top of page
Search

Supreme Court Holds CBDT Circulars Bind the Revenue and Never the Courts

Writer: Kaustav Chowdhury
Kaustav Chowdhury
49 minutes ago
6 min read

Background and Facts

An assessee cannot build a deduction on a departmental memorandum that the statute does not support. The Supreme Court has restated that CBDT circulars reflect the Executive's understanding of the law, bind the officers who administer it, and do not bind a court at all. The judgment in Orient Crafts Limited v. Commissioner of Income Tax, New Delhi [Civil Appeal Nos. 143-144 of 2013, heard with Civil Appeal Nos. 137-138, 139-140 and 141-142 of 2013] carries the neutral citation 2026 INSC 1018 and was delivered on September 18, 2026.

Orient Crafts Limited is a public company engaged in the manufacture and export of readymade garments. For assessment year 2001-02 it declared income of Rs 3,97,22,789 and claimed a deduction under Section 80HHC of the Income-tax Act, 1961 of Rs 13,85,68,402. Included in the computation was Rs 73,49,341 received as premium on the sale of surplus export quota, which the company treated as local turnover and as business profit.

The Assessing Officer completed the assessment under Section 143(3) on August 13, 2003 and accepted the claim. The Commissioner then issued a notice under Section 263 on December 20, 2004, holding the assessment erroneous and prejudicial to the interests of the Revenue, and directed that ninety per cent of the quota premium be excluded under Explanation (baa) to Section 80HHC. The company's answer rested on a Central Board of Direct Taxes Office Memorandum dated February 23, 1998, which treated export quota premium as equivalent to the export incentives specified in Sections 28(iiia) to 28(iiic).

Key Legal Issue

Two questions arose together. The first was whether premium on the sale of export quota falls within Sections 28(iiia) to 28(iiic) so as to attract the benefit of Section 80HHC. The second, and the one with reach beyond tax, was whether an Office Memorandum of the Board that says it does can be given effect where the statute says otherwise.

The Supreme Court's Ruling

A Bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria dismissed the appeals and upheld the judgment of the Delhi High Court. The deduction was not available, and the Office Memorandum could not make it available.

A Circular Binds the Revenue, Not the Court

The Court held that

"administrative Circulars and clarifications issued by the Central or State Governments merely reflect the Executive's understanding of statutory provisions", and that such instruments are not binding on the High Courts or on the Supreme Court.

The statutory basis for the first half of that proposition is Section 119 of the Income-tax Act, 1961. Sub-section (1) empowers the Board to issue orders, instructions and directions to other income-tax authorities as it thinks fit for the proper administration of the Act, and provides that those authorities and all other persons employed in the execution of the Act shall observe and follow them. The provision is addressed to the administration. It says nothing about courts, and the provisos to it confirm the limits of the power by forbidding the Board from directing a particular assessment or from interfering with the discretion of the appellate Commissioners.

The consequence the Court drew is worth stating in its own words:

"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". Were it otherwise, the Court observed, the judiciary would have to follow an administrative memorandum even where it directly violates an enactment of Parliament.

A Legal Fiction Cannot Be Built Against the Statute

On the substantive question the Court held that quota permits allocated by the Apparel Export Promotion Council are not import licences under the Imports (Control) Order, 1955. They are general commercial rights, and the premium realised on transferring them falls residually within Section 28(iv) as the value of a benefit arising from business rather than within the specified incentives in Sections 28(iiia) to 28(iiic).

The Office Memorandum, by equating the premium with those specified items, created a legal fiction. The Court held that

"the application of a legal fiction contrary to the explicit statutory position is impermissible in law". A fiction can be created by the legislature. It cannot be created by the Board and then used to enlarge a deduction that Parliament confined to named categories.

Precedent Relied Upon

The Bench applied the Constitution Bench decision in Commissioner of Central Excise, Bolpur v. Ratan Melting and Wire Industries, (2008) 13 SCC 1, which drew the same line for excise. Departmental circulars and instructions issued by the Central Board are binding on the subordinate authorities functioning under the respective statutes, but once a constitutional court has declared the law, no court or tribunal may prefer the circular to that declaration. The present judgment carries that principle into the direct tax context without qualification.

Practice Notes

In practice, the judgment affects how a circular should be used in argument rather than whether it can be used at all:

  • Know which forum you are in: Before the Assessing Officer and the appellate Commissioner a Board circular is an instrument the authority is required to observe under Section 119. Before a High Court or the Supreme Court it is evidence of the Executive's view and nothing more.

  • Do not let a circular carry the whole case: A claim that survives only because a memorandum says so is exposed the moment the matter reaches a court. Build the argument on the text of the charging and computation provisions first, and treat the circular as support.

  • Watch for fictions: A circular that equates one statutory category with another is doing legislative work. That is the species of clarification most likely to fail, because the statute has already named the categories it intends to cover.

  • For the Revenue: The proposition cuts in one direction only as to courts, but the binding effect on departmental authorities under Section 119 remains. An officer who departs from a subsisting circular still has to explain the departure.

  • On Section 263 exposure: Where a deduction is admitted at assessment on the strength of a circular, the assessment remains open to revision. The acceptance of a claim by the Assessing Officer is not a safeguard when the underlying construction is unsound.

Key Provisions Discussed

  • Section 80HHC of the Income-tax Act, 1961: Deduction in respect of profits retained for export business, with Explanation (baa) governing the exclusion of specified receipts from profits of the business.

  • Sections 28(iiia) to 28(iiic) of the Income-tax Act, 1961: Specified export incentives chargeable as profits and gains of business or profession.

  • Section 28(iv) of the Income-tax Act, 1961: The value of any benefit or perquisite arising from business, being the residual head into which the quota premium was held to fall.

  • Section 119 of the Income-tax Act, 1961: Power of the Board to issue orders, instructions and directions to income-tax authorities, which those authorities and persons employed in the execution of the Act shall observe and follow, subject to provisos protecting individual assessments and appellate discretion.

  • Section 143(3) of the Income-tax Act, 1961: Assessment on scrutiny.

  • Section 263 of the Income-tax Act, 1961: Revision by the Commissioner of an order that is erroneous and prejudicial to the interests of the Revenue.

Case Details

  • Case: Orient Crafts Limited v. Commissioner of Income Tax, New Delhi

  • Case No: Civil Appeal Nos. 143-144 of 2013, with Civil Appeal Nos. 137-138, 139-140 and 141-142 of 2013

  • Citation: 2026 INSC 1018

  • Court: Supreme Court of India

  • Date of Judgment: September 18, 2026

  • Bench: Justice S.V.N. Bhatti and Justice N.V. Anjaria

  • Outcome: Appeals dismissed. The judgment of the Delhi High Court rejecting the Section 80HHC claim on export quota premium was upheld.

Sources and References


Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.

Comments

bottom of page