ORIENT CRAFTS LIMITED v. COMMISSIONER OF INCOME TAX, NEW DELHI.

2026 INSC 1018 NON-REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S). 143-144 OF 2013

ORIENT CRAFTS LIMITED … APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX, NEW DELHI. … RESPONDENT(S) WITH CIVIL APPEAL NO(S). 139-140 OF 2013

WITH CIVIL APPEAL NO(S). 141-142 OF 2013

WITH CIVIL APPEAL NO(S). 137-138 OF 2013

JUDGMENT

S.V.N. BHATTI, J.

1. The Civil Appeals are at the instance of Orient Crafts Limited/Assessee

and arise from the common Orders dated 01.06.2012 and 07.09.2012 in I.T.A.

Nos. 993 of 2008 and the batch in the High Court of Delhi at New Delhi. The

details of the Appeals are tabulated hereunder:

Assessment Civil Appeal Nos. Year (AY) 2000-01 141-142/2013 & Signature Not Verified 137-138/2013 Digitally signed by SNEHA DAS 2001-02 139-140/2013 Date: 2026.09.18 18:21:49 IST Reason: & 143-144/2013

2. The Assessee is a Public Limited Company incorporated under the

Companies Act, 1956, engaged in manufacturing and exporting readymade

garments from India. In the subject Appeals, as noted above, the dispute

relates to the Assessment Years 2000-01 and 2001-02. The issue between the

Assessee and the Revenue arises under Section 80HHC read with Sections

28(iiia) to (iiic) of the Income Tax Act, 1961 (“the Act, 1961”). However, the

arguments have been confined to Section 263 of the Act, 1961. For

convenience, we refer to the circumstances relating to A.Y. 2001-02.

3. The Assessee filed a Return on 31.10.2001 for AY 2001-02, declaring

income of Rs.3,97,22,789/- (Rupees Three Crores Ninety-Seven Lakhs

Twenty-Two Thousand Seven Hundred and Eighty-Nine). The Assessee

claimed a deduction under Section 80HHC of the Act, 1961, amounting to

Rs. 13,85,68,402/- (Rupees Thirteen Crores Eighty-Five Lakhs Sixty-Eight

Thousand Four Hundred and Two). The audited Report under Section

80HHC(4) of the Act, 1961, filed by the Assessee, states that the Assessee

received Rs. 73,49,341/- (Rupees Seventy-Three Lakhs Forty-Nine Thousand

Three Hundred and Forty-One) as premium on the sale of export quota. The

Assessee claims that the premium on the sale of export quota was included

in the total turnover shown as local turnover and treated as “profits of

business” computed under the head “Profits and gains of business or

profession”.

3.1 On 17.06.2003, the Assessing Officer (“AO”) issued a Notice under

Section 143(2) of the Act, 1961, accompanied by a questionnaire. By Order

dated 13.08.2003, the AO completed the assessment under Section 143(3) of

the Act, 1961. Accordingly, the Assessee contends that the claim for deduction

under Section 80HHC has been duly examined and accepted by the AO. The

Assessee relies on the CBDT Office Memorandum/Circular dated 23.02.1998

(“CBDT O.M.”), which states 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.

4. The C.I.T. (Delhi-V) issued a Notice under Section 263 of the Act, 1961,

on 20.12.2004, calling upon the Assessee to show cause why the assessment

dated 13.08.2003 should not be reopened and reassessed. According to the

C.I.T., the Order dated 13.08.2003 was erroneous and prejudicial to the

interest of the Revenue, as the AO 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/- (Rupees Fifty One Lakh Twenty Three

Thousand One Hundred Fifty One). The Revenue contends that the export

quota premium receipt must be reduced by 90% under Explanation (baa) to

Section 80HHC, as other receipts are not eligible, and that the Assessee is not

entitled to a proportionate adjustment under the proviso to Section 80HHC(iii)

of the Act, 1961. According to the Revenue, the reason in law appears to be

that export quota is not explicitly enumerated in Section 28(iiia) to 28(iiic) of

the Act, 1961. The Assessee replies to this objection by relying on the CBDT

Office Memorandum (O.M.), which is binding on the Officers of the

Department. On receipt of the reply dated 15.01.2005, the C.I.T., vide Order

dated 01.02.2005, set aside the Order of Assessment dated 13.08.2003 and

directed the AO to undertake a fresh assessment, treating the premium on

quota sale proceeds as “other receipts” under Explanation (baa) to Section

80HHC of the Act, 1961.

