While dismissing the assessees’ claims for deduction under Section 80HHC of the Income Tax Act, the Supreme Court has reiterated that administrative circulars cannot override statutory text and that the Commissioner rightly exercised revisional jurisdiction under Section 263. The Court ruled that export quota premium does not constitute income ‘derived’ from exports, rather, it is a domestic transaction with a third party and falls residually under Section 28(iv) of the Income Tax Act, not under Sections 28(iiia) to (iiic).
The Apex Court said that CBDT Office Memorandum dated Feb 23, 1998, which seeks to equate quota premium with profits on sale of import licences, cash assistance, and duty drawback, creates a legal fiction that is impermissible when it contradicts the express statutory position. Also, the Court clarified that the CBDT circulars and instructions bind the Revenue Department and its subordinate officers, but they are not binding on Courts. Once the Supreme Court or a High Court declares the law, no Tribunal or Court can direct that an executive circular be given effect in preference to judicial interpretation.
A Two-Judge Bench comprising Justice S.V.N. Bhatti and Justice N. V. Anjaria observed that the High Court had correctly held that consideration received from the sale of export quota permits is not income ‘derived’ from exports, as the immediate and proximate source is the domestic transaction with a third party in India. The Court said that quota permits are not issued under the Imports (Control) Order, 1955, so Section 28(iiia) is inapplicable, whereas, quota earnings are not cash assistance or duty drawback, so Sections 28(iiib) and 28(iiic) are also inapplicable. Further, quotas are entirely distinct from DEPB entitlements under Section 28(iiid) and 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.
The Court further observed that the first proviso to Section 80HHC(3) strictly and specifically refers only to sums referred to in Sections 28(iiia), (iiib), and (iiic), and 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. The Court noted that the CBDT Office Memorandum dated Feb 23, 1998, is binding on Revenue officers but not on Courts, and following the Constitution Bench decision in CCE, Bolpur v. Ratan Melting & Wire Industries [(2008) 13 SCC 1], circulars contrary to statutory provisions have no existence in law and cannot prevail over judicial interpretation.
The Court also summarised the principles governing Section 263 jurisdiction, noting that both ‘erroneous’ and ‘prejudicial to the Revenue’ must co-exist, and where two views are possible and the AO has taken one, the order cannot be treated as erroneous and prejudicial.
Briefly, the Assessee, a Public Limited Company engaged in manufacturing and exporting readymade garments, filed an ITR for AY 2001-02, declaring income of Rs. 3.97 crores and claimed a deduction under Section 80HHC of the Income Tax Act, amounting to Rs. 13.85 crores, including Rs. 73.49 lakhs received as premium on the sale of export quota. The Assessing Officer completed the assessment under Section 143(3), accepting the claim by relying on the CBDT Office Memorandum dated Feb 23, 1998, which equates export quota premium with items under Sections 28(iiia) to (iiic) of the Act.
Subsequently, the C.I.T. issued a notice under Section 263, and set aside the assessment, directing the AO to treat the quota premium as ‘other receipts’ under Explanation (baa) to Section 80HHC. The AO thereafter passed a fresh assessment, which was set aside by the C.I.T.(Appeals). The ITAT allowed the Assessee’s appeals, but the High Court reversed the ITAT’s findings and ruled in favour of the Revenue, holding that the C.I.T. had rightly exercised revisional jurisdiction under Section 263.
