A bench comprising Justice SVN Bhatti and Justice NV Anjaria dismissed a batch of appeals concerning claims for deductions under Section 80HHC of the Income Tax Act, 1961, in respect of premiums earned through the sale of export quotas.
The Court held that the premium received from selling an export quota could not be treated as income generated from exports because the transaction itself did not result in the receipt of foreign exchange. Consequently, the assessees could not claim the benefit of Section 80HHC on such income.
Section 80HHC, which was applicable to the assessment years in question, provided deductions in respect of profits derived from exports. The provision ceased to provide deductions from April 1, 2005.
Dispute Over Export Quota Premium
The appeals concerned assessment years 2000-01 and 2001-02. The assessees were engaged in manufacturing and exporting readymade garments and had earned premiums by selling their export quotas.
They relied upon a 1998 CBDT circular to contend that income from the sale of export quotas should receive treatment similar to the categories of income referred to in Section 28(iiia) to (iiic) of the Act. The circular had indicated that export quota premiums could technically be equated with items such as profits on the sale of import licences, cash assistance and duty drawback.
The Assessing Officer initially granted the assessees the benefit of deduction under Section 80HHC.
The Revenue subsequently challenged that decision before the Commissioner of Income Tax. Exercising revisional jurisdiction under Section 263, the Commissioner withdrew the deduction.
The assessees approached the Income Tax Appellate Tribunal (ITAT), which accepted their challenge and restored the Assessing Officer’s order, relying on the CBDT circular.
The Revenue then moved the Delhi High Court. The High Court set aside the ITAT’s decision and denied the deduction claimed on the income arising from the sale of export quotas.
The dispute ultimately reached the Supreme Court.
CBDT Circular Cannot Control Judicial Interpretation
One of the central questions before the Supreme Court was whether a CBDT circular could compel courts to adopt an interpretation that was not supported by the statutory provisions.
The Court answered the issue by relying on the Constitution Bench judgment in CCE, Bolpur v. Ratan Melting & Wire Industries (2008), which settled that departmental circulars cannot bind courts in interpreting legislation.
The bench held that the 1998 CBDT circular could not convert the premium earned from the sale of export quotas into business income falling within the relevant clauses of Section 28 when the statutory requirements were not satisfied.
The Court observed that the basic characteristics of the transaction, including the receipt of foreign exchange, had to be present before such income could be treated as income arising from exports.
In other words, an administrative clarification could not expand the scope of the statute or create a deduction that the legislation itself did not provide.
Export Quota Sale Not Covered By Section 28(iiia)-(iiic)
The Supreme Court also agreed with the reasoning adopted by the Delhi High Court in its 2012 decision in Commissioner of Income Tax v. Nagesh Knitwears P. Ltd.
In that case, the High Court had held that profits or premiums arising from the sale of export quotas or licences did not fall within Sections 28(iiia) to 28(iiic) of the Income Tax Act and therefore could not qualify for deductions under Section 80HHC.
Applying that position, the Supreme Court concluded that the premium received by the assessees from the sale of their export quotas could not be treated as qualifying export income merely because a CBDT circular had sought to equate the transaction with specified categories under Section 28.
The appeals were accordingly dismissed, leaving the High Court’s decision against the assessees undisturbed.
The ruling reiterates an important distinction in tax law: while CBDT circulars may guide the tax administration, they cannot dictate how courts must interpret the statute where the statutory language points in another direction.