5. On 24.02.2006, the AO passed a fresh Assessment Order,

redetermining the taxable income at Rs.4,56,44,810/- (Rupees Four Crores

Fifty-Six Lakhs Forty-Four Thousand Eight Hundred Ten), with ancillary and

incidental levies. The Assessee carried the matter in Appeal before the C.I.T.

Appeals-XVI, and on 31.07.2006, the Assessment Order dated 24.02.2006

was set aside. The Assessee, challenging the C.I.T. Order dated 01.02.2005,

made under Section 263 of the Act, 1961, also initiated parallel proceedings

by filing I.T.A. Nos. 2210-2211/Del/2005 for AYs 2000-01 and 2001-02

before the Income Tax Appellate Tribunal (ITAT). While matters stood thus,

the Revenue filed I.T.A. Nos. 3204-3205/D/2006 before the ITAT, Delhi,

challenging the Order dated 31.07.2006 of the C.I.T. On 07.09.2007, the ITAT

allowed the Appeals in I.T.A. Nos. 2210-2211/Del/2005 filed by the Assessee,

and on 15.10.2007, Appeals filed by the Revenue in I.T.A. Nos. 3204-

3205/D/2006 were dismissed, in view of the Tribunal's decision in the

connected Appeals.

6. The Revenue carried the matters on appeal under Section 260A of the

Act, 1961, before the High Court of Delhi. By the impugned Judgment, the

High Court set aside the Orders of ITAT dated 07.09.2007 and 15.10.2007.

The gist of the consideration and conclusion in the impugned Judgment is

summarised hereunder:

A. On Nature and Source of Receipt: Consideration received from the sale

of export quota permits is not income “derived” from exports. The immediate

and proximate source of the income is the domestic transaction with a third

party in India to whom the permit was sold.

B. On the Non-Applicability of Sections 28 (iiia) to (iiie) of the Act, 1961:

Quota permits are not issued under the Imports (Control) Order, 1955, so

Section 28(iiia) is inapplicable. Further, Quota earnings are not cash

assistance or duty drawback, so Sections 28(iiib) and 28(iiic) are inapplicable.

Quotas are entirely distinct from Duty Entitlement Pass Book (DEPB)

entitlements under Section 28(iiid) and Duty Free replenishment certificates

(DFRC) under Section 28(iiie). Hence, Quota premium constitutes a general

business benefit falling within the residuary ambit of Section 28(iv) of the Act,

C. On the Status and Limits of CBDT O.M.: The High Court rejected the

Revenue’s argument that the CBDT O.M. was not a Circular under Section

119 of the Act, 1961, and applied the Constitution Bench Judgment of this

Court in CCE, Bolpur v. Ratan Melting & Wire Industries1, holding that

circulars contrary to statutory provisions have no existence in law and cannot

prevail over judicial interpretation in pending matters before courts. The

Revenue may challenge an erroneous interpretation before the appellate

courts, notwithstanding any beneficial administrative circulars in favour of

the Assessee.

D. On Construction of Provisos to Section 80HHC(3): The Circular, at best,

permits treating quota profits as business profits exigible under Explanation

(baa) to Section 80HHC of the Act, 1961, which accounts for the 90%

exclusion. The first proviso to Section 80HHC(3) of the Act, 1961, strictly and

specifically refers only to sums referred to in Sections 28(iiia), (iiib), and (iiic)

of the Act, 1961. The provisos contain specific statutory compliance

conditions, such as the third proviso's requirement that turnover exceed

Rs. 10 crores, which export quota premiums cannot satisfy, either logically or

practically. Because the provisos do not include residuary business income,

the benefits thereunder cannot be extended by analogy to the CBDT O.M.

E. On Revisional Jurisdiction of C.I.T.: C.I.T. correctly exercised its powers

under Section 263 because the AO failed to conduct basic inquiries or apply

the statutory criteria for export incentives, thereby rendering the Order

erroneous and prejudicial to the interests of the Revenue within the meaning

of Section 263 of the Act, 1961.

