CBDT Circulars and Instructions Cannot Bind Courts on Income Tax Act Interpretation, Holds Supreme Court:

The Supreme Court has held that CBDT circulars and instructions can bind Income Tax Department officials, but they cannot control how courts interpret the Income Tax Act.

The Supreme Court of India's bench, comprising Justice S.V.N. Bhatti and Justice N. V. Anjaria, delivered a significant judgement on September 18, 2026, in a case titled Orient Crafts Limited vs. Commissioner of Income Tax, New Delhi. The appeals (Civil Appeal Nos. 143-144 of 2013) pertaining to the assessment years 2000-01 and 2001-02 were dismissed.

The case involved the tax treatment of premium received from the sale of export quotas. Orient Crafts Ltd, a manufacturer and exporter of readymade garments, received Rs 73.49 lakh as a premium from the sale of the export quota in AY 2001-02. The company treated this amount as business income while claiming a deduction under Section 80HHC of the Income Tax Act.

The company relied, among other things, on a CBDT Office Memorandum dated February 23, 1998. It argued that the CBDT’s position supported its treatment of the export quota premium for the purpose of Section 80HHC.

While deciding the dispute, the Supreme Court clarified the legal status of CBDT instructions. The Court observed that the CBDT Office Memorandum was binding on Income Tax Department officers. However, it specifically held that the memorandum was not binding on courts while interpreting the Income Tax Act.

The Court relied on the Constitution Bench Judgement in a case titled CCE, Bolpur v. Ratan Melting & Wire Industries. It explained that CBDT instructions may guide tax officials in administering the law, but they cannot override the provisions enacted by Parliament or determine how courts must interpret those provisions.

The Supreme Court also examined Section 263, under which the Commissioner can revise an assessment only when the assessment order is both erroneous and prejudicial to the interests of the Revenue. Finding no reason to interfere with the High Court’s decision, the Court dismissed the appeals.

The ruling clarifies that while CBDT circulars may provide guidance on departmental tax administration, the interpretation of the Income Tax Act ultimately rests with the courts.