Section 263 Revision Upheld, CBDT Export Quota Circular Not Binding on Courts: Supreme Court in Orient Crafts Ltd. v. CIT [2026 INSC 1018]

In Orient Crafts Ltd. v. Commissioner of Income Tax, New Delhi (2026 INSC 1018), the Supreme Court upheld the Delhi High Court's finding that the Commissioner rightly exercised revisional jurisdiction under Section 263 of the Income Tax Act, 1961 to reopen an assessment that had allowed export quota premium the benefit of Section 80HHC (paras 14–15). In a companion judgment of the same date in M/s Samtex Fashions Ltd. v. CIT, the Bench of Justice S.V.N. Bhatti (author) and Justice N.V. Anjaria held that a CBDT circular is not binding on the courts and that quota premium cannot, through a legal fiction in the circular, be equated with income under Sections 28(iiia) to (iiic) (Samtex, paras 14–19).

Status: All appeals of the Assessees dismissed; Delhi High Court judgments in favour of the Revenue affirmed (para 15; Samtex, paras 19–20).

Headnote: Section 263 Revision and Export Quota Premium under Section 80HHC

Income Tax Act, 1961 – Section 263 – Revision of orders prejudicial to the Revenue – "Erroneous" and "prejudicial to the interests of the Revenue" – Section 80HHC – Explanation (baa) – First proviso to Section 80HHC(3) – Sections 28(iiia) to 28(iiie) and 28(iv) – Premium on sale of export quota – CBDT Office Memorandum dated 23.02.1998 – Section 119 – Binding nature of circulars – Legal fiction – Section 260A appeal.

Held: (i) Revisional jurisdiction under Section 263 requires the assessment order to be both erroneous and prejudicial to the interests of the Revenue; where two views are possible and the AO has taken one, the order cannot be treated as erroneous unless the view is unsustainable in law (para 12).

(ii) The High Court considered the issue between the Assessee and the Revenue and recorded a finding that the Commissioner had rightly exercised jurisdiction under Section 263; its view on all relevant issues is available and tenable (paras 14–15).

(iii) CBDT circulars bind the departmental authorities but are not binding on the High Courts or the Supreme Court, and a circular contrary to the statute has no legal existence before a court (Samtex, paras 13–14).

(iv) The CBDT O.M. creates a legal fiction by equating export quota premium with items in Sections 28(iiia) to (iiic); applying such a fiction contrary to the explicit statutory position is impermissible (Samtex, para 15).

(v) Quota sale generates horizontal revenue but does not earn foreign exchange, so it lacks the basic traits of the receipts covered by Sections 28(iiia) to (iiic) (Samtex, paras 15–16).

(vi) The reasoning of the Delhi High Court in CIT v. Nagesh Knitwears P. Ltd. is legally tenable and was affirmed (Samtex, para 17).

(paras 12–15; Samtex, paras 13–19)

Case Details: Orient Crafts Ltd. v. CIT (2026 INSC 1018)

Final Outcome: Civil Appeals of Orient Crafts Ltd. and the connected appeals dismissed; Civil Appeal Nos. 11063 and 12449 of 2017 (Samtex Fashions Ltd.) also dismissed by a separate judgment of the same date; no costs.

Case: Orient Crafts Limited v. Commissioner of Income Tax, New Delhi (with M/s Samtex Fashions Ltd. v. Commissioner of Income Tax, New Delhi)

Neutral Citation: 2026 INSC 1018

Case No.: Civil Appeal Nos. 143–144 of 2013 with Civil Appeal Nos. 139–140, 141–142 and 137–138 of 2013; companion judgment in Civil Appeal Nos. 11063 and 12449 of 2017

Court: Supreme Court of India (Civil Appellate Jurisdiction) – Non-Reportable

Date of Decision: 18 September 2026

Bench: Justice S.V.N. Bhatti (author) and Justice N.V. Anjaria

Relevant Acts & Sections: Income Tax Act, 1961 – Sections 10A, 28(iiia) to 28(iiie), 28(iv), 80HHC (including Explanation (baa) and first proviso to Section 80HHC(3)), 119, 143(3), 260A and 263; CBDT Office Memorandum dated 23.02.1998

Impugned Orders: Delhi High Court – common orders dated 01.06.2012 and 07.09.2012 in I.T.A. No. 993 of 2008 and batch (Orient Crafts) (para 1); order dated 23.05.2017 in ITA No. 32 of 2005 and ITA No. 1057 of 2008 (Samtex, para 1)

Counsel: Mr. Salil Aggarwal, Senior Advocate, for Orient Crafts Ltd.; Mr. Santosh Krishnan, Advocate, for Samtex Fashions Ltd.; Mr. Arijit Prasad, Senior Advocate, for the Revenue (paras 8–9; Samtex, paras 9–10)

Source: Supreme Court of India (official website)