7. Hence, the Civil Appeals at the instance of the Assessee.

8. Learned Senior Counsel, Mr. Salil Aggarwal, has primarily submitted

that the High Court failed to consider the view taken by the ITAT in concluding

that the C.I.T. had erroneously exercised jurisdiction under Section 263 of the

Act, 1961. With considerable force, the learned Senior Counsel argued that,

in the case at hand, the assessment was completed under Section 143(3) of

the Act, 1961. The CBDT O.M. is binding on the AO. There is a distinction

between the discretion available to the AO in obeying the CBDT O.M. and the

discretion exercised by the Courts of Law. To that end, the learned Senior 6

Counsel submits that, in passing the Assessment Order dated 13.08.2003,

the AO followed a binding Circular and gave due effect to the receipt of

premium on quota sales under Section 80HHC of the Act, 1961. Under

Section 263 of the Act, 1961, the C.I.T. exercises jurisdiction only if the

requirements of Section 263 are satisfied, namely, that the case is erroneous

and prejudicial to the Revenue. By a catena of decisions, it is well established

that, on a conjoint reading of “erroneous” and “prejudicial to the Revenue,”

the C.I.T. has jurisdiction to reopen an Assessment. In the circumstances of

the case, the exercise of jurisdiction under Section 263 of the Act, 1961 is

illegal. The ITAT considered, in sufficient detail, the C.I.T.’s illegal exercise of

revisional jurisdiction. In an Appeal filed under Section 260A of the Act, 1961

by the Revenue, the High Court reversed the findings of the Tribunal without

sufficient reasoning. In the batch of Appeals, the learned Senior Counsel

emphasised the unsuitable attempt by the Revenue to challenge the Order

dated 01.02.2005 of C.I.T. under Section 263 of the Act, 1961 by relying on

the decisions reported in C.I.T., Ludhiana v. Max India Ltd,2 C.I.T. v. Amitabh

Bachhan3, Malabar Industries Co. Ltd. v. CIT4 and Ratan Melting (supra).

9. Learned Senior Counsel, Mr. Arijit Prasad, argues that the AO has

illegally applied or treated the entitlement under Section 80HHC of the Act,

1961. Section 80HHC is not read in conjunction with Sections 28(iiia) to (iiic)

of the Act, 1961, but is read along with the applicable Explanation (baa) to

Section 80HHC. In fact, there is a difference between the direct benefit on

utilisation of export quota by a manufacturer and the receipt of premium on

sale of quota. The Tribunal committed a serious error by relying on the CBDT

O.M., as it runs inconsistent with the language of both the Sections. The

learned Senior Counsel contends that the impugned Judgment cannot be

assailed on the ground of being bereft of reasons, on the view taken by the

Tribunal vis-à-vis the Order dated 01.02.2005 of the Commissioner under

Section 263 of the Act, 1961. He relies on the very impugned Judgment and

argues that, at this stage, this argument is unavailable and that there are no

merits in the Appeal, and prays for dismissal of the same.

10. We have heard the learned Senior Counsel and perused the record.

11. The short point for decision is whether the exercise of jurisdiction by

the C.I.T. under Section 263 of the Act, 1961, is justifiable and whether the

impugned Judgment reversed the findings of the ITAT by recording its own

view.

12. The jurisdiction of the Commissioner under Section 263 of the Act,

1961, is well-defined by a catena of decisions of this Court, and for continuity,

we briefly summarise the same:

A. C.I.T. v. Max Limited (supra): This Court examined the validity of a

Commissioner's Revision Order passed under Section 263 of the Act, 1961.

The power of revision under Section 263 requires that the phrase "prejudicial

to the interest of the revenue" be read in conjunction with the expression

"erroneous" order. Every loss of revenue resulting from a course adopted by

an AO cannot automatically be treated as prejudicial to the interest of the

Revenue. Where two views are possible and the AO has taken one with which

the Commissioner disagrees, the Order cannot be treated as an erroneous

Order prejudicial to the interest of the revenue. The only exception is if the

view taken by the AO is entirely unsustainable in law. The validity of a

Commissioner's revision order must be evaluated based on the position of law

exactly as it stood on the date the Order was passed. A subsequent statutory

amendment, even if applied with retrospective effect, cannot be used to attract

the provisions of Section 263 if the AO’s original stance was inherently

possible at the relevant time.

