SC says CBDT circular not binding in courts, rejects Section 80HHC claim

The Supreme Court (SC) has reiterated that circulars issued by the Central Board of Direct Taxes (CBDT) are not binding on courts, while dismissing appeals by taxpayers seeking a deduction under Section 80HHC of the Income Tax Act, 1961, on premiums earned from the sale of export quotas, reported Live Law.

According to the report, a bench of Justices SVN Bhatti and NV Anjaria held that the premium received from the sale of export quotas could not be treated as income generated from exports because the transaction did not involve receipt of foreign exchange. It therefore did not qualify as export income eligible for deduction under Section 80HHC.


The dispute concerned assessment years 2000-01 and 2001-02 and involved companies engaged in manufacturing and exporting readymade garments. The taxpayers had relied on a 1998 CBDT circular which said that premium earned from export quota could be equated with specified categories of business income under Section 28 of the Act.

The cases were Orient Crafts Ltd v Commissioner of Income Tax, New Delhi and M/s Samtex Fashions Ltd v Commissioner of Income Tax, New Delhi, along with connected appeals.

The Assessing Officer had initially granted the deduction. The Commissioner of Income Tax (CIT), exercising powers under Section 263, subsequently revised the assessment order and denied the benefit. The Income Tax Appellate Tribunal restored the deduction by relying on the CBDT circular. The Delhi High Court later allowed the revenue’s appeal and set aside the ITAT order, following which the taxpayers approached the Supreme Court.

The Supreme Court held that the CBDT circular could not bind courts where its interpretation was inconsistent with the Income Tax Act. Live Law reported that the court relied on the Constitution Bench judgment in CCE, Bolpur v Ratan Melting & Wire Industries (2008), which had settled the issue of the binding effect of departmental circulars on courts.

The court also endorsed the Delhi High Court’s 2012 ruling in Commissioner of Income Tax v Nagesh Knitwears P Ltd, which held that premium or profit from the sale of export quotas or licences did not fall within the relevant provisions of Section 28 and was therefore not eligible for deduction under Section 80HHC.

On the CIT’s powers under Section 263, the Supreme Court held that the revisional jurisdiction had been validly exercised in this case. It reiterated that an assessment order can be revised under the provision only when it is both erroneous and prejudicial to the interests of the revenue. The court said an order may be erroneous if, among other things, it is based on an incorrect assumption of facts, misapplies the law or is passed without proper application of mind.

The court also noted that the Assessing Officer had failed to conduct basic inquiries, justifying the Commissioner’s intervention. It consequently declined to interfere with the Delhi High Court’s findings and dismissed the appeals.