M.K. CHAWLA, J.

The petitioner was working as secretary of Messrs. Hans Raj Gupta and Co. P. Ltd., (hereinafter referred to as "the company"), for more than 40 years on a monthly salary of Rs. 1, 100. He was looking after only the clerical and routine matters and was not at all concerned with the payment of salaries to the other employees or with deduction of tax at source. In fact, Shri Hans Raj Gupta was holding/controlling over 70 per cent of share capital of the company and was the real person who was managing the company and was responsible for the conduct of the affairs of the company The company is carrying on the business of hiring agricultural machinery and equipment like kolhus and pans for cane crushing to farmers and other persons. In the year 1979-80, the business of the company suffered extreme slump due to severe drought conditions in the country which caused heavy damage to the crops. During that period, the company suffered losses to the tune of more than Rs. 8 lakhs. Due to the extreme financial difficulties and absence of liquidity, the tax deducted at source was deposited by the company with the Income-tax Department with some delay.

The Income-tax Officer served a notice dated January 25, 1982 in respect of the years 1979-80 and 1980-81, requiring the company to show cause why penalty under section 221 of the Income-tax Act (hereinafter referred to as "the Act") should not be imposed, as the company had either failed to deduct the income-tax at the time of payment of salaries and/or after deducting had failed to pay the same within time. The company submitted a reply on February 10, 1982, inter alia, stating that on account of abnormal conditions, as a result of which the company suffered heavy losses, there was some delay in the payment of tax deducted at source. Subsequently, the Income-tax Officer sent repeated show-cause notices for the subsequent years threatening prosecution for the same default for which suitable replies were sent. The company also made representations that since they have already made payments voluntarily to the Department and have also paid interest in accordance with the provisions of section 201(lA, ) of the Act, the delay may be condoned without further penalty of any kind. It was also submitted that if it is considered absolutely necessary to levy some penalty in addition to the interest which had already been paid, the maximum penalty amounting to Rs. 5, 000 be levied for all these 4 years and the proceedings be dropped by condoning the delay. No action has been taken on these representationsOn or about December 14, 1984, the Income-tax Officer, on behalf of the Commissioner of Income-tax, filed as many as 59 complaints each comprising three offences in respect of four years of default in the Court of the Additional Chief Metropolitan Magistrate, Delhi. The method of instituting the prosecutions was to convert each deposit into a separate complaint against the company, its three directors and the Petitioner being the secretary and principal officer in respect of continuous default for four years.

The petitioner has come to this court under articles 226 and 227 of the Constitution of India, inter alia, seeking the issuance of a writ of mandamus and/or any other writ, order or direction that respondent No. 3, the Central Board of Direct Taxes, is not entitled to issue any instructions under section 119 of the Act, to take away the powers of the Commissioner of Income-tax in the matter of compounding of offences.

The contention of learned counsel for the petitioner is that, under section 279 of the Act, the Commissioner of Income-tax or any person authorised by him can file a complaint under section 276B of the Act. Under sub-section (2) of section 279, the Commissioner has been given an express power to compound the offences either before or after the institution of the proceedings. This power, according to learned counsel, cannot be regulated, dictated or circumscribed by another authority, howsoever high it may be. The further submission of learned counsel for the petitioner is that respondent No. 3 has issued various instructions, the last being Instruction No. 1317 of 1980, under which the power which vested in the Commissioner of Income-tax under sub-section (2) of section 279 of the Act has been completely taken away by the Central Board of Direct Taxes and partly vested in the Finance Minister. The instructions contained in the said circular issued by respondent No. 3 are wrong, unjust, unfair, arbitrary and oppressive, besides being in violation of the statutory provisions and are as such liable to be quashedThe case of the respondents as disclosed in the affidavit of Shri M. C. Pindwal, Income-tax Officer, in brief, is that the petitioner was in charge of and responsible to the company for the conduct of its business and as such has rightly been arrayed as an accused in the complaint. The amount of tax deducted at source was Government money lying in trust with the company and the company was required to deposit the same within the stipulated period. Its non-deposit in respect of each employee every month is a distinct offence. It is further alleged that even though respondent No. 2, i.e., the Commissioner of Income-tax, has been given the power to compound the offence under section 279(2) of the Act, this power is executive in nature and is, therefore, subject to the guidelines issued by the Central Board of Direct Taxes in exercise of its powers under section 119 of the Act.