Key Holdings of the Supreme Court

• The Commissioner's revision under Section 263 of the assessment that treated export quota premium as eligible for Section 80HHC deduction was upheld (paras 15–16).
• Section 263 requires the assessment order to be both erroneous and prejudicial to the Revenue; both conditions must co-exist (para 12).
• The High Court's view, which did not accept the fiction in the CBDT O.M., is available and tenable; no remand was ordered (paras 14–15).
• A CBDT circular binds Revenue officers, but not the High Courts or the Supreme Court (Samtex, paras 14–15).
• Export quota premium cannot be equated with profit on sale of import licence, cash assistance or duty drawback under Sections 28(iiia) to (iiic) (Samtex, paras 15–17).
• Treating a circular as binding on courts would undermine the statutory framework of "income derived" and strict construction of deductions (Samtex, para 18).

Brief Facts of the Case

Orient Crafts Ltd., a garment exporter, claimed a deduction of Rs.13,85,68,402 under Section 80HHC for AY 2001-02. It had received Rs.73,49,341 as premium on sale of export quota, which it treated as business profit, relying on a CBDT Office Memorandum dated 23.02.1998 that equated export quota premium with items in Sections 28(iiia) and (iiic) (paras 2–3, 3.1).

The AO accepted the claim in a scrutiny assessment under Section 143(3) on 13.08.2003. The Commissioner then issued notice under Section 263, holding that the AO failed to exclude 90% of the quota premium under Explanation (baa) to Section 80HHC, resulting in an excess deduction of Rs.51,23,151, and on 01.02.2005 directed a fresh assessment (paras 3.1, 4).

The ITAT allowed the Assessee's appeals against the Section 263 order on 07.09.2007, but the Delhi High Court, in an appeal under Section 260A, set aside the ITAT's orders, holding that quota premium is a general business benefit under Section 28(iv) and that the CBDT O.M. could not override the statute (paras 5–6).

In the companion case, Samtex Fashions Ltd. claimed Section 80HHC deduction on Rs.90,43,061 of export quota proceeds for AY 2001-02. The CIT(A) and ITAT allowed the claim relying on the CBDT O.M., but the Delhi High Court reversed them, following CIT v. Nagesh Knitwears P. Ltd. (Samtex, paras 3–7, 9).

Issues Before the Supreme Court

1. Whether the exercise of jurisdiction by the Commissioner under Section 263 was justified, and whether the High Court reversed the ITAT by merely recording its own view (para 11).
2. Whether the CBDT O.M. dated 23.02.1998 binds the courts and entitles export quota premium to the treatment of Sections 28(iiia) to (iiic) for Section 80HHC (Samtex, para 13).

Court's Findings and Reasoning

Scope of Section 263 (para 12): Summarising CIT v. Max India Ltd., CIT v. Amitabh Bachhan and Malabar Industries Co. Ltd. v. CIT, the Court reiterated that an order must be both erroneous and prejudicial to the Revenue, that not every loss of revenue is prejudicial, and that where the AO takes one of two possible views, revision is not available unless that view is unsustainable in law.

High Court's view tenable (paras 13–14): The High Court considered the substantial questions, relied on ITO v. D.G. Housing Projects Ltd., and did not approve the fiction created by the CBDT O.M. in interpreting the relevant provisions. Its view on all relevant issues was available and tenable.

No interference, no remand (para 15): After examining the Commissioner's order, the ITAT's order and the impugned judgment, the Court found that the High Court had recorded a finding that the Commissioner rightly exercised revisional jurisdiction, and declined to remand the matter.

Circulars and the courts (Samtex, paras 13–14): Applying the Constitution Bench decision in CCE, Bolpur v. Ratan Melting & Wire Industries, the Court held that circulars represent the executive's understanding of a statute, bind only departmental authorities, and have no existence before a court when they conflict with the statute as judicially interpreted.

No legal fiction contrary to the statute (Samtex, paras 15–17): The CBDT O.M. equates quota premium with Sections 28(iiia) to (iiic) receipts through a legal fiction, which is impermissible against the explicit statutory position. Quota sale does not earn foreign exchange, so it lacks the basic traits of those receipts. The reasoning in Nagesh Knitwears P. Ltd. was held legally tenable.

Final Outcome and Directions

• The appeals of Orient Crafts Ltd. fail and are dismissed; the connected appeals, being identical, are dismissed for the same reasons (paras 15–16).
• The Samtex Fashions Ltd. appeals (Civil Appeal Nos. 11063 and 12449 of 2017) are dismissed by the companion judgment (Samtex, paras 19–20).
• No order as to costs; pending applications disposed of (para 17).

Legal Principle Laid Down

The Commissioner's power under Section 263 of the Income Tax Act, 1961 can be exercised only where the assessment order is both erroneous and prejudicial to the interests of the Revenue. A CBDT circular binds Revenue officers but not the High Courts or the Supreme Court, and a circular that creates a legal fiction contrary to the statute cannot be enforced through the courts. Premium on sale of export quota does not fall within Sections 28(iiia) to (iiic) and cannot receive their treatment for the purposes of Section 80HHC.

