CBDT Circulars Reflect Executive's Understanding Of Law, Not Binding On Courts: Supreme Court

The Supreme Court on Friday held that CBDT circulars merely represent the Executive's understanding of a statutory provision and are not binding on the High Courts or the Supreme Court.

The observation came while the court rejected an assessee's reliance on a CBDT Office Memorandum to claim a deduction under Section 80HHC of the Income Tax Act on premium received from the sale of export quotas

A bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria held that such circulars merely reflect the Executive's understanding of a statutory provision and cannot bind courts while interpreting the Income Tax Act. The court observed:

“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.”

The appeals concerned Section 80HHC, which provided a deduction in respect of profits retained for export business. The assessee had received a premium after transferring surplus export quota and claimed that the amount should receive the same treatment as specified export incentives for computing the deduction.

The assessee relied on a CBDT Office Memorandum dated February 23, 1998. It stated that, technically, premium from export quota could be equated with items covered by Sections 28(iiia), (iiib) and (iiic). These provisions covered profits from the sale of import licences, cash assistance received against exports, and duty drawback.

In simple terms, the assessee's argument was that the department had itself directed its officers to treat export quota premium like these specified export incentives. It therefore contended that it was entitled to the corresponding deduction under Section 80HHC.

The court rejected the argument.

It held that the CBDT O.M. created a legal fiction by equating quota-sale premium with the categories specifically covered by Sections 28(iiia) to (iiic). The court held that such a fiction could not be applied when it ran contrary to the express provisions of the Act.

The court also considered the nature of the quota transaction. It observed that the sale of a quota generates revenue for the assessee but does not earn foreign exchange. The requisite features of income covered by Sections 28(iiia) to (iiic) were therefore absent in the sale of the quota.

The distinction mattered because the first proviso to Section 80HHC(3) specifically covered sums referred to in Sections 28(iiia), (iiib) and (iiic), while the quota premium did not fall within those categories.

The Delhi High Court had held that export quotas were different from import licences, cash assistance, duty drawback, DEPB and DFRC benefits covered by the Act.

The top court relied on the Constitution Bench ruling in CCE, Bolpur v. Ratan Melting & Wire Industries, which held that administrative circulars are not binding on courts and cannot override statutory provisions or a judicial declaration of law.

The court accordingly refused to interfere with the Delhi High Court judgment and dismissed the appeals.

For Orient Crafts Limited: Senior Advocate Salil Aggarwal

For Revenue: Senior Advocate Arijit Prasad appeared