CBDT Circulars Are Not Binding on Courts: Supreme Court Clarifies in Orient Crafts

A tax department issues a circular that says one thing. The law passed by Parliament says something else. Which one should a court follow?

The Supreme Court gave a firm answer on 18 September 2026 in Orient Crafts Limited v Commissioner of Income Tax, New Delhi, together with Samtex Fashions Ltd v Commissioner of Income Tax, New Delhi, reported as 2026 INSC 1018. The bench was Justice S.V.N. Bhatti and Justice N.V. Anjaria. The lead appeals were Civil Appeal Nos. 143-144 of 2013. The report marks both judgments as non-reportable, but the principle is one that every judiciary aspirant should know.

The rule in one line

CBDT circulars bind the tax officers who work under the Board. They do not bind the courts.

The Court said that a circular only reflects the executive's understanding of a law. The meaning of a law is for the courts to decide. A circular that goes against the statute has no force in a court.

What a circular is and why it matters

The Central Board of Direct Taxes, or CBDT, is the top body that supervises the income tax department. It issues circulars and office memoranda to guide officers on how to apply the Income Tax Act. These are administrative instructions.

They matter in two ways. Officers must follow them, and taxpayers often rely on them. In practice a taxpayer may get relief at the department's level because of a circular. The question in this case was what happens when the matter reaches a court.

Also Check: Manav Bhanot v. NHAI (2026 INSC 973)

The facts

The dispute concerned Section 80HHC of the Income Tax Act. This section gives a deduction for profits retained in the export business.

Orient Crafts had earned a premium by transferring surplus export quota. It claimed the deduction under Section 80HHC. It relied on a CBDT Office Memorandum dated 23 February 1998, which treated the quota premium like some specified export incentives covered under Sections 28(iiia), 28(iiib) and 28(iiic). Those sections cover profits from the sale of import licences, cash assistance for exports and duty drawback.

The Assessing Officer at first accepted the claim. Later, the Commissioner used the power of revision under Section 263 and treated the quota premium as an ordinary business receipt, with a 90 percent reduction under Explanation (baa).

In the companion matter of Samtex Fashions, the Assessing Officer rejected the claim outright. Samtex won before the Commissioner (Appeals) and the Tribunal, both of which relied on the 1998 memorandum. The High Court reversed the decision and refused to give the memorandum binding force.

What the Supreme Court decided

The appeals were dismissed. The Court upheld the High Court and drew three conclusions.

First: the circular does not bind courts

The Court relied on the Constitution Bench decision in Ratan Melting and Wire Industries. That case had already held that circulars bind departmental authorities and not the courts. The bench said that if the Revenue could never argue against its own circular, then no court could settle the true meaning of a law. That would defeat the role of the judiciary.

The Court also noted that it was distinguishing K.P. Varghese v ITO, which said that the Revenue cannot repudiate a valid circular. That principle continues to protect assessees at the department level, but it does not force a court to accept a wrong reading of the statute.

Second: export quota premium is not the same as the listed items

Sections 28(iiia) to 28(iiic) list specific items. The Court held that a sale of export quota brings revenue, but it does not earn foreign exchange. It does not have the features that link the listed items to exports. The memorandum tried to create a legal fiction that treated quota premium like the listed items. Because tax fictions are read narrowly, the Court refused to extend it. It also referred to Nagesh Knitwears P. Ltd., which had excluded quota premium from the relevant clauses.

Third: the Section 263 point

In Orient Crafts, the Commissioner had used Section 263. The Court restated that this power needs both conditions to be met: the order must be erroneous and it must be prejudicial to the Revenue. Where two views of the law are possible, an order that accepts one of them is not erroneous unless the view is legally untenable. The Court referred to CIT v Max India Ltd. and CIT v Amitabh Bachchan on the tests and the need for a proper hearing.

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Why the decision matters beyond tax

Even if you are not planning to study income tax deeply, the principle applies across all areas of law that involve administrative bodies.

•        A statute is made by the legislature. It has the highest force.

•        A circular or memorandum is an internal instruction of the executive. It is subordinate to the statute.

•        A court interprets the statute. It is not bound by an executive reading.

This is an example of the basic hierarchy: Constitution, statute, delegated legislation and then administrative instructions. The Taxscan report puts the constitutional point in a sentence: forcing courts to obey circulars that conflict with laws passed by Parliament would go against the basic rules for interpreting tax laws.

Preparing this case for the exam

Likely questions are:

•        "Are departmental circulars binding on courts?" The answer is no, per Ratan Melting and Wire Industries and Orient Crafts (2026 INSC 1018).

•        "Are circulars binding on the department?" Yes, they bind departmental authorities.

•        "Can the Revenue challenge an interpretation that follows its own circular?" The Court said the Revenue cannot be barred from doing so before a court.

Write these three lines in your notes together with the case name, the bench and the date. That will cover a Prelims one-liner and give you a strong opening for a Mains answer on delegated legislation or administrative instructions.

Frequently Asked Questions

Q1. What is the case about?

It is about whether a CBDT office memorandum can bind the courts while they interpret Section 80HHC of the Income Tax Act. The Supreme Court held that it cannot.

Q2. What is the citation?

Orient Crafts Limited v Commissioner of Income Tax, New Delhi, and Samtex Fashions Ltd v Commissioner of Income Tax, New Delhi, 2026 INSC 1018.

Q3. Who decided it and on what date?

Justice S.V.N. Bhatti and Justice N.V. Anjaria, on 18 September 2026.

Q4. Which earlier decision did the Court follow?

The Constitution Bench in Ratan Melting and Wire Industries, which held that circulars bind departmental authorities and not the courts.

Q5. What was the CBDT memorandum?

An office memorandum dated 23 February 1998 that treated export quota premium like specified export incentives under Sections 28(iiia) to 28(iiic).

Q6. Why was quota premium not eligible for the deduction?

It brings revenue but does not earn foreign exchange, and it does not fit within the listed items in Sections 28(iiia) to 28(iiic).

Q7. What does Section 263 require?

The Commissioner can revise an order only if it is both erroneous and prejudicial to the Revenue.

Q8. Did the Court overrule K.P. Varghese v ITO?

No. It distinguished that decision. The Revenue cannot ignore a valid circular at the departmental level, but a court is not bound by one that conflicts with the statute.

Q9. Is the judgment marked reportable?

The report says both judgments are marked non-reportable, though the principle rests on a Constitution Bench ruling.

Q10. What is the wider lesson?

Administrative instructions are below the statute in rank, and only courts declare what a statute means.

Conclusion

Orient Crafts and Samtex Fashions restate a rule that protects the hierarchy of laws. An executive circular can guide officers, but it cannot rewrite a Parliament-made statute or take away the courts' power to interpret it.

That kind of clarity is what a Civil Judge or PCS J candidate needs. Prepare with Aashayein Judiciary, where Nitesh Sir explains current judgments in the language of the exam. Use our Judiciary Notes, PYQ practice and Mock Test support in Online Judiciary Coaching to link today's rulings with the principles you have already learned.