High Court rightly upheld Section 263 revision as export quota

High Court rightly upheld Section 263 revision as export quota premium exclusion under Section 80HHC was erroneous.

Issue

Whether the High Court was justified in upholding the Commissioner’s revisional jurisdiction under Section 263, which set aside the assessment for failure to exclude 90% of export quota premium from business profits under Explanation (baa) to Section 80HHC.

Facts

The assessee, engaged in manufacturing and exporting readymade garments, claimed deduction under Section 80HHC for AYs 2000-01 and 2001-02.
Assessments were initially completed by the Assessing Officer (AO) under Section 143(3).
The Commissioner initiated revision proceedings under Section 263, holding that the assessment orders were erroneous and prejudicial to the interests of the Revenue because the AO failed to exclude 90% of the export quota premium from business profits under Explanation (baa) to Section 80HHC.
The Commissioner set aside the original assessment orders and directed fresh assessments treating the quota sale premium as “other receipts” under Explanation (baa).
The ITAT allowed the assessee’s appeals against the Section 263 orders, setting aside the revision.
On appeal by the Revenue, the High Court set aside the ITAT’s orders and restored the exercise of revisional jurisdiction under Section 263.

Decision

The Supreme Court noted that the High Court properly evaluated the core issue between the assessee and the Revenue regarding the treatment of export quota premium.
The High Court correctly recorded a finding that the Commissioner validly exercised revisional jurisdiction under Section 263.
Consequently, the Supreme Court found no reason to interfere with the impugned judgment of the High Court, deciding the issue in favor of the Revenue.

Key Takeaways

Scope of Revisional Jurisdiction: The Commissioner validly invokes Section 263 when an Assessing Officer fails to apply explicit statutory provisions, rendering the assessment order erroneous and prejudicial to Revenue interests.
Treatment under Section 80HHC: Export quota premium constitutes receipts akin to brokerage, commission, or interest under Explanation (baa), requiring 90% exclusion from business profits while computing profits derived from exports.

SUPREME COURT OF INDIA

Orient Crafts Ltd.

Commissioner of Income-tax

S.V.N. BHATTI and N.V. Anjaria, JJ.

CIVIL APPEAL NO(S). 137 to 144 OF 2013^†

SEPTEMBER 18, 2026

Sudarshan Lamba and Miss Madhulika Upadhyay, AORs for the Respondent.

JUDGMENT

S.V.N. Bhatti, J.- The Civil Appeals are at the instance of Orient Crafts Limited/Assessee and arise from the common Orders dated 01.06.2012 and 07.09.2012 in I.T.A. Nos. 993 of 2008 and the batch in the High Court of Delhi at New Delhi. The details of the Appeals are tabulated hereunder:

Assessment Year (AY)	Civil Appeal Nos.
2000-01	141-142/2013 & 137-138/2013
2001-02	139-140/2013 & 143-144/2013

2. The Assessee is a Public Limited Company incorporated under the Companies Act, 1956, engaged in manufacturing and exporting readymade garments from India. In the subject Appeals, as noted above, the dispute relates to the Assessment Years 2000-01 and 2001-02. The issue between the Assessee and the Revenue arises under Section 80HHC read with Sections 28(iiia) to (iiic) of the Income Tax Act, 1961 (“the Act, 1961”). However, the arguments have been confined to Section 263 of the Act, 1961. For convenience, we refer to the circumstances relating to A.Y. 2001-02.

3. The Assessee filed a Return on 31.10.2001 for AY 2001-02, declaring income of Rs.3,97,22,789/- (Rupees Three Crores Ninety-Seven Lakhs Twenty-Two Thousand Seven Hundred and Eighty-Nine). The Assessee claimed a deduction under Section 80HHC of the Act, 1961, amounting to Rs. 13,85,68,402/- (Rupees Thirteen Crores Eighty-Five Lakhs Sixty-Eight Thousand Four Hundred and Two). The audited Report under Section 80HHC(4) of the Act, 1961, filed by the Assessee, states that the Assessee received Rs. 73,49,341/- (Rupees Seventy-Three Lakhs Forty-Nine Thousand Three Hundred and Forty-One) as premium on the sale of export quota. The Assessee claims that the premium on the sale of export quota was included in the total turnover shown as local turnover and treated as “profits of business” computed under the head “Profits and gains of business or profession”.

3.1 On 17.06.2003, the Assessing Officer (“AO”) issued a Notice under Section 143(2) of the Act, 1961, accompanied by a questionnaire. By Order dated 13.08.2003, the AO completed the assessment under Section 143(3) of the Act, 1961. Accordingly, the Assessee contends that the claim for deduction under Section 80HHC has been duly examined and accepted by the AO. The Assessee relies on the CBDT Office Memorandum/Circular dated 23.02.1998 (“CBDT O.M.”), which states that technically, export quota premium can be equated with the items mentioned in Section 28(iiia) and (iiic) of the Act, 1961, and therefore the premium on the sale of export quota statutorily receives the same treatment as profit on the sale of import license, cash assistance and duty drawback.