B. C.I.T. v. Amitabh Bachhan (supra). This Court held that Section 263 of

the Act, 1961 requires the concurrent presence of two preconditions before

revisional jurisdiction can be exercised. The Assessment Order passed by the

primary Authority must be erroneous and prejudicial to the interests of the

Revenue. Unlike the power to reopen an Assessment under Section 147,

Section 263 does not require a prior Show-Cause Notice detailing the specific

grounds for revision as a condition precedent. The statutory requirement of

Section 263 is that the assessee must be afforded a reasonable opportunity

of being heard, which is implicit in observing the Principles of Natural Justice.

The Commissioner is not foreclosed from considering new issues and is not

confined to the terms of the initial notice, provided the Assessee has a full

opportunity to controvert the new facts and explain the circumstances before

a final decision is made. No breach of natural justice occurs if the

Commissioner records findings beyond the Show-Cause Notice, provided

those findings are based on the existing assessment record and the Assessee

had the opportunity to contest the basis during the revisional proceedings.

C. Malabar Industries Co. (supra): This Court held that for the

Commissioner to exercise suo motu jurisdiction under Section 263(1), two

strict prerequisites must be met: the AO’s Order must be "erroneous" and

"prejudicial to the interests of the Revenue". Both conditions must co-exist; 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.

13. Let us revert to the circumstances of the case. The impugned Judgment

first considered the issue arising under Sections 28(iiia) to 28(iiie) of the Act,

1961. The summary of the view taken by the High Court is noted by us in the

preceding paragraphs and is not reiterated for brevity. The High Court

referred to the substantial questions on which the Appeal has been admitted,

as stated. In the impugned Judgment, the High Court considered a question

regarding the correctness of the ITAT's view on the Commissioner's decision

under Section 263 of the Act. The High Court relied on the decision in ITO v.

D.G. Housing Projects Limited5, dated 01.03.2012 and juxtaposed the view of

the Commissioner and answered the issue in favour of the Revenue and

against the Assessee.

14. The impugned Judgment has taken note of the binding nature of the

CBDT O.M. for Revenue officers and of the limitations before a Court of Law.

The consideration of the issue has proceeded on the expression in the CBDT

Circular, namely, “technically, export quota premium can be equated with the

items mentioned in Section 28(iiia) (profit on sale of import licenses) section

28(iiic) (duty drawback)”. The fiction created by this expression has not been

approved by the High Court in interpreting the applicable Sections. The view

taken on all the relevant issues is available and tenable.

15. For the limited purpose of assessing whether the impugned Judgment

completely ignored the Tribunal's view on the C.I.T.'s decision under Section

263 of the Act, 1961, we have examined the C.I.T.'s Order, the ITAT's Order,

and the impugned Judgment. We are of the view that, in considering the scope

and ambit of Section 263 of the Act, 1961, the High Court noted the fact in

issue between the Assessee and the Revenue and then recorded a finding that

the C.I.T. had rightly exercised the revisional jurisdiction under Section 263

of the Act, 1961. We are not inclined to interfere with the impugned Judgment

and are not keen to remand the matter to the High Court for reconsideration,

5 ITA No. 179 of 2011.

particularly after appreciating the nature of the disputes between the

Assessee and the Revenue. The Appeals fail and are dismissed.

16. The accompanying Appeals, being identical and for the same reasons,

are dismissed accordingly.

17. Pending application(s), if any, stand disposed of accordingly. No costs.

.…………………………J. [S.V.N. BHATTI]

.…………………………J. [N. V. ANJARIA]

New Delhi; September 18, 2026.

NON-REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 11063 OF 2017

M/S SAMTEX FASHIONS LTD. … APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX, NEW DELHI. … RESPONDENT(S)

WITH CIVIL APPEAL NO. 12449 OF 2017

JUDGMENT

S.V.N. BHATTI, J.

