SC Says CBDT Circular Not Binding in Courts, Rejects Section 80HHC Claim

The Supreme Court has dismissed appeals by taxpayers seeking deductions under Section 80HHC of the Income Tax Act, 1961, on premiums earned from selling export quotas, holding that such income could not be treated as export income when no foreign exchange was received. 

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The court also reiterated that circulars issued by the Central Board of Direct Taxes (CBDT) do not bind courts when their interpretation is inconsistent with the provisions of the Income Tax Act. 

A bench comprising Justices SVN Bhatti and NV Anjaria considered the matter, which involved companies engaged in manufacturing and exporting readymade garments. The dispute related to assessment years 2000-01 and 2001-02. 

Export quota premium not treated as export income 

Whether premiums paid for export quotas can be eligible for deductions as per Section 80HHC formed the crux of the case. 

Taxpayers in question were relying upon the CBDT circular issued in 1998. As per the circular, premium earned out of export quotas could be treated as income under specific heads of income covered under Section 28 of Income Tax Act. 

However, the Supreme Court ruled that income out of sales of export quotas could not be considered as export income as per Section 80HHC since there was no foreign exchange involved in such transactions. 

The cases related to Orient Crafts Ltd v Commissioner of Income Tax, New Delhi and M/s Samtex Fashions Ltd v Commissioner of Income Tax, New Delhi, and related appeals. 

Dispute moved through multiple tax forums 

The dispute had traveled through different levels before reaching the Supreme Court. 

At first instance, Assessing Officer allowed deduction claimed by the taxpayers. Thereafter, Commissioner of Income Tax used his revisional jurisdiction under Section 263 and made amendment in the assessment order. 

The taxpayers then received relief from the Income Tax Appellate Tribunal, which restored the deduction after relying on the CBDT circular. 

The revenue challenged that decision before the Delhi High Court. The High Court allowed the revenue’s appeal and set aside the ITAT order, prompting the taxpayers to approach the Supreme Court. 

CBDT circular cannot override the law 

In considering the appeals, the Supreme Court reiterated the position that a departmental circular cannot bind a court where the interpretation contained in it conflicts with the statute. 

The court relied on the Constitution Bench ruling in CCE, Bolpur v Ratan Melting & Wire Industries from 2008, which had dealt with the question of whether departmental circulars are binding on courts. 

It also endorsed the Delhi High Court’s 2012 ruling in Commissioner of Income Tax v Nagesh Knitwears P Ltd. 

That ruling had held that premium or profit generated from selling export quotas or licences did not fall within the relevant provisions of Section 28 and consequently was not eligible for deduction under Section 80HHC. 

Supreme Court backs CIT’s use of Section 263 

The Supreme Court also considered whether the Commissioner of Income Tax was justified in using the revisional powers available under Section 263. 

The court upheld the exercise of those powers in the present case. 

It reiterated that an assessment order can be revised under Section 263 when two conditions are met: the order must be erroneous and it must be prejudicial to the interests of the revenue. 

An assessment can be considered erroneous in circumstances including an incorrect assumption of facts, an incorrect application of law or a lack of proper application of mind. 

The court also noted that the Assessing Officer had not carried out basic inquiries in the matter, which supported the Commissioner’s decision to intervene. 

With these findings, the Supreme Court declined to interfere with the Delhi High Court’s decision and dismissed the taxpayers’ appeals.