4. The C.I.T. (Delhi-V) issued a Notice under Section 263 of the Act, 1961, on 20.12.2004, calling upon the Assessee to show cause why the assessment dated 13.08.2003 should not be reopened and reassessed. According to the C.I.T., the Order dated 13.08.2003 was erroneous and prejudicial to the interest of the Revenue, as the AO failed to exclude 90% of the quota premium from business profits under Explanation (baa) to Section 80HHC, resulting in an excess deduction of Rs.51,23,151/- (Rupees Fifty One Lakh Twenty Three Thousand One Hundred Fifty One). The Revenue contends that the export quota premium receipt must be reduced by 90% under Explanation (baa) to Section 80HHC, as other receipts are not eligible, and that the Assessee is not entitled to a proportionate adjustment under the proviso to Section 80HHC(iii) of the Act, 1961. According to the Revenue, the reason in law appears to be that export quota is not explicitly enumerated in Section 28(iiia) to 28(iiic) of the Act, 1961. The Assessee replies to this objection by relying on the CBDT Office Memorandum (O.M.), which is binding on the Officers of the Department. On receipt of the reply dated 15.01.2005, the C.I.T., vide Order dated 01.02.2005, set aside the Order of Assessment dated 13.08.2003 and directed the AO to undertake a fresh assessment, treating the premium on quota sale proceeds as “other receipts” under Explanation (baa) to Section 80HHC of the Act, 1961.

5. On 24.02.2006, the AO passed a fresh Assessment Order, redetermining the taxable income at Rs.4,56,44,810/- (Rupees Four Crores Fifty-Six Lakhs Forty-Four Thousand Eight Hundred Ten), with ancillary and incidental levies. The Assessee carried the matter in Appeal before the C.I.T. Appeals-XVI, and on 31.07.2006, the Assessment Order dated 24.02.2006 was set aside. The Assessee, challenging the C.I.T. Order dated 01.02.2005, made under Section 263 of the Act, 1961, also initiated parallel proceedings by filing I.T.A. Nos. 2210-2211/Del/2005 for AYs 2000-01 and 2001-02 before the Income Tax Appellate Tribunal (ITAT). While matters stood thus, the Revenue filed I.T.A. Nos. 3204-3205/D/2006 before the ITAT, Delhi, challenging the Order dated 31.07.2006 of the C.I.T. On 07.09.2007, the ITAT allowed the Appeals in I.T.A. Nos. 2210-2211/Del/2005 filed by the Assessee, and on 15.10.2007, Appeals filed by the Revenue in I.T.A. Nos. 3204-3205/D/2006 were dismissed, in view of the Tribunal’s decision in the connected Appeals.

6. The 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:

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.

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.

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 v. Ratan Melting & Wire Industries (2008) 13 SCC 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.

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.

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.

7. Hence, the Civil Appeals at the instance of the Assessee.

8. Learned Senior Counsel, Mr. Salil Aggarwal, has primarily submitted that the High Court failed to consider the view taken by the ITAT in concluding that the C.I.T. had erroneously exercised jurisdiction under Section 263 of the Act, 1961. With considerable force, the learned Senior Counsel argued that, in the case at hand, the assessment was completed under Section 143(3) of the Act, 1961. The CBDT O.M. is binding on the AO. There is a distinction between the discretion available to the AO in obeying the CBDT O.M. and the discretion exercised by the Courts of Law. To that end, the learned Senior Counsel submits that, in passing the Assessment Order dated 13.08.2003, the AO followed a binding Circular and gave due effect to the receipt of premium on quota sales under Section 80HHC of the Act, 1961. Under Section 263 of the Act, 1961, the C.I.T. exercises jurisdiction only if the requirements of Section 263 are satisfied, namely, that the case is erroneous and prejudicial to the Revenue. By a catena of decisions, it is well established that, on a conjoint reading of “erroneous” and “prejudicial to the Revenue,” the C.I.T. has jurisdiction to reopen an Assessment. In the circumstances of the case, the exercise of jurisdiction under Section 263 of the Act, 1961 is illegal. The ITAT considered, in sufficient detail, the C.I.T.’s illegal exercise of revisional jurisdiction. In an Appeal filed under Section 260A of the Act, 1961 by the Revenue, the High Court reversed the findings of the Tribunal without sufficient reasoning. In the batch of Appeals, the learned Senior Counsel emphasised the unsuitable attempt by the Revenue to challenge the Order dated 01.02.2005 of C.I.T. under Section 263 of the Act, 1961 by relying on the decisions reported in CIT (Central) v. Max India Ltd. [2007] 295 ITR 282 (SC), CIT v. Amitabh Bachchan 384 ITR 200 (SC), Malabar Industrial Co. Ltd. v. CIT [2000] 109 243 ITR 83 (SC) and Ratan Melting (supra).

