A CBDT circular or instruction can bind income tax officials, but it cannot decide how a court should interpret the Income Tax Act. The Supreme Court has reiterated this principle while deciding a tax dispute involving garment exporter Orient Crafts Ltd.
The judgment was delivered on September 18, 2026, by a bench of Justice S.V.N. Bhatti and Justice N. V. Anjaria in Orient Crafts Ltd. vs. Commissioner of Income Tax, New Delhi. The case involved Civil Appeal Nos. 143-144 of 2013 and connected appeals and is reported as 2026 INSC 1018. The Supreme Court dismissed the appeals.
The dispute related to assessment years 2000-01 and 2001-02 and concerned the tax treatment of premium received from the sale of export quotas.
Orient Crafts, a company engaged in manufacturing and exporting readymade garments, had received Rs 73.49 lakh as premium from the sale of export quota in assessment year 2001-02. The company treated the amount as part of its business profits while computing its deduction under Section 80HHC of the Income Tax Act.
What was the dispute in the Orient Crafts case?
The company relied, among other things, on a CBDT Office Memorandum dated February 23, 1998. The assessee’s argument was that the CBDT’s position supported treating export quota premium in a manner similar to certain export incentives covered under Section 28 of the Income Tax Act.
The matter eventually reached the Supreme Court in the context of the Commissioner’s revisionary powers under Section 263 of the Income Tax Act.
The Supreme Court made an important clarification about the legal status of CBDT instructions.
The Court said the CBDT Office Memorandum was binding on officers of the Income Tax Department. However, it made it clear that the same instruction could not bind a court while interpreting the law.
CBDT circulars bind tax officers, but not courts
“The CBDT O.M. is not binding on the Courts,” the Supreme Court said.
The Court referred to the Constitution Bench decision in CCE, Bolpur v. Ratan Melting & Wire Industries while dealing with this principle.
In simple terms, the CBDT can issue instructions for the administration of tax laws and its officers are required to follow such instructions within their legal scope. But a circular cannot change the provisions passed by Parliament. A court is also not required to accept the CBDT’s interpretation if it does not agree with the statutory provisions.
The Supreme Court also considered the scope of Section 263. Under this provision, the Commissioner can revise an assessment order only when the order is both erroneous and prejudicial to the interests of the Revenue. The Court noted that both conditions must exist.
In the present case, the Court did not find a reason to interfere with the High Court’s decision. It dismissed the appeals and upheld the position taken by the lower authorities.
For taxpayers, the broader takeaway is important. A CBDT circular can provide guidance to tax officers and may give taxpayers clarity on how the department will administer a provision. But such a circular cannot override the Income Tax Act or determine how courts should interpret the law.
The Supreme Court’s ruling therefore draws a clear distinction between ‘departmental instructions and the law enacted by Parliament’. A CBDT instruction may bind the tax department, but the final interpretation of the statute remains with the courts.
Disclaimer: This article is based on the Supreme Court judgment in Orient Crafts Ltd. v. Commissioner of Income Tax, New Delhi, 2026 INSC 1018. It is intended for general information and should not be treated as legal or tax advice.