New Delhi: The Supreme Court has dismissed two connected sets of appeals filed by garment exporters, Orient Crafts Limited and M/s Samtex Fashions Ltd., against the Delhi High Court's rulings that premium earned on the sale of export quota does not qualify for deduction under Section 80HHC of the Income Tax Act, 1961, and that a CBDT Office Memorandum equating such premium with export incentives under Sections 28(iiia) to (iiic) is not binding on courts. The Court also upheld the Commissioner of Income Tax's exercise of revisional jurisdiction under Section 263 in reopening an assessment that had allowed such a deduction.
A Bench of Justices S.V.N. Bhatti and N.V. Anjaria was hearing Civil Appeal Nos. 143-144 of 2013, along with connected Civil Appeal Nos. 139-140 of 2013 and 137-138 of 2013, filed by Orient Crafts Limited against the Commissioner of Income Tax, New Delhi, arising from common orders of the Delhi High Court dated 01.06.2012 and 07.09.2012, and Civil Appeal No. 11063 of 2017, along with connected Civil Appeal No. 12449 of 2017, filed by M/s Samtex Fashions Ltd. against the Commissioner of Income Tax, arising from a judgment of the Delhi High Court dated 23.05.2017. Though tagged and heard together, the Bench pronounced separate reasoned judgments given the distinct issues involved.
Both assessees, garment exporters, had claimed deductions under Section 80HHC on premium earned from the sale of export quota, relying on a CBDT Office Memorandum dated 23.02.1998 that equated such premium with items under Sections 28(iiia) to (iiic) of the Act. In Orient Crafts' case, the original assessment for AY 2001-02 allowing the deduction was completed under Section 143(3) in 2003, but the CIT issued a notice under Section 263 in 2004 and, holding the assessment erroneous and prejudicial to Revenue for not excluding 90% of the premium under Explanation (baa) to Section 80HHC, directed a fresh assessment; though the CIT(A) and ITAT ruled in the assessee's favour, the Delhi High Court, on the Revenue's appeal, reversed the ITAT and upheld the CIT's revision. In Samtex Fashions' case, for the same assessment year, the assessee had additionally claimed deduction on interest earned on margin money deposits; the CIT(A) and ITAT allowed both claims, but the Delhi High Court, relying on its earlier decision in CIT v. Nagesh Knitwears P. Ltd., reversed these findings and ruled in favour of the Revenue on the ground that quota premium fell under the residuary Section 28(iv) rather than Sections 28(iiia) to (iiic), and that the CBDT Memorandum could not override statutory provisions.
Senior Counsel for Orient Crafts, Mr. Salil Aggarwal, submitted that the original assessment had followed a binding CBDT Circular, that the CIT could invoke Section 263 only where the assessment was both erroneous and prejudicial to Revenue, a threshold not met here since two views were reasonably possible, and that the ITAT had correctly held the CIT's revision illegal after detailed consideration, whereas the High Court had reversed this finding without sufficient reasoning, relying on this Court's decisions in Max India Ltd., Amitabh Bachhan, Malabar Industries and Ratan Melting. Counsel for Samtex Fashions, Mr. Santosh Krishnan, confined his arguments to the Section 80HHC deduction on quota premium, submitting that the CBDT Memorandum, issued under Section 119 of the Act, was binding on the Department, that Nagesh Knitwears did not show it to be inconsistent with the statute, and that, relying on K.P. Varghese, Vijay Krishnaswami and State of Tamil Nadu v. India Cements, the Revenue could not resile from its own binding circular before the courts, though he accepted that circulars do not bind courts in interpreting the statute or impose obligations beyond what the statute prescribes.
Senior Counsel for the Revenue in both matters, Mr. Arijit Prasad, submitted that Section 80HHC had to be read with Explanation (baa) rather than with Sections 28(iiia) to (iiic), that the CBDT Memorandum's equation of quota premium with those provisions was inconsistent with the plain language of the statute, and that quota premium, lacking the foreign-exchange element common to Sections 28(iiia) to (iiic), was at best a residuary business benefit under Section 28(iv) attracting no corresponding Section 80HHC benefit. He submitted that the Delhi High Court's judgments, following a literal construction of the relevant provisions, could not be faulted for want of reasoning merely because they disagreed with the Tribunal's view, and that no error warranting interference had been shown in either case, and prayed for dismissal of both sets of appeals.
On the Section 263 question in the Orient Crafts appeals, the Court reiterated the settled principles from Max India Ltd., Amitabh Bachhan and Malabar Industries, namely that an order can be revised only if it is both erroneous and prejudicial to Revenue, that a mere possible view taken by the Assessing Officer cannot be revised unless entirely unsustainable in law, and that the Commissioner need not be confined to the original show-cause notice so long as the assessee is heard. Examining the High Court's judgment, the Court found that it had duly considered the ITAT's view and recorded its own reasoned finding, relying on ITO v. D.G. Housing Projects Ltd., that the CIT had rightly exercised revisional jurisdiction, and declined to interfere with or remand the matter.
On the substantive Section 80HHC question common to both matters, the Court, applying the Constitution Bench ruling in CCE, Bolpur v. Ratan Melting & Wire Industries, held that departmental circulars bind subordinate authorities but not courts, that a circular contrary to statutory provisions or judicial interpretation has no legal existence, and that treating the Revenue as bound by its own circular even in litigation would extinguish its right of appeal and undermine the binding force of judicial precedent under Article 141. It held that the CBDT Memorandum's equation of quota premium with items under Sections 28(iiia) to (iiic) created a legal fiction contrary to the statute, since none of those provisions' requirement of a foreign-exchange element was satisfied by a mere domestic transfer of quota entitlements, and endorsed the reasoning in Nagesh Knitwears P. Ltd. that the incidence of quota premium could not be equated with incomes covered by Sections 28(iiia) to (iiie).
Accordingly, the Court dismissed Civil Appeal Nos. 143-144 of 2013 and the connected Orient Crafts appeals, as well as Civil Appeal No. 11063 of 2017 and the connected Samtex Fashions appeal, declining to interfere with either of the Delhi High Court's judgments, and disposed of all pending applications, with no costs in the Orient Crafts matters.
Case Title: Orient Crafts Limited vs. Commissioner of Income Tax, New Delhi, Civil Appeal Nos. 143-144 of 2013 (with connected Civil Appeal Nos. 139-140 of 2013 and 137-138 of 2013); with M/s Samtex Fashions Ltd. vs. Commissioner of Income Tax, New Delhi, Civil Appeal No. 11063 of 2017 (with connected Civil Appeal No. 12449 of 2017)