In order to appreciate the rival contentions of the parties, it is relevant to keep in mind section 279 of the Income-tax Act and Instruction No. 1317 of 1980 issued by the Central Board of Direct Taxes on March 11, 1980. Section 279(1) lays down,

"(1) A person shall not be proceeded against for an offence under sections 275A, 276A, 276B, 276-C, 276D, 277, 278 or section 278A except at the instance of the Commissioner

(2) The Commissioner may either before or after the institution of proceedings compound any such offence . . ." *

A bare reading of this provision shows that it gives the Commissioner the right to compound any offence under sections 275A to 278 either before or after the institution of proceedings. The sanction of the court or any authority under the Act is not at all necessary for compounding the offence. The section does not say that the offence can be compounded only if it is proved to have been actually committed. If there is a proceeding on a charge, it would come within the purview of section 279 and compounding of the offence would be within the section, and the assessee cannot claim a refund of the composition fee on the ground that he had really committed no offence. However, this provision of compounding is not intended to confer on the Department the power to extract as much money as possible by holding out a threat of prosecutionWe need not go into the entire instructions contained in the Circular No. 1317 of 1980 but only refer to the offending clauses which prima facie impinge upon the statutory power of the Commissioner to compound an offence.

Clause (B) of the circular enumerates certain cases which should not be compounded:-

1. No compounding will be done if the assessee belongs to monopoly or large industrial house or is a director of a company belonging to or controlled by such house ;

2. Cases in which the prospects of a successful prosecution are good should not ordinarily be compounded;

3. Compounding will not be done in cases of second and subsequent offences.

Clause (C) of the instructions enumerates cases which may be compounded.

1. Except in cases falling within categories (1) and (3) of (B) above, compounding of an offence can be done with the consent of the Board, if the amount involved in the offence/ default is less than Rs. 1 lakh.

2. Except in cases falling under categories (1) and (3) of (B) above and category of (1) of (C), compounding may be done with the approval of the Minister if, in view of the developments taking place subsequent to the launching of the prosecution, it is found, after consultation with the Ministry of Law, that chances of conviction are not good.

Clause (D) of these instructions lays down that notwithstanding anything stated in (B), the Board may approve compounding in deserving and suitable cases involving hardship, with the approval of the Minister.

Section 6 of these instructions reads as under:

"While the above are only intended to provide broad guidelines to be followed before sending a proposal for compounding, the previous approval of the Board should always be obtained before deciding about the compounding of an offence. No assurance of any kind should be given to the assessee before obtaining the Boards approval."

The abovesaid provisions of the instructions prima facie, if not completely, partially take away the powers of the Commissioner of Income-tax to use the discretion vested in him under section 279(2) of the Act to compound the offence, if any application is made before him for this purpose. Under the impugned instruction, he is required to obtain "the previous approval of the Board before deciding to compound an offence." Once the Legislature has vested in the Commissioner a discretion to compound a particular offence, the same cannot be set at nought or curtailed substantially and/or materially by issuing the offending instructions which we hold are in direct contravention of the statutory provisions conferring the power to compound offences on the Commissioner.

The submission of learned counsel for the respondent is that the Central Board of Direct Taxes is the highest executive authority of the Department. Its power of administration, supervision and control extend over the whole of the Department. It has also the power to make rules and to issue orders, instructions and directions to all the concerned officers, in the execution of provisions of this Act. These instructions/directions have statutory force and are of binding nature. This has, however, two exceptions,

(a) it cannot interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions (proviso (b) to section 119(1)) ; and

(b) it cannot direct the Income-tax Officer or any other incometax authorities to make a particular assessment or to dispose of a particular case in a particular manner.

