Samtex Fashions Ltd. vs Commissioner of Income Tax, New Delhi

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2026 Supreme(SC) 1146

SUPREME COURT OF INDIA
S.V.N. Bhatti, N. V. Anjaria, JJ.
M/S Samtex Fashions Ltd. - Appellant
Versus
Commissioner of Income Tax, New Delhi. - Respondent
Civil Appeal No. 11063 OF 2017 With Civil Appeal No. 12449 OF 2017
Decided On : 18-09-2026

Important Points

Administrative circulars and memoranda issued by tax authorities bind the revenue department but not the courts. They cannot override statutory provisions or judicial interpretations, nor can they create legal fictions contrary to the explicit text of the law.

Subject

Taxation - Direct Tax

Act Referred

CONSTITUTION OF INDIA: Art.141
INCOME TAX ACT: S.28(iii)(a), S.263, S.80(h)(h)(c), S.143(3), S.10(a), S.260(a)

Headnote

(A) Income Tax Act, 1961 - Sections 28(iiia) to 28(iiie) and 80HHC - Deduction in respect of profits retained for export business - Sale of export quota and interest on margin money deposits - Binding nature of administrative circulars - Departmental circulars and instructions are binding on subordinate authorities but not on the courts - Once a court declares the law, it is impermissible to give effect to an executive circular in preference to the judicial view - Administrative circulars reflecting the executive’s understanding of statutory provisions cannot override statutory text. (Paras 13 and 14)

(B) Statutory Interpretation - Legal fiction - The creation of a legal fiction by an administrative memorandum to equate specific receipts with statutory categories of income is impermissible if it contradicts the explicit statutory position - Receipts from the sale of export quota, which do not earn foreign exchange, cannot be treated as business income under specific sections of the Act if the basic traits of the transaction are not satisfied. (Paras 15-17)

Facts of the case:
An assessee claimed deductions under Section 80HHC of the Income Tax Act, 1961, in respect of proceeds from the sale of export quota and interest earned on margin money deposits. The assessing officer rejected these claims, while the first appellate authority and the tribunal allowed them, relying in part on an administrative memorandum that treated quota premiums as eligible for deduction. The High Court subsequently reversed these decisions, ruling in favor of the revenue.

Findings of Court:
The administrative memorandum equating export quota premiums with specific categories of business income under Sections 28(iiia) to 28(iiic) is not binding on the judiciary. Such a memorandum cannot create a legal fiction that deviates from the plain reading of the statutory provisions.

Issues: Whether the proceeds from the sale of export quota and interest on margin money deposits are eligible for deduction under Section 80HHC of the Act, 1961, by virtue of an administrative memorandum.

Ratio Decidendi: Administrative circulars are binding only on the revenue department's administrative authorities and not on the courts. They represent the executive's understanding of a statute and have no legal force when they run contrary to the statutory text or judicial declarations. Judicial interpretation of a statute prevails over administrative clarifications.

Result: Appeal fails and is dismissed.

Advocates appeared:
For the Appellant(s) : Mr. Bhargava V. Desai, AOR Mr. Shivam Sharma, Adv. Mr. Santosh Krishnan, AOR Mr. Ashwin Joseph, Adv.
For the Respondent(s): Mr. Sudarshan Lamba, AOR Miss Madhulika Upadhyay, AOR

JUDGMENT :

S.V.N. BHATTI, J.

CIVIL APPEAL NOS. 11063 AND 12449 OF 2017

1. The Assessee is the Appellant in both the Appeals. The Civil Appeals arise from the Order dated 23.05.2017 in ITA No. 32 of 2005 and ITA No. 1057 of 2008, passed by the High Court of Delhi at New Delhi. The controversy in the subject Appeals pertains to the Returns filed by the Assessee for the Assessment Years (“A.Y.”) 2000-2001 and 2001-2002. The Appeals have been tagged and heard with Civil Appeal Nos. 143-144 of 2013 and the batch. For convenience, and noting the distinguishing considerations between the clubbed matters, we find it convenient to pronounce separate Judgments in the bunch of Appeals heard together. To complete the narrative, we observe that in Civil Appeal Nos. 143-144 of 2013 and batch, though the substantive issue between the Revenue and the Assessee is under Sections 28(iiia) to 28(iiie) and 80HHC (Deduction in respect of profits retained for export business) of the Income Tax Act, 1961 (“The Act, 1961”), the arguments in Civil Appeal Nos. 143-144 of 2013 and batch have been advanced on the exercise of power by the C.I.T. under Section 263 of the Act, 1961. Further, the impugned judgments refer to and rely upon the decision of the Delhi High Court in CIT v. Nagesh Knitwears P. Ltd., (2012) 345 ITR 135, which considered and decided issues arising under both Section 80HHC and Section 263 of the Act, 1961. Vide a separate judgment of the even date in Civil Appeal Nos. 143-144 of 2014 and batch, we affirm the view taken in Nagesh Knitwears P. Ltd. (supra) on the exercise of power by the C.I.T. under Section 263 of the Act, 1961. Therefore, the issue raised by the Assessee under Sections 28(iiia) to 28(iiie) and 80HHC of the Act, 1961, in these Appeals is examined by the present Judgment.

THE CIVIL APPEAL NO. 11063 OF 2017

2. The circumstances set out in Civil Appeal No. 11063 of 2017 are referred to and relied upon for convenience and to dispose of both Appeals.

3. On 21.10.2001, the Assessee filed the Return for AY 2001-02. The Assessee declared Rs. 90,43,061/- (Ninety Lakhs Forty-Three Thousand and Sixty-One) towards proceeds from the sale of export quota and Rs. 16,72,286/- (Sixteen Lakhs Seventy-Two Thousand Two Hundred and Eighty-Six) towards interest earned on the margin money deposit. The Assessee claimed a deduction under Section 80HHC of the Act, 1961. The Assessing Officer (Assistant Commissioner of Income Tax, Central Circle-6, New Delhi) (“AO”) under Section 143(3) of the Act, 1961, on 24.03.2004, rejected the claim under Section 80HHC of the Act, 1961, and assessed the total taxable income of the Assessee at Rs. 1,07,15,350/- (One Crore Seven Lakh Fifteen Thousand Three Hundred and Fifty). The AO recorded the reasons for rejecting the deduction of both the sums claimed by the Assessee, and the reasoning of the AO is summarised as follows: -

A. On Sale of Export Quota: Section 10A of the Act, 1961 applies strictly to profits and gains “derived by” an industrial undertaking from the export of articles or things. The export quota entitlements were granted under the Garment Export Entitlement Policy, based on past export performance. Monetising such quotas by selling them to third parties did not constitute export activity of the industrial undertaking. While relying on this Court’s Judgment in CIT v. Sterling Foods, (1999) 237 ITR 579, it held that quota sale income had only an incidental, commercial connection rather than a direct nexus with the industrial undertaking. It rejected the assessee’s alternative computation under Section 10A(4) of the Act, 1961, noting that because the Assessee exported 100% of its manufactured goods and had no domestic sales, the statutory proportional formula did not apply.

B. On Interest earned on Margin Money: The interest earned on fixed deposits pledged with banks to secure credit facilities had no direct nexus to the undertaking's manufacturing and export activities. It reclassified the interes