Reiterating that CBDT circulars are not binding on Courts, the Supreme Court recently dismissed a batch of appeals filed by assessees claiming deductions under Section 80HHC for the premium they received on the sale of their export quota.

Section 80HHC provided tax deductions on export profits for Indian companies and resident taxpayers, but no deduction is available from April 1, 2005, onwards.

A bench of Justice SVN Bhatti and Justice NV Anjaria held that premium received by the assesses from the sale of their export quota is not an income generated from the export, as no foreign exchange is earned; therefore, the transaction cannot be qualified as an 'income from export' to claim deductions under Section 80HHC of the Income Tax Act, 1961 (“Act”).

Background

The dispute relates to the two assessment years 2000-01 and 2001-02, where the Appellants-assesses engaged in manufacturing and exporting readymade garments from India, relied on the CBDT circular to claim deductions from the income earned as premium from the sale of their export quota.

The 1998 CBDT circular stated that technically, export quota premium can be equated with the items mentioned in Section 28(iiia) and (iiic) of the Act, 1961, and therefore the premium on the sale of export quota statutorily receives the same treatment as profit on the sale of import license, cash assistance and duty drawback.

Aggrieved by the Assessing Officer's (AO) decision to grant a benefit of tax exemption to the Assessees under Section 80HHC of the Act, the revenue appealed to the CIT, which in exercise of its powers under Section 263 of the Act, had revised the AO's decision and denied the benefit of tax deduction to the Assessees.

The Assessees then challenged the CIT's order to the Income Tax Appellate Tribunal (ITAT), which had allowed the Assessees' appeal, thereby restoring the AO's order of grant of tax deduction on the premium earned on sale of export quota in light of the CBDT circular.

Against the ITAT's order, the revenue carried the matter to the Delhi High Court, which had effectively allowed the revenue's appeal and set aside the ITAT's order upholding the deduction to the assessees for the income earned by them from the sale of their export quota.

Challenging the High Court's order, the assessees finally moved to the Supreme Court.

Issues

Before the Supreme Court, the following issues arose:

1. whether CBDT circular have any binding effect on the Courts?

2. Whether the CIT was justified in exercising its revisional powers under Section 263 to rectify the AO's order granting deduction benefit to the assessees?

3. Whether the premium earned by the assessees from the sale of their export quota would be categorised as their business income under Sections 28(iiia) to 28(iiie) of the Act, liable to be deducted under the Act?

Decision

Affirming the impugned findings, the judgment authored by Justice Bhatti held that since the law on the binding effect of CBDT circulars on Courts is no longer res integra, as settled by the Constitution Bench decision in CCE, Bolpur v. Ratan Melting & Wire Industries (2008), the CBDT circular treating the premium received by the assessees from the sale of their export quota as business income under Sections 28(iiia) to 28(iiie) could not bind the Courts to follow the same, when the Act says otherwise.

In effect, the Court rejected the Assessee's reliance on the CBDT circular to claim tax deduction benefit under Section 80HHC.

“The result would be that the CBDT O.M. cannot come anywhere near the transactions covered by Sections 28(iiia) to 28(iiic) of the Act, 1961. It is difficult to equate something as “business income” unless the basic traits of the transaction, namely receipt of foreign exchange, etc., are satisfied.”, the Court said.

The Court endorsed the Delhi High Court's 2012 decision in Commissioner of Income Tax v. Nagesh Knitwears P. Ltd., which held that the premium or profit on the sale of export quotas/licenses does not fall under clauses (iiia) to (iiic) of Section 28 of the Income Tax Act, 1961, and is therefore not eligible for deductions under Section 80HHC.

“…the CBDT circular has equated premium from quota sales with income under Sections 28(iiia), (iiib) and (iiic) of the Act, 1961. In Nagesh Knitwears P. Ltd. (supra), Hon'ble Mr. Justice Sanjiv Khanna, as he then was, speaking for the Bench, explained that the incidence of premium cannot be equated with the incomes covered by Sections 28(iiia) to (iiie) of the Act, 1961. The reason is legally tenable and hence does not warrant further examination… if a Court were compelled to treat an administrative CBDT Circular as binding on itself, 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.”, the Court added.

CIT's revisional powers were rightly exercised under Section 263

Regarding the exercising of the CIT's revisional powers to revise the AO's order granting tax deduction benefits to the Appellants-assesses, the Supreme Court said that the CIT's powers were legitimately exercised as both the conditions were met, i.e., the order passed by the AO was both 'erroneous' and 'prejudicial to the interests of the revenue'.

The Court reiterated that Section 263 can be invoked only when the assessment order is both "erroneous" and "prejudicial to the interests of the Revenue."

“if an Order is erroneous but not prejudicial, or prejudicial but not erroneous, this provision is unavailable. The Commissioner cannot use this power to correct every minor mistake made by an AO. An Assessment Order becomes "erroneous" if it rests on an incorrect assumption of facts, misapplies the law, violates Principles of Natural Justice, or is passed without application of mind. The phrase "Prejudicial to the Interests of the Revenue" has wide import and is not confined solely to the loss of tax. However, if an AO's erroneous Order results in the Revenue losing tax that is lawfully payable, it is considered prejudicial to its interests.”

It noted that where the Assessing Officer had failed to conduct basic inquiries, the Commissioner was justified in exercising revisional jurisdiction.

As a result, the Court declined to interfere with the High Court's findings and dismissed the appeals.

Cause Title: ORIENT CRAFTS LIMITED VERSUS COMMISSIONER OF INCOME TAX, NEW DELHI. (with connected appeals)

M/S SAMTEX FASHIONS LTD. VERSUS COMMISSIONER OF INCOME TAX, NEW DELHI. (with connected appeals)

Citation : 2026 LiveLaw (SC) 960

Click here to download judgment

Appearance:

For Appellant(s) Mr. Salil Aggarwal, Sr. Adv. Mr. Bhargava V. Desai, AOR Mr. Madhur Aggarwal, Adv. Mr. Shivam Sharma, Adv. Ms. Prakriti Rastogi, Adv. Ms. Surabhi Tuli, Adv. Mr. Uma Shankar, Adv. Mr. Utkarsh Vats, Adv. Mr. Santosh Krishnan, AOR Mr. Ashwin Joseph, Adv.

For Respondent(s) Mr. Arijit Prasad, Sr. Adv. Mr. N Venkatraman, A.S.G. (N.P.) Mr. Sudarshan Lamba, AOR Mr. V C Bharathi, Adv. Mr. Gaurav Arya, Adv. Mrs. Rashmi Malhotra, Adv. Mr. Bhuvan Kapoor, Adv. Mr. Mrigna Shekhar, Adv. Mrs. Gargi Khanna, Adv. Ms. Ankita Singh, Adv. Mr. Deepak Kumar, Adv. Mr. Gaurav Arya, Adv. Miss Madhulika Upadhyay, AOR