In support of his submission, learned counsel for the respondent placed reliance on a judgment reported as Navnit Lal C. Javeri v. K. K. Sen, AAC, 1965 AIR(SC) 1375, 1965 (56) ITR 198 [LQ/SC/1964/293] , 1965 (1) SCR 909 [LQ/SC/1964/293] , 1965 (2) ITJ 1, holding that, under section 5(8) of the Act, the circulars issued by the Central Board of Revenue are binding on all the officers and persons employed in the DepartmentIn this case, we may note that one such circular was issued after some amendments in the Act were introduced in Parliament. At that time, the Honble Minister for Revenue and Civil Expenditure gave an assurance that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment year 1955-56 will not be subject to tax, if it is shown that they had been genuinely refunded to the respective companies before June 30, 1955. It was realised by the Government that unless such step was taken, the operation of section 12(1B) would lead to extreme hardship, because it would have covered the aggregate of all outstanding loans of past years and it would have imposed an unreasonably high liability on the respective shareholders to whom the loans might have been advanced. It was only on the assurance given by the Minister in Parliament that Circular No. 20(XXI-6)/55 was issued.

This case, in our opinion, is quite distinguishable inasmuch as the instructions were in the nature of an explanation as to how section 12(1B) is to operate with minimum hardship to the genuine shareholders of companies.

This very ratio was approved, in the case of Ellerman Lines Ltd. v. CIT 1972 AIR(SC) 524, 1971 (82) ITR 913 [LQ/SC/1971/563] , 1972 (4) SCC 474 [LQ/SC/1971/563] , 1972 (2) SCR 168 [LQ/SC/1971/563] , 1972 (59) AIR(SC) 524, 1972 CTR(SC) 7, 1974 SCC(Tax) 304. In this case, the instructions were in the following terms (at page 918),

"The Central Board of Revenue had issued the notification dated February 10, 1942. Under that notification, instructions had been issued to the assessing authorities laying down the principles to be applied in assessing the foreign shipping companies. As regards the British shipping companies, they were directed to permit those companies to elect to be assessed on the basis of a ratio certificate granted by the U. K. authorities regarding the income or loss and the wear and tear allowance."

The necessity for issuing such instructions was felt when the Board came across a letter wherein the Income-tax Officers were instructed to take into consideration the investment allowance granted by the U. K. authorities in computing the taxable income of the British shipping companies.

The learned Solicitor-General appearing for the Revenue had at one stage of his arguments contended that the instructions issued by the Board of Revenue cannot have any binding effect and those instructions cannot abrogate or modify the provisions of the Act. But he did not contend that rule 33 was ultra vires the Act. Relying on the case of Navnit Lal C. Javeri 1965 AIR(SC) 1375, 1965 (56) ITR 198 [LQ/SC/1964/293] , 1965 (1) SCR 909 [LQ/SC/1964/293] , 1965 (2) ITJ 1, the court observed (at page 921 ),

"It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under section 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision."

In this judgment, it was observed that as the learned Solicitor-General has not challenged the vires of rule 33 of the Act, the so-called instructions in question merely lay down the manner of applying this rule. Even this case does not help the respondents.