CIVIL APPEAL NOS. 11063 AND 12449 OF 2017

1. The Assessee is the Appellant in both the Appeals. The Civil Appeals

arise from the Order dated 23.05.2017 in ITA No. 32 of 2005 and ITA No. 1057

of 2008, passed by the High Court of Delhi at New Delhi. The controversy in

the subject Appeals pertains to the Returns filed by the Assessee for the

Assessment Years (“A.Y.”) 2000-2001 and 2001-2002. The Appeals have been

tagged and heard with Civil Appeal Nos. 143-144 of 2013 and the batch. For

convenience, and noting the distinguishing considerations between the

clubbed matters, we find it convenient to pronounce separate Judgments in

the bunch of Appeals heard together. To complete the narrative, we observe

that in Civil Appeal Nos. 143-144 of 2013 and batch, though the substantive

issue between the Revenue and the Assessee is under Sections 28(iiia) to

28(iiie) and 80HHC (Deduction in respect of profits retained for export

business) of the Income Tax Act, 1961 (“The Act, 1961”), the arguments in

Civil Appeal Nos. 143-144 of 2013 and batch have been advanced on the

exercise of power by the C.I.T. under Section 263 of the Act, 1961. Further,

the impugned judgments refer to and rely upon the decision of the Delhi High

Court in CIT v. Nagesh Knitwears P. Ltd.1, which considered and decided

issues arising under both Section 80HHC and Section 263 of the Act, 1961.

Vide a separate judgment of the even date in Civil Appeal Nos. 143-144 of

2014 and batch, we affirm the view taken in Nagesh Knitwears P. Ltd. (supra)

on the exercise of power by the C.I.T. under Section 263 of the Act, 1961.

Therefore, the issue raised by the Assessee under Sections 28(iiia) to 28(iiie)

and 80HHC of the Act, 1961, in these Appeals is examined by the present

Judgment.

THE CIVIL APPEAL NO. 11063 OF 2017

2. The circumstances set out in Civil Appeal No. 11063 of 2017 are

referred to and relied upon for convenience and to dispose of both Appeals.

3. On 21.10.2001, the Assessee filed the Return for AY 2001-02. The

Assessee declared Rs. 90,43,061/- (Ninety Lakhs Forty-Three Thousand and

Sixty-One) towards proceeds from the sale of export quota and Rs.

16,72,286/- (Sixteen Lakhs Seventy-Two Thousand Two Hundred and Eighty-

Six) towards interest earned on the margin money deposit. The Assessee

claimed a deduction under Section 80HHC of the Act, 1961. The Assessing

1 (2012) 345 ITR 135.

Officer (Assistant Commissioner of Income Tax, Central Circle-6, New Delhi)

(“AO”) under Section 143(3) of the Act, 1961, on 24.03.2004, rejected the

claim under Section 80HHC of the Act, 1961, and assessed the total taxable

income of the Assessee at Rs. 1,07,15,350/- (One Crore Seven Lakh Fifteen

Thousand Three Hundred and Fifty). The AO recorded the reasons for

rejecting the deduction of both the sums claimed by the Assessee, and the

reasoning of the AO is summarised as follows: -

A. On Sale of Export Quota: Section 10A of the Act, 1961 applies strictly

to profits and gains “derived by” an industrial undertaking from the export of

articles or things. The export quota entitlements were granted under the

Garment Export Entitlement Policy, based on past export performance.

Monetising such quotas by selling them to third parties did not constitute

export activity of the industrial undertaking. While relying on this Court’s

Judgment in CIT v. Sterling Foods2, it held that quota sale income had only

an incidental, commercial connection rather than a direct nexus with the

industrial undertaking. It rejected the assessee’s alternative computation

under Section 10A(4) of the Act, 1961, noting that because the Assessee

exported 100% of its manufactured goods and had no domestic sales, the

statutory proportional formula did not apply.

B. On Interest earned on Margin Money: The interest earned on fixed

deposits pledged with banks to secure credit facilities had no direct nexus to

the undertaking's manufacturing and export activities. It reclassified the

interest receipts as "Income from Other Sources" under Section 56 rather than

2 (1999) 237 ITR 579.

as business profits under Section 28, relying on CIT v. Pandyan Chemicals

Ltd.3, North East Gases Pvt. Ltd. v. CIT 4, and CIT v. Paras Oil Extraction Ltd.5

4. The Assessee, assailing the Order dated 24.03.2004, filed Appeal No.

174/2004-05 before the C.I.T. (Appeals)-III (“the CIT(A)”). On 13.02.2006, the

CIT(A) allowed the Assessee's Appeal, holding that quota-sale proceeds are

deductible under Section 80HHC of the Act, 1961, and that interest on margin

money is exempt under Section 10A of the Act, 1961, and allowed both claims

in full. The findings of the CIT(A) are as follows:

A. On Sale of Export Quota: The CIT(A) relied on the CBDT

Instruction/Office Memorandum dated 23.02.1998 (“CBDT O.M.”), which

provided that the premium on the transfer of export quotas is equated with

export incentives under Sections 28(iiia), (iiib), and (iiic), i.e., profits on the

sale of import licences, cash assistance, and duty drawback of the Act, 1961.