9. Learned Senior Counsel, Mr. Arijit Prasad, argues that the AO has illegally applied or treated the entitlement under Section 80HHC of the Act, 1961. Section 80HHC is not read in conjunction with Sections 28(iiia) to (iiic) of the Act, 1961, but is read along with the applicable Explanation (baa) to Section 80HHC. In fact, there is a difference between the direct benefit on utilisation of export quota by a manufacturer and the receipt of premium on sale of quota. The Tribunal committed a serious error by relying on the CBDT O.M., as it runs inconsistent with the language of both the Sections. The learned Senior Counsel contends that the impugned Judgment cannot be assailed on the ground of being bereft of reasons, on the view taken by the Tribunal vis-a-vis the Order dated 01.02.2005 of the Commissioner under Section 263 of the Act, 1961. He relies on the very impugned Judgment and argues that, at this stage, this argument is unavailable and that there are no merits in the Appeal, and prays for dismissal of the same.

10. We have heard the learned Senior Counsel and perused the record.

11. The short point for decision is whether the exercise of jurisdiction by the C.I.T. under Section 263 of the Act, 1961, is justifiable and whether the impugned Judgment reversed the findings of the ITAT by recording its own view.

12. The jurisdiction of the Commissioner under Section 263 of the Act, 1961, is well-defined by a catena of decisions of this Court, and for continuity, we briefly summarise the same:

Max Ltd. (supra): This Court examined the validity of a Commissioner’s Revision Order passed under Section 263 of the Act, 1961. The power of revision under Section 263 requires that the phrase “prejudicial to the interest of the revenue” be read in conjunction with the expression “erroneous” order. Every loss of revenue resulting from a course adopted by an AO cannot automatically be treated as prejudicial to the interest of the Revenue. 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. The only exception is if the view taken by the AO is entirely unsustainable in law. The validity of a Commissioner’s revision order must be evaluated based on the position of law exactly as it stood on the date the Order was passed. A subsequent statutory amendment, even if applied with retrospective effect, cannot be used to attract the provisions of Section 263 if the AO’s original stance was inherently possible at the relevant time.

Amitabh Bachhan (supra). This Court held that Section 263 of the Act, 1961 requires the concurrent presence of two preconditions before revisional jurisdiction can be exercised. The Assessment Order passed by the primary Authority must be erroneous and prejudicial to the interests of the Revenue. Unlike the power to reopen an Assessment under Section 147, Section 263 does not require a prior Show-Cause Notice detailing the specific grounds for revision as a condition precedent. The statutory requirement of Section 263 is that the assessee must be afforded a reasonable opportunity of being heard, which is implicit in observing the Principles of Natural Justice. The Commissioner is not foreclosed from considering new issues and is not confined to the terms of the initial notice, provided the Assessee has a full opportunity to controvert the new facts and explain the circumstances before a final decision is made. No breach of natural justice occurs if the Commissioner records findings beyond the Show-Cause Notice, provided those findings are based on the existing assessment record and the Assessee had the opportunity to contest the basis during the revisional proceedings.

Malabar Industries Co. (supra): This Court held that for the Commissioner to exercise suo motu jurisdiction under Section 263(1), two strict prerequisites must be met: the AO’s Order must be “erroneous” and “prejudicial to the interests of the Revenue”. Both conditions must co-exist; if an Order is erroneous but not prejudicial, or prejudicial but not erroneous, this provision is unavailable. The Commissioner cannot use this power to correct every minor mistake made by an AO. An Assessment Order becomes “erroneous” if it rests on an incorrect assumption of facts, misapplies the law, violates Principles of Natural Justice, or is passed without application of mind. The phrase “Prejudicial to the Interests of the Revenue” has wide import and is not confined solely to the loss of tax. However, if an AO’s erroneous Order results in the Revenue losing tax that is lawfully payable, it is considered prejudicial to its interests.

13. Let us revert to the circumstances of the case. The impugned Judgment first considered the issue arising under Sections 28(iiia) to 28(iiie) of the Act, 1961. The summary of the view taken by the High Court is noted by us in the preceding paragraphs and is not reiterated for brevity. The High Court referred to the substantial questions on which the Appeal has been admitted, as stated. In the impugned Judgment, the High Court considered a question regarding the correctness of the ITAT’s view on the Commissioner’s decision under Section 263 of the Act. The High Court relied on the decision in ITO v. D.G. Housing Projects Ltd. (Delhi) and juxtaposed the view of the Commissioner and answered the issue in favour of the Revenue and against the Assessee.

14. The 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.

15. For the limited purpose of assessing whether the impugned Judgment completely ignored the Tribunal’s view on the C.I.T.’s decision under Section 263 of the Act, 1961, we have examined the C.I.T.’s Order, the ITAT’s Order, and the impugned Judgment. We are of the view that, in considering the scope and ambit of Section 263 of the Act, 1961, the High Court noted the fact in issue between the Assessee and the Revenue and then recorded a finding that the C.I.T. had rightly exercised the revisional jurisdiction under Section 263 of the Act, 1961. We are not inclined to interfere with the impugned Judgment and are not keen to remand the matter to the High Court for reconsideration, particularly after appreciating the nature of the disputes between the Assessee and the Revenue. The Appeals fail and are dismissed.

16. The accompanying Appeals, being identical and for the same reasons, are dismissed accordingly.

17. Pending application(s), if any, stand disposed of accordingly. No costs.