PETITIONER: COMMISSIONER OF INCOME TAX, KARNATAKA Vs. RESPONDENT: STERLING FOODS, MANGALORE DATE OF JUDGMENT: 15/04/1999 BENCH: S.P.Bharucha, R.C.Lahoti, JUDGMENT:
BHARUCHA.J.
The Judgment and order under appeal (190 ITR 274)
was pronounced by a Division Bench of the Karnataka High
Court on a reference made by the assessee, and the Revenue
is in appeal. The High Court answered in favour of the
assessee the following question:
“Whether, on the fact and
circumstances of the case, the Tribunal was
justified in law in holding that the receipt
from the sale of import entitlements could
not be included in the income of the assessee
for the purpose of computing the relief under
Section 80HH of the Income-tax Act, 1961?”
The identical question had arisen in respect of the
same assessee for an earlier year and the High Court had
then answered the question against the assessee (150 ITR
293). The assessee had not carried the matter further
Ordinarily, therefore, the Division Bench hearing the
assessee’s appeal for the later assessment year would have
been bound by the earlier decision. However, it chose not
to do so relying upon the fact that Section 28 of the Income
Tax Act, 1961 had been amended in the meanwhile by the
Finance Act, 1990 with effect from 1st April, 1962 by
insertion of clause (iiia) and clause (iiib) with effect
form April 1, 1967, which read as follows:
(iiia) profits on sale of a licence
granted under the Imports (Control) Order,
1955, made under the Imports and Exports
(Control) Act, 1947 (18 off 1947).
(iiib) cash assistance (by whatever
name called) received or receivable by any
person against exports under any scheme of
the Govt. of India.
As we shall point out, these amended provisions have
no relevance to the point at issue and the High Court was in
error in relying thereon and not following the earlier
judgment.
The facts are :
The assessee firm is engaged in
processing prawns and other sea food, which
it exports during the Assessment Years
1975-76 and 1976-77. It also earned some
import entitlements granted by the Central
Govt. under an Export Promotion Scheme. The
assessee was entitled to use the import
settlements itself or sell the same to
others. It sold the import entitlements that
it had earned to others. Its total income
for the aforementioned assessment years
included the sale proceeds for such import
entitlements and it claimed relief under
Section 80HH of the Act in respect also of
the sale proceeds of the import entitlements.
Section 80HH, so far as it is relevant, read
at all relevant times thus:
“80HH, Deduction in respect of
profits and gains from newly established
industrial undertakings or hotel business in
backward areas. (1) where the gross total
income of an assessee includes any profits
and gains derived from an industrial
undertaking or the business of a hotel, to
which this section applies, there shall, in
accordance with and subject to the provisions
of this section, he allowed, in computing the
total income of the assessee, a deduction
from such profits and against of an amount
equal to twenty per cent thereof.”
To analyses the provision so far as it is relevant
here, if the gross total income of an assessee includes any
profits and gains derived from an industrial undertaking,
the assessee is entitled to be allowed, in the computation
of his total income, a deduction from the profits and gains
derived from the industrial undertaking of an amount equal
to 20% thereof.
The question, therefore, was whether the income
derived by the assessee by the sale of the import
entitlements was profit and gain derived from its industrial
undertaking of processing sea food. The Division Bench of
the High Court came to the conclusion that the income which
the assessee had made by selling the import entitlements was
not a profit and gain which it had derived from its
industrial undertaking. For that purpose, it relied upon
the decision of this Court in Cambay Electric Supply
Industrial Co. Ltd. vs. CIT (113 ITR 84). It was there
held that the expression “attributable to” was wider in
import than the expression “derived from”. The expression
of wider import, namely, attributable to was used when the
legislature intended to cover receipts from sources other
than the actual conduct of the business. The Division Bench
of the High Court observed that to obtain the benefit of
Section 80HH the assessee had to establish that the profits
and gains were derived from its industrial undertaking and
it was just not sufficient that a commercial connection was
established between the profits earned and the industrial
undertaking. The industrial undertaking itself had to be
the source of the profit. The business of the industrial
undertaking had directly to yield that profit. The
industrial undertaking had the direct source of the profit
and not a means to earn any other profit. Reference was
also made to the meaning of word “source”, and it was held
that the import entitlements that the assessee had earned
were awarded by the Central Govt. under the Scheme to
encourage exports. The source referable to the profits and
gains arising out of the sale proceeds of the import
entitlement was, therefore, the Scheme of the Central Govt.
and not the industrial undertaking of the assessee.
The question arose, as aforestated again for the
Assessment Year 1979-80 and the Division Bench of the High
Court then basing itself on the amendment to Section 28
referred to above, decided otherwise. The relevant portion
of the judgment and order under appeal reads thus :
“We have already extracted what was
decided by this court. It cannot be said
that that decision is incorrect. What has
happened is that that decision as a binding
precedent is of little value in the light of
amendments made to section 28
retrospectively. If it is not binding on us,
then at the time we are called upon to answer
a question for the subsequent assessment
year, we must look at