Lastly, learned counsel for the respondent relied upon the judgment in K. P. Varghese v. ITO 1981 AIR(SC) 1922, 1981 (131) ITR 597 [LQ/SC/1981/368] , 1981 (3) Scale 1315 [LQ/SC/1981/368] , 1981 (4) SCC 173 [LQ/SC/1981/368] , 1982 (1) SCR 629 [LQ/SC/1981/368] , 1981 (24) CTR 358 [LQ/SC/1981/368] , 1981 (7) TAXMAN 13 [LQ/SC/1981/368] , 1981 (3) SCALE 1315 [LQ/SC/1981/368] , 1981 TaxLR 1448 [LQ/SC/1981/368] , 8124 CTR 358, 1981 SCC(Tax) 293. In this case also, the observations made in the case of Navnit Lal C. Javeri 1965 AIR(SC) 1375, 1965 (56) ITR 198 [LQ/SC/1964/293] , 1965 (1) SCR 909 [LQ/SC/1964/293] , 1965 (2) ITJ 1, were relied upon and approved. In this case, soon after the introduction of sub-section (2) of section 52 of the Act, the Central Board of Direct Taxes, in exercise of the power conferred under section 119 of the Act, issued a circular dated July 7, 1964, explaining the scope and object of sub-section (2) and the conditions under which it is to be applied, with view to protect honest and bona fide transactions where the consideration in respect of the transfer was correctly disclosed or declared by the assessee. Later on, it came to the knowledge of the higher authorities that Income-tax Officers in several cases have levied tax by invoking prosecutions under sub-section (2) even in cases where the transactions were perfectly honest and bona fide and there was no understatement of the consideration. Under these circumstances, the court observed that as the Income-tax Officers were interpreting sub-section (2) quite contrary to the instructions issued in the circular which was binding on the tax department., the Central Board of Direct Taxes was, therefore, constrained to issue another circular on January 14, 1974, explaining the circumstances under which this provision is to be invokedWe have carefully gone through the judgments relied upon by learned counsel for the respondents but we are constrained to hold that in none of these cases, the powers of the Commissioner under section 279(2) of the Act were watered down, abrogated or restricted. The instructions in all the cases were in the nature of explaining the correct implications of particular provision to the Income-tax Officers and how the same is to be interpreted and followed. In our opinion, there is no harm in issuing such like instructions of a binding nature, as the intention was for the proper administration of the provisions of the Act or the amendments made therein. However, in exercise of its powers to issue orders and circulars under section 119 of the Act, the Board cannot take away the judicial or quasi-judicial functions of the Commissioner and vest the same to itself or put them under the overall supervision of the Minister. The Board can relax the rigour of the laws or grant relief to the taxpayers which is not to be found in the statute but it cannot be allowed to dilute the discretion of the Commissioner which has been conferred by the statute. Normally, such circulars are issued for the benefit of the assessees or for a just and fair administration of the various provisions of the Act.

In the recent judgment of the Supreme Court in State of Madhya Pradesh v. G. S. Dall and Flour Mills 1991 (187) ITR 478 [LQ/SC/1990/570] , 1991 AIR(SC) 772, 1990 (S1) SCR 590, 1992 (S1) SCC 150, 1990 (4) JT 430, 1990 (2) SCALE 756, 1991 (80) STC 138 [LQ/SC/1990/570] , 1990 (2) Scale 756 [LQ/SC/1990/570] , in similar circumstances, it was held (at p. 499),

"Executive instructions can supplement the statute or cover areas to which the statute does not extend. But they cannot run contrary to statutory provisions or whittle down their effect."

This judgment supports the view which we have taken in the present case.

We have already reproduced some of the clauses of the instructions which, on the face of it, run counter to the provisions of the Act. This circular, in our opinion, has substantially curtailed the powers of the Commissioner of Income-tax which are vested in him under section 279 of the Act. In fact, the decision of the Commissioner has ceased to be his decision and has become the decision of the Board and/or that of the Minister, in view of the instructions that,

"the previous approval of the Board should always be obtained before deciding to compound an offence".". . . No assurance of any kind should be given to the assessee before obtaining the Boards approval"

This was not the intention of the Legislature when section 279 of the Act was incorporated.

In the result, we allow the petition and quash that part of the instructions referred to above being clauses (B), (C) and (D) and section 6 which arbitrarily take away the powers of the Commissioner to compound offences. We direct the Commissioner of Income-tax to consider the question of compounding the offence, if any, allegedly committed by the petitioner, as per the powers conferred on him by section 279(2) of the Act independently and without reference to the illegal instructions contained in Circular No. 1317 dated March 11, 1980.

The writ petition stands disposed of. There will be no order as to costs.