The Supreme Court has reinforced that circulars issued by the Central Board of Direct Taxes are only binding on departmental officials and cannot override statutory law when judges interpret tax legislation, affecting deductions linked to export quotas.
The Supreme Court has reinforced a familiar tax principle: circulars issued by the Central Board of Direct Taxes can guide tax officials, but they do not bind the courts when judges are asked to interpret the law. In a dispute involving Samtex Fashions and Orient Crafts over deductions linked to the sale of export quotas, the bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria said executive instructions cannot override the statute itself.
According to reports of the ruling in Verdictum and Sagi Infotech, the case turned on whether a premium earned from selling export quotas could be treated as a business profit for the purpose of deduction under section 80HHC of the Income Tax Act, 1961. The taxpayers relied on a CBDT office memorandum that sought to place such receipts alongside export incentives such as cash assistance, import licence premiums and duty drawbacks. Their argument was that the department should not be permitted to take a position different from its own circular.
The Supreme Court rejected that approach, drawing on its earlier ruling in Ratan Melting & Wire Industries. As TaxTMI noted in its discussion of that precedent, the court has long held that administrative circulars are binding on departmental officers only so far as internal administration is concerned; they cannot control the High Court or the Supreme Court when the judges are deciding what the law means. The bench said a circular cannot create a legal fiction that turns export-quota proceeds into the kind of income covered by sections 28(iiia), 28(iiib) or 28(iiic) unless the statute itself says so.
The court also agreed with the High Court that the revenue authorities may challenge a tribunal or court decision if they believe the law has been wrongly interpreted, even where a circular had initially favoured the taxpayer. That distinction matters because, as the bench observed, a rule that permanently barred the department from questioning an interpretation would prevent the higher courts from ever settling the true meaning of the statute. The result was that the taxpayers obtained no relief, and the department’s memorandum could not be used to secure the deduction they sought.
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