Where income is considered for exemption under Section 10A, then it is

eligible for deduction under Section 80HHC because Section 10A(4)(iii) omits

Section 80HHC from the list of prohibited Chapter VI-A deductions under the

Act, 1961. Reliance is placed on CIT v. Mahalaxmi Textile Mills Ltd.6 and CIT

v. P. Surendra Prabhu7 to hold that an Assessee is entitled to relief under an

alternative eligible provision if denied under another. The ruling in IPCA

Laboratory Ltd. v. DCIT8 was superseded by the Taxation Laws (Amendment)

Act, 2005 (“Act 55 of 2005”) with retrospective effect from 01.04.1992,

3 (1998) 233 ITR 497. 4 (1996) 220 ITR 372. 5 (1998) 230 ITR 266. 6 (1967) 66 ITR 710. 7 (2005) 279 ITR 402. 8 (2004) 266 ITR 521.

permitting 90% incentive additions even where business profits resulted in a

loss. Because the Assessee’s entire turnover was export turnover, the full

quota amount of Rs. 90,43,061/- was deductible under Section 80HHC, and

the addition was deleted.

B. On Interest on Margin Money: The ITAT’s decision in the Assessee's own

case for AY 2000–01 (ITA No. 4803/Del/03) was followed to endorse the

principle that placing fixed deposits was a mandatory condition precedent

imposed by the lending bank to provide operational credit facilities for

running the export unit. The fixed deposits were merely the “foster mother” of

the interest income, whereas the “real mother” was the industrial undertaking

itself. Hence, the interest income has a direct nexus with the industrial

undertaking and qualifies for exemption under Section 10A of the Act, 1961.

Accordingly, the addition of Rs. 16,72,286/- made by the AO is reversed.

5. The Revenue filed ITA Nos. 1625-1627/DEL/2006, and on 15.05.2007,

the said Appeals filed by the Revenue were dismissed. The Tribunal's view is

stated as follows: -

A. On Sale of Export Quota: The Tribunal affirmed the CIT(A)'s finding that

the sale of export quota is analogous to the sale of import licences and is

accorded identical statutory treatment under Section 28 read with Section

80HHC of the Act, 1961. It upheld the view that the retrospective amendment

by Act 55 of 2005 entitled the Assessee to deductions under Section 80HHC

of the Act, 1961 in respect of export incentives.

B. On Interest on Margin Money: Following its own precedent in the

Assessee's case for AY 2000–01, the Tribunal affirmed the CIT(A)'s finding that

interest earned on margin money deposits had a direct operational nexus with

the business of the industrial undertaking. Accordingly, it upheld the

Assessee's alternate eligibility to claim a deduction under Section 80HHC and

dismissed the Revenue's Appeal.

6. Under Section 260A of the Act, 1961, the Revenue filed ITA No. 1057 of

2008 before the High Court of Delhi. The Appeal was admitted on the following

substantial questions of law: -

“Whether ITAT was correct in law in deleting the addition made by the Assessing Officer by disallowing Assessee’s claim under Section 10A of the Act out of income earned on sale of export/import quota holding that the assessee was alternatively entitled to deduction under Section 80HHC of the Act? Whether ITAT was correct in law in deleting the addition made by the Assessing Officer by disallowing Assessee’s claim under Section 10A of the Act on interest on margin money by holding that the assessee was alternatively entitled to deduction under Section 80HHC of the Act?”

7. The impugned Judgment, referring to the decisions in CIT v. Nagesh

Knitwears P. Ltd.(supra), CIT v. M/s Mereena Creations9 and CIT v. Shri Ram

Honda Power Equip10, answered the questions in favour of the Revenue and

against the Assessee.

8. Hence, the Civil Appeals.

9. Mr. Santosh Krishnan, learned Counsel for the Assessee, argues that

the Assessee's case has been rejected by reference to Nagesh Knitwears P. Ltd.

(supra). Therefore, the Assessee must assail the reasoning in Nagesh

Knitwears P. Ltd. (supra) to substantiate the deductions claimed under

Section 80HHC of the Act, 1961. The arguments are confined to the deduction

claimed under Section 80HHC, amounting to Rs.90,43,061/-.

9.1 The CBDT O.M. provides that a quota sale is treated as profit on the

sale of an import licence, cash assistance, and duty drawback, as per the

items in Section 28(iiia), (iiib), and (iiic) of the Act, 1961. The export quota the

Assessee received from the Apparels Export Promotion Council (“AEPC”) is

transferable. The Assessee transferred the available surplus quota and

realised a premium. By operation of the CBDT O.M., the premium is treated

as eligible for deduction under Section 80HHC of the Act, 1961, in accordance

with the description in Section 28(iiia) to (iiic). The CBDT O.M. is clothed with

Section 119 of the Act, 1961, and binds the Department. A reading of Nagesh

Knitwears P. Ltd. (supra) does not show that the CBDT O.M. deviates from or

violates any provisions of the Act, 1961. The CIT(A) and ITAT have appreciated

the binding nature of the CBDT O.M. and have properly allowed a deduction

under Section 80HHC of the Act, 1961, in favour of the Assessee.

9.2 The learned Counsel, by referring to the expression in the CBDT O.M.

dated 23.02.1998, argues that the premium is treated as export earnings

because it falls within Section 28(1) of the Act, 1961, namely profit on the sale

of a licence under Section 28(iiia); cash assistance against exports under

Section 28(iiib); and duty drawback under Section 28(iiic). The decisions in

KP Varghese v. ITO11, Vijay Krishnaswami v. DDIT12, and State of TN & Anr. v.

India Cements Ltd. & Anr.13 are relied upon to support the proposition that

11 (1981) 4 SCC 173. 12 2025 SCC Online SC 1843. 13 (2011) 13 SCC 247.

statutory Circulars, instructions, and guidelines are binding on the Revenue

Department and its subordinate Officers in administering and executing tax

Statutes. The Revenue cannot repudiate, challenge, or take a stance contrary

to its own valid Circulars. The Department cannot, by arguing that a

Departmental Circular is inconsistent with the Statute or deviates from its

strict terms, assail the Orders of the CIT(A) and ITAT. The Circulars bind the

executive and adjudicating Authorities; they do not bind the courts in

interpreting statutory provisions, nor can they impose on taxpayers a burden

greater than what the Statute itself envisages.

10. Arijit Prasad, learned Senior Counsel for the Revenue, argues that the

Claim is substantially based on the CBDT O.M. The binding nature of the

CBDT O.M. on the Courts of law is no longer res integra. The relied-upon

Judgment has considered the scope and application of Sections 28(iiia) to (iiic)

and 80HHC of the Act, 1961. The findings in the relied-upon Judgment are

not open to challenge and strictly follow the literal construction of the relevant

provisions. The Act, 1961 deals with total income derived, as per the Act,

1961, and tax payable thereon. The Appellant's argument runs counter to the

basic scheme for deriving or determining the Assessee's total taxable income.

11. It is apposite to refer to the findings of the relied-upon Judgment by the

High Court as follows:

A. In classifying the consideration earned from the transfer of export quota

rights, it was held that such receipts do not fall within any clause of Sections

28(iiia) to (iiie) of the Act, 1961. Quota permits allocated by the AEPC are not

import licences issued under the Imports (Control) Order, 1955, thereby

excluding Section 28(iiia). Nor do they constitute Government cash 8

compensatory support under Section 28(iiib), customs/excise duty drawback

under Section 28(iiic), or DEPB/DFRC duty remission credits under Sections

28(iiid) and (iiie). Instead, the export quotas allocated by the AEPC represent

a general commercial right, and the premium realised on their domestic

transfer to a third party constitutes an incidental business advantage, falling

residually under Section 28(iv) as a benefit arising from the exercise of

business.

B. This residual classification disentitles the Assessee from claiming the

deduction under the First Proviso to Section 80HHC(3) of the Act, 1961.

Because quota premium falls under Section 28(iv), it would be covered as an

"other receipt of a similar nature" under Explanation (baa), thereby subjecting

it to a 90% reduction from the business profit base. However, because Section

28(iv) is not included in the First Proviso to Section 80HHC(3), no

corresponding addition back to export profit will occur.

C. The Assessee sought to overcome this statutory barrier by relying on

CBDT O.M., which stated that quota premiums technically equate to Section

28(iiia) and (iiic) items and should “statutorily receive the same treatment”.

The High Court rejected this argument by referring to the Constitution Bench

decision in Ratan Melting & Wire Industries14, which held that administrative

Circulars cannot override statutory text or tie the hands of a Court

interpreting the law.

12. We have heard the parties and perused the record.

14 CCE, Bolpur v. Ratan Melting & Wire Industries, (2008) 13 SCC 1.

13. The controversy falls within a very narrow compass, and further

consideration of the availability of deductions under Section 80HHC of the

Act, 1961 would depend on the meaning the Court would attach to the CBDT

O.M. for technically equating it with Sections 28(iiia) to 28(iiic) of the Act,

1961. This Court, in Ratan Melting & Wire Industries (supra), laid down the

following principles on the scope and binding nature of the CBDT circulars:

A. 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.

B. Administrative Circulars and clarifications issued by the Central or

State Governments merely reflect the Executive’s understanding of statutory

provisions. Such Circulars are not binding on the courts. Under the

constitutional framework, only the Judiciary can interpret statutory

provisions. The Executive does not have this power.

C. Any Administrative Circular or clarification that runs contrary to

statutory provisions or to the judicial declaration thereof has no force in the

eyes of the law.

D. Accepting the contention that the Revenue is precluded from

challenging an interpretation contrary to its Circulars would extinguish the

Revenue's valuable right of appeal. Because an assessee who benefits from a

Circular will not appeal, precluding the Revenue from appealing would

prevent the High Courts and the Supreme Court from ever adjudicating the

question. Such an outcome would directly undermine the law declared by the

Supreme Court and compromise its binding force under Article 141 of the

Constitution of India.

14. The CBDT O.M. is not binding on the Courts. The Assessee's argument,

for the reasons given in Nagesh Knitwears P. Ltd. (supra), does not merit

further consideration in the subject Appeals. A Constitution Bench of this

Court in Ratan Melting & Wire Industries (supra) held that Circulars issued by

the CBDT bind only the Administrative Departmental Authorities. They

merely represent the Executive's understanding of a statutory provision and

are never binding on the High Courts or the Supreme Court. When the High

Court or Supreme Court interprets a statutory provision, a conflicting

Administrative Circular has no legal existence before the Court. If a circular

were binding on courts, the judiciary would have to follow an Administrative

Memo even when it directly violates a Parliament enactment. Further, if the

Revenue were permanently barred by its own Circular from questioning a legal

interpretation in Court, the Department could never appeal an erroneous

Tribunal decision. Since an assessee benefiting from a circular would never

appeal, the true statutory meaning could never be adjudicated by the High

Courts or the Supreme Court.

15. The CBDT O.M. is binding on Revenue Officers. The assessee can

challenge it before the Court. The Revenue has availed of this remedy and has

succeeded before the High Court. If accepted, the Assessee's argument would

effectively enforce the CBDT Circular, which is otherwise not in line with the

Act, 1961 and the precedents of this Court. 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. Further, the

scope for limiting legal fiction is well established in tax matters. 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.

16. Let us apply the same interpretative tool/standard to Sections 28(iiia)

to 28(iiic) of the Act, 1961 and appreciate their meaning and scope. 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.

17. Through a legal fiction, 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.

18. Lastly, 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.

19. In effect, the argument of the Assessee calls upon this Court to give

effect to the CBDT O.M. We reject this argument. No other argument is

canvassed. For the above reasons, we see no reason to interfere with the

impugned Judgment. The Appeal fails and is dismissed accordingly.

CIVIL APPEAL NO. 12449 OF 2017

20. For the reasons discussed above, the Appeal fails and is dismissed.

21. Pending application(s), if any, shall be disposed of accordingly.

..……….…………………J. [S.V.N. BHATTI]

..…………………………J. [N. V. ANJARIA]

New Delhi; September 18, 2026.