be filed on merits. There is nothing to suggest

in the said Circular/ Office Memorandum that they shall have

retrospective effect. On the contrary, from the language employed

in the said Circular dated 06.09.2019, it clearly transpires that the

appeals may be filed on merits as an exception to the other

Circulars issued earlier, where the Board by way of special order

direct filing of Appeals on merits in the cases involved in organized

tax evasion activity. Therefore, by virtue of the said Circular dated

06.09.2019, the appeals could be filed on merits, irrespective of the

monetary limits fixed in earlier cases, if the Board passes special

order for filing appeals in cases involving tax evasion activity. The

said Circular speaks about the Appeals that may be filed with the

special order of the Board in future, and hence could not be

construed to have retrospective effect. The Tribunal interpreting

the said Circular/ Office Memorandum in the impugned order has

rightly observed that in respect of each case or category of cases

whether an appeal should be filed in view of the Circular dated

06.09.2019 or not shall be decided by the Board by way of special

order, and thus a specific requirement of issuance of special order

by CBDT is a must. The Tribunal therefore has rightly held that the

CBDT Circular No. 23/2019 dated 06.09.2019 should be read along

with the Office Memorandum dated 16.09.2019, in respect of the

appeals to be filed pursuant to such special orders of CBDT and

shall apply to all the appeals filed on or after 16.09.2019 by the

revenue, where the tax effect may be low but the appeal could still

be filed by the revenue on merits.

8. The appeals including the appeal in case of the respondent,

which were disposed of by the Tribunal vide the common order

dated 14.08.2019 could not be said to have been filed pursuant to

the special order of the CBDT in view of the Circular dated

06.09.2019 read with the Office Memorandum dated 16.09.2019,

and therefore it could not be said that the Tribunal had committed

any mistake apparent from the record, which would require

rectification as envisaged in Section 254(2) of the Income Tax Act, 1961.

9. In that view of the matter, the Court does not find any

illegality or infirmity in the impugned order dated 09.09.2020

passed by the Tribunal dismissing the Miscellaneous Application

filed by the petitioner. The petition being devoid of merits is

dismissed in limine.