IMPORTANT POINT
Circular will apply retrospectively subject to two conditions.

JUDGMENT

SANJAY KISHAN KAUL, J.

1. Leave granted.

2. The propensity of Government Departments and public authorities to keep litigating through different tiers of judicial scrutiny is one of the reasons for docket explosion. The Income Tax Department of the Government of India is one of the major litigants. There are two departmental scrutinies at the level of the Assessing Officer and the Commissioner of Income Tax (Appeals) and thereafter an independent judicial scrutiny at the Income Tax Appellate Tribunal (hereinafter referred to as the ‘ITAT’) level followed by the legal issue which can be inquired into by the High Courts. The last tier is, of course, the jurisdiction under Article 136 of the Constitution of India before the Supreme Court.

3. Mindful of the phenomenon of the docket explosion and the rising litigation in the country, the Union of India in order to ensure the conduct of responsible litigation framed what is today known as the National Litigation Policy, to bring down the pendency of cases and get meaningful issues decided from the judicial forums rather than multiple tiers of scrutiny just for the sake of it. The Government, being a litigant in well over 50 per cent of the cases, has to take a lead in not being a compulsive litigant.

4. It is towards the aforesaid avowed object that the Income Tax Department, from time to time, has come out with administrative circulars/notifications for the Department not to litigate where the revenue impact is low.

5. In the present proceedings, we are concerned with the implementation of Instruction No.3 of 2011 dated 9.2.2011, providing for appeals not to be filed before the High Court(s) where the tax impact was less than Rs.10 lakh. It also contains certain other conditions which will be reverted to later, but suffice to say that this Instruction was in supersession of the earlier Instruction No.1979 of 2000 dated 27.3.2000 where the limit of the tax effect was Rs.4 lakh. The Instruction/Circular in question is stated to have a prospective effect as per the Revenue and, thus, cases which were pending in the High Court(s) and had been filed prior to the Instruction in question (Instruction No.3) but had tax effect of less than Rs.10 lakh were, thus, required to be determined on their merits and not be dismissed by applying the circular/instruction.

6. There has been a divergence of legal opinion on this aspect amongst the High Courts.

7. There have also been certain orders passed by this Court which appear to have a divergence of view and we consider it necessary to examine this issue in detail so that conflicting orders do not arise and the High Courts are also guided appropriately. This is also necessary, as in the mean time, a large number of cases have been disposed of on the application of the Instruction/Circular in question though the appeals were preferred by the Revenue prior to the Instruction/Circular being issued as a large number of High Courts took that view.

High Courts of the View that the Circular in question would apply to pending appeals as well:

A. Karnataka High Court:

Commissioner of Income Tax, Bangalore v. Ranka & Ranka, 2013(352) ITR 121. The issue was squarely addressed by the Division Bench of the Karnataka High Court recognizing that the concept of providing the monetary limit was not new and has been invoked from 1992. The limit was raised from time to time. The clause in the circular has explained the meaning of ‘Tax Effect’ as the “difference between the tax on total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed without impact of interest.” The different clauses protected the interest of the Revenue so as not to have any precedentiary impact. There were, however, certain exclusions from this, i.e., challenge to constitutional validity of an Act or Rule, declaration of any Board Order, Notification,