The Supreme Court of India, comprising a Bench of Justice S.V.N. Bhatti and Justice N. V. Anjaria, has held that premium earned from the sale of export quota permits cannot be equated with statutory export incentives under Section 28(iiia) to (iiic) of the Income Tax Act, 1961 for claiming deductions under Section 80HHC. Dismissing appeals filed by garment exporters Orient Crafts Limited and M/s Samtex Fashions Ltd., the Court ruled that administrative circulars issued by the Central Board of Direct Taxes (CBDT) cannot create an impermissible legal fiction contrary to statutory terms, nor can executive instructions bind constitutional courts in interpreting tax statutes. The Bench also affirmed the invocation of revisional jurisdiction by the Commissioner of Income Tax under Section 263 against assessment orders that wrongly allowed the statutory deduction.
Background of the Dispute
The controversy stemmed from assessment proceedings for Assessment Years 2000–01 and 2001–02 involving garment manufacturing and export companies. Orient Crafts Limited claimed deduction under Section 80HHC amounting to Rs. 13,85,68,402/-, which included Rs. 73,49,341/- received as premium on the sale of export quota, treated by the assessee as business profits. The Assessing Officer initially accepted the return under Section 143(3). Relying on a CBDT Office Memorandum/Circular dated 23.02.1998, the assessee maintained that export quota premiums technically receive identical statutory treatment as profits on the sale of import licences, cash assistance, and duty drawback.
However, the Commissioner of Income Tax (Delhi-V) invoked Section 263 of the Act, issuing a show-cause notice on the ground that the assessment order was erroneous and prejudicial to the interests of the Revenue. The Commissioner observed that the Assessing Officer failed to exclude 90% of the quota premium from business profits under Explanation (baa) to Section 80HHC, resulting in an excess deduction of Rs. 51,23,151/-. The Commissioner set aside the assessment and directed a fresh assessment treating the proceeds as “other receipts”.
While the Income Tax Appellate Tribunal (ITAT) set aside the revisional directive and ruled in favour of the assessee, the High Court of Delhi reversed the Tribunal’s decision. The High Court held that consideration from the transfer of export quota rights is not income derived from exports, but a domestic transfer falling residually under Section 28(iv), which does not qualify for inclusion under the provisos to Section 80HHC(3).
In the companion appeal of M/s Samtex Fashions Ltd., the Assessing Officer had disallowed deductions claimed under Section 80HHC on quota sale proceeds of Rs. 90,43,061/- and interest on margin money deposits of Rs. 16,72,286/-. Although the CIT (Appeals) and the ITAT initially granted relief to the company by relying on the CBDT Circular, the Delhi High Court overturned those orders by applying its precedent in CIT v. Nagesh Knitwears P. Ltd.
Submissions by the Parties
Arguing for Orient Crafts Limited, Senior Counsel Salil Aggarwal contended that the assessment was duly completed under Section 143(3) following an inquiry. Counsel submitted that the CBDT circular was strictly binding on the Assessing Officer, and where the assessing authority adopted a plausible view in compliance with departmental guidelines, the Commissioner could not invoke Section 263. It was argued that revisional powers cannot be exercised merely because the Commissioner holds a different view, placing reliance on C.I.T., Ludhiana v. Max India Ltd., C.I.T. v. Amitabh Bachhan, and Malabar Industrial Co. Ltd. v. CIT.
Counsel for M/s Samtex Fashions Ltd., Santosh Krishnan, argued that export quotas allotted by the Apparels Export Promotion Council (AEPC) are transferable, and the premium realised on surplus quotas is eligible for Section 80HHC relief by operation of the CBDT Office Memorandum dated 23.02.1998. Citing KP Varghese v. ITO, Vijay Krishnaswami v. DDIT, and State of TN v. India Cements Ltd., counsel submitted that the Revenue cannot repudiate its own circulars or appeal against orders that adhere to its binding instructions.
Opposing the assessees, Senior Counsel Arijit Prasad appeared for the Revenue and argued that Section 80HHC must be read alongside Explanation (baa). He maintained that export quota sales do not yield export earnings or foreign exchange, but merely domestic proceeds. Counsel emphasized that an administrative circular cannot override explicit statutory enactments or tie the hands of appellate courts, drawing support from the Constitution Bench ruling in CCE, Bolpur v. Ratan Melting & Wire Industries.
Court’s Analysis on Section 263 and Precedents
Addressing the challenge to revisional jurisdiction under Section 263 of the Act, the Supreme Court summarized the settled principles governing the provision:
- Under C.I.T. v. Max India Ltd., the expression “prejudicial to the interest of the revenue” must be read in conjunction with an “erroneous” order. While an order cannot be revised merely because two views are possible and the officer took one, revisional intervention is warranted if the view adopted is entirely unsustainable in law.
- Under C.I.T. v. Amitabh Bachhan, revisional jurisdiction requires the concurrent presence of both preconditions—that the order is erroneous and prejudicial to the revenue. The Commissioner is not confined strictly to the initial notice, provided principles of natural justice are observed and the assessee is granted an opportunity to contest the record.
- Under Malabar Industrial Co. Ltd. v. CIT, an assessment order becomes erroneous if it proceeds on an incorrect assumption of facts, misapplies the law, or is passed without application of mind, leading to loss of tax lawfully payable.
Applying these benchmarks, the Court noted that the Assessing Officer failed to apply the statutory criteria governing export incentives, making the order erroneous and prejudicial. The High Court had rightly affirmed the Commissioner’s revisional order.
Findings on CBDT Circulars and Export Quota Premiums
Examining the substantive challenge under Sections 28 and 80HHC, the Bench scrutinized the legal fiction sought to be introduced via the CBDT Office Memorandum dated 23.02.1998, which stated that “technically, export quota premium can be equated with the items mentioned in Section 28(iiia) and (iiic)”.
The Court held that such an equivalence is impermissible under the statutory scheme:
“In essence, the CBDT O.M. creates a legal fiction by equating the export quota premium with the items mentioned in Section 28(iiia) to (iiic) of the Act, 1961. The application of a legal fiction contrary to the explicit statutory position is impermissible in law.”
The Bench highlighted the fundamental distinction between export incentives recognized by statute and domestic quota sales:
“Revenue from the sale of a quota generates horizontal revenue for the assessee but does not earn foreign exchange. The requisite for any of the revenues covered by Section 28(iiia) to (iiic) of the Act, 1961 is not present in the sale of the quota. Therefore, on a plain reading of Section 28, the sale of quota cannot be treated as business income.”
Reiterating the limits of executive circulars established in CCE, Bolpur v. Ratan Melting & Wire Industries, the Bench underscored:
“Departmental Circulars and instructions issued by the Central Board of Excise and Customs (CBEC) are binding on the subordinate Authorities functioning under the respective Statutes. However, once the Supreme Court or a High Court declares the law on a question arising for consideration, it is impermissible for any Court or Tribunal to direct that the Executive Circular be given effect in preference to the view expressed by the Constitutional Court.”
The Court observed that administrative circulars represent only the executive’s understanding of a statutory provision and cannot bind judicial forums. If an administrative circular were binding on courts, “it would undermine the entire constitutional and statutory framework governing income tax liability, including the standard of ‘income derived,’ the strict construction of legitimate deductions, and the classification of permissible expenses.”
Furthermore, the Court noted that barring the Revenue from challenging an interpretation contrary to its circular would destroy the Revenue’s right of appeal, preventing constitutional courts from ever adjudicating erroneous interpretations under Article 141 of the Constitution.
Endorsing the view expressed in CIT v. Nagesh Knitwears P. Ltd., the Supreme Court concluded that quota premiums allocated by the AEPC fall under the residuary ambit of Section 28(iv) as an incidental business benefit, rather than under Sections 28(iiia), (iiib), or (iiic). Consequently, they are subject to a 90% exclusion under Explanation (baa) without any corresponding benefit of addition back under the provisos to Section 80HHC(3).
Decision
The Supreme Court declined to interfere with the common judgments of the Delhi High Court, dismissing the civil appeals filed by Orient Crafts Limited and M/s Samtex Fashions Ltd., along with all connected appeals.
Case Title: Orient Crafts Limited v. Commissioner of Income Tax, New Delhi
Case No.: Civil Appeal Nos. 143-144 of 2013
Bench: Justice S.V.N. Bhatti and Justice N. V. Anjaria
Date: September 18, 2026