Precedents Relied Upon

• CIT, Ludhiana v. Max India Ltd., (2007) 295 ITR 282 (SC) – Relied upon – where two views are possible, the AO's view is not erroneous unless unsustainable in law. Discussed at para 12.
• CIT v. Amitabh Bachhan, (2016) 384 ITR 200 (SC) – Relied upon – twin conditions of Section 263 and opportunity of hearing. Discussed at para 12.
• Malabar Industries Co. Ltd. v. CIT, (2000) 243 ITR 83 (SC) – Relied upon – meaning of "erroneous" and "prejudicial to the interests of the Revenue". Discussed at para 12.
• CCE, Bolpur v. Ratan Melting & Wire Industries, (2008) 13 SCC 1 (Constitution Bench) – Relied upon – circulars not binding on courts. Discussed at Samtex, paras 13–14.
• CIT v. Nagesh Knitwears P. Ltd., (2012) 345 ITR 135 (Delhi HC) – Affirmed – export quota premium falls under Section 28(iv), not Sections 28(iiia) to (iiic). Discussed at Samtex, paras 11, 14, 17.
• ITO v. D.G. Housing Projects Ltd., ITA No. 179 of 2011 (Delhi HC) – Noted as relied upon by the High Court. Discussed at para 13.

Important Paragraphs of the Judgment

Verbatim extracts from the judgments. For the full text, refer to the judgment PDF below.

Para 12: "Where two views are possible and the AO has taken one with which the Commissioner disagrees, the Order cannot be treated as an erroneous Order prejudicial to the interest of the revenue."

Para 14: "The view taken on all the relevant issues is available and tenable."

Samtex, Para 14: "The CBDT O.M. is not binding on the Courts."

Samtex, Para 15: "The application of a legal fiction contrary to the explicit statutory position is impermissible in law."

Samtex, Para 15: "Revenue from the sale of a quota generates horizontal revenue for the assessee but does not earn foreign exchange."

Samtex, Para 19: "In effect, the argument of the Assessee calls upon this Court to give effect to the CBDT O.M. We reject this argument."

Practical Impact of the Ruling

• For exporters: Premium on sale of export quota will not get the add-back benefit of the first proviso to Section 80HHC(3) on the strength of the CBDT O.M. of 1998 (Samtex, paras 15–19).
• For the Revenue: The Department may challenge an interpretation in the courts even where its own circular favours the assessee (Samtex, paras 13–15).
• For assessees facing Section 263 notices: Reliance on a binding circular before the AO does not by itself shield the assessment from revision if the High Court finds the twin conditions met (paras 12, 15).
• For tax practitioners: Circulars bind officers, not courts; arguments built solely on a circular that departs from the statute will not succeed in appeal (Samtex, paras 14, 18).

FAQs on Section 263 and Export Quota Premium

1. What did the Supreme Court decide in Orient Crafts Ltd. v. CIT?

It dismissed the Assessee's appeals and upheld the Delhi High Court's finding that the Commissioner rightly exercised revisional jurisdiction under Section 263 over the assessment allowing Section 80HHC benefit on export quota premium (paras 15–16).

2. Is a CBDT circular binding on the courts?

No. Following Ratan Melting & Wire Industries, the Court held that CBDT circulars bind Revenue officers but not the High Courts or the Supreme Court (Samtex, paras 13–15).

3. Can export quota premium be treated like duty drawback or import licence profit?

No. The Court held that quota premium does not earn foreign exchange and cannot, through the legal fiction in the CBDT O.M., be equated with receipts under Sections 28(iiia) to (iiic) (Samtex, paras 15–17).

4. When can the Commissioner revise an assessment under Section 263?

Only when the order is both erroneous and prejudicial to the interests of the Revenue; if the AO took one of two possible views, revision is not available unless that view is unsustainable in law (para 12).

5. Which High Court decision did the Supreme Court affirm?

The reasoning of the Delhi High Court in CIT v. Nagesh Knitwears P. Ltd., (2012) 345 ITR 135, on Sections 80HHC and 263 (Samtex, paras 1, 17).

Keywords: 2026 INSC 1018, Orient Crafts Ltd. v. CIT, Samtex Fashions Ltd. v. CIT, Section 263 Income Tax Act, Section 80HHC, export quota premium, Explanation (baa), Section 28(iiia), CBDT circular not binding on courts, Ratan Melting, Nagesh Knitwears, Justice S.V.N. Bhatti, Supreme Court non-reportable judgment

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Download Judgment PDF – Orient Crafts Ltd. v. CIT

Judgment PDF: 2026 INSC 1018 – Orient Crafts Ltd. v. Commissioner of Income Tax, New Delhi (Civil Appeal Nos. 143–144 of 2013) – Download Judgment PDF

Source: Supreme Court of India (official website).