The Supreme Court reaffirmed that circulars issued by the Central Board of Direct Taxes bind the Income Tax Department and its officers but carry no binding force over courts. Courts interpret tax law independently and are not constrained by CBDT's administrative instructions. The ruling clarifies the hierarchy between executive guidance and judicial authority in income tax matters, reinforcing that statutory interpretation remains exclusively within the judicial domain and cannot be pre-empted by departmental circulars.

This ruling sits at the intersection of administrative law and constitutional separation of powers. CBDT is a statutory body under the Central Board of Revenue Act, 1963, and exercises powers under Section 119 of the Income Tax Act, 1961. Section 119 expressly empowers CBDT to issue circulars and instructions to subordinate income tax authorities. These circulars are binding on the department under the principle established in Navnit Lal C. Javeri v. K.K. Sen (1965) and later reaffirmed in UCO Bank v. CIT (1999), where the Supreme Court held that CBDT circulars, even if inconsistent with statutory provisions, bind the department and can be enforced by an assessee against the Revenue.

However, the critical distinction — now sharply reaffirmed — is that this binding effect flows downward within the executive hierarchy, not horizontally or upward toward courts. Courts are not bound by executive instructions because allowing it would permit the executive to effectively override judicial interpretation of law, violating the basic structure doctrine's separation of powers limb.

The constitutional basis is Article 141 (law declared by the Supreme Court is binding on all courts) and Article 144 (all civil and judicial authorities shall act in aid of the Supreme Court). Administrative circulars cannot substitute for or constrain these constitutional mandates.

For CLAT PG, the examiner's likely move is to test whether a circular favourable to the taxpayer can be used against the department (yes), and whether a court must follow a CBDT circular that contradicts a statutory provision (no). The distinction between binding-on-department and not-binding-on-court is the precise doctrinal cut the examiner tests.