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Orient Crafts Ltd. v. C.I.T., New Delhi

Civil Appeal · 2026 INSC 1018Decided 18 Sept 2026
Civil Appeal Nos. 143-144 of 2013 with connected Civil Appeals of 2013
Justice S.V.N. Bhatti · Justice N.V. Anjaria

Background

The appellant, a garments exporting company, claimed a deduction under Section 80HHC of the Income Tax Act, 1961 for Assessment Years 2000-01 and 2001-02, treating premium received from the sale of export quota permits as ordinary business profit, relying on a CBDT circular that equated such premium with items like duty drawback under Section 28(iiia)-(iiic). The Assessing Officer accepted this in the original assessment, but the Commissioner of Income Tax later invoked his revisional power under Section 263, holding the assessment erroneous and prejudicial to Revenue because 90% of the quota premium should have been excluded from business profits. The Income Tax Appellate Tribunal ruled for the assessee, but the Delhi High Court reversed and upheld the Commissioner's revision.

Decision Breakdown

The Supreme Court held that export quota premium is not income "derived" from exports since its immediate source is a domestic sale of the permit to a third party, and it does not fall within Sections 28(iiia) to (iiic); at best it is a general business receipt under Section 28(iv), subject to the 90% exclusion under Explanation (baa) to Section 80HHC. The Court reaffirmed settled law that the Commissioner's revisional jurisdiction under Section 263 requires the assessment order to be both "erroneous" and "prejudicial to the interests of the Revenue," and found that the High Court had correctly applied this test and had not ignored the Tribunal's reasoning. Agreeing with the High Court's view that a CBDT circular favorable to the assessee cannot override the correct statutory interpretation once the matter reaches a court, the Supreme Court dismissed the assessee's appeals (and the connected identical appeals) with no order as to costs.

Lesson Learnt

A tax-friendly administrative circular from the CBDT binds tax officers but cannot substitute for, or override, the correct legal interpretation of a taxing statute once a dispute is examined by courts, and an assessment order can be revised under Section 263 if it is both legally erroneous and causes real revenue loss, even where the assessing officer had merely followed such a circular.

Official source (sci.gov.in)View Judgment (PDF)

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