CBDT Circulars Cannot Override Income Tax Act, Not Binding on Courts: Supreme Court

The Supreme Court has held that administrative circulars issued by the Central Board of Direct Taxes (CBDT) cannot override the statutory text of the Income Tax Act, 1961, and are not binding on constitutional courts while interpreting the law.

The Apex Court made the observation while holding that the premium received on the sale of an export quota does not fall within the scope of Section 28(iiia) to (iiic) of the Income Tax Act, as it does not have the character of export incentive income contemplated under those provisions.

A Bench of Justices S V Bhatti and N V Anjaria said the premium received from the sale of an export quota cannot be equated with profits on the sale of import licences, cash assistance or duty drawback referred to under Section 28(iiia) to (iiic).

Sections 28(iiia) to (iiic) of the Income Tax Act specify that profits from import licenses, export cash assistance, and duty drawbacks are taxable as business income.

According to the court, premium received from the sale of an export quota is an incidental business advantage falling within the residuary ambit of Section 28(iv), rather than a direct incentive for export activity.

Why did Court reject assessee's reliance on CBDT circular?

Court noted that CBDT circulars and instructions are binding only on subordinate executive authorities functioning under the Income Tax Act.

"They represent the Executive's understanding of statutory provisions and cannot be used to impose tax burdens contrary to the Statute or to prevent courts from adjudicating the true legal meaning of a provision," the Bench said.

The observation assumes significance because the assessee had relied on a CBDT Office Memorandum/Circular dated February 23, 1998, which stated that, technically, export quota premium could be equated with the items mentioned in Section 28(iiia) to (iiic) and could therefore receive similar tax treatment.

The Supreme Court, however, held that such an administrative understanding could not determine the meaning or scope of the statutory provisions.

What was the dispute over the export quota premium?

The case arose from the assessment of Orient Crafts Limited, a public limited company incorporated under the Companies Act, 1956, and engaged in manufacturing and exporting readymade garments from India.

The dispute related to assessment years 2000-01 and 2001-02 and concerned the assessee's claim for deduction under Section 80HHC of the Income Tax Act, read with Sections 28(iiia) to (iiic).

For assessment year 2001-02, the assessee filed its return in 2001 declaring an income of Rs 3,97,22,789 and claimed a deduction of Rs 13,85,68,402 under Section 80HHC.

In its audited report filed under Section 80HHC(4), the assessee disclosed that it had received Rs 73,49,341 as premium on the sale of export quota.

The assessee treated this premium as part of its total turnover and included it in the "profits of business" computed under the head "Profits and gains of business or profession".

The assessee relied on the February 23, 1998 CBDT circular to contend that the premium on the sale of export quota should receive the same treatment as profits on the sale of import licences, cash assistance and duty drawback.

How did the dispute reach Supreme Court?

A fresh assessment order was passed in 2006, redetermining the taxable income at Rs 4,56,44,810, along with ancillary and incidental levies.

The assessee challenged the assessment before the Commissioner of Income Tax (CIT) and the Income Tax Appellate Tribunal (ITAT), which allowed its appeals.

The Revenue then challenged the ITAT's orders before the Delhi High Court, which set aside the ITAT's orders.

The matter eventually reached the Supreme Court in appeals filed by Orient Crafts Limited.

The principal question before the Apex Court was whether the CIT had correctly exercised revisional jurisdiction under Section 263 of the Income Tax Act and whether the Delhi High Court was justified in reversing the findings of the ITAT.

When can Section 263 be invoked?

The Supreme Court also examined the scope of the revisional power under Section 263 of the Income Tax Act.

Section 263 of the Income Tax Act gives the Principal Commissioner or Commissioner of Income Tax (PCIT/CIT) the power to review and revise assessment orders passed by lower tax authorities.

It said this jurisdiction can be invoked where an assessment order is both erroneous and prejudicial to the interests of the Revenue.

"An order is erroneous if it rests on an incorrect assumption of facts, misapplies the law, or is passed without application of mind, even if based on an administrative circular inconsistent with the statute," the Bench said.

Court therefore upheld the CIT's power under Section 263 to revise assessment orders where the Assessing Officer failed to apply the correct statutory criteria while dealing with tax incentives.

After considering the nature of the dispute, the Bench said it was not inclined to interfere with the Delhi High Court's judgment or remand the matter for reconsideration.

"We are not inclined to interfere with the impugned judgment and are not keen to remand the matter to the high court for reconsideration, particularly after appreciating the nature of the disputes between the assessee and the revenue," the Bench said while dismissing the appeals.

Case Title: Orient Crafts Limited Vs Commissioner of Income Tax, New Delhi

Bench: Justices S V N Bhatti and N V Anjaria 

Date of Judgment: September 18, 2026