Does a CBDT Office Memorandum bind a Court of Law interpreting Sections 28(iiia) and 80HHC of the Income Tax Act?

Paragraph 6The 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, 1961. 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 Industries[^1], 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.

Paragraph 6Under 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?”

Paragraph 14The 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.

Paragraph 14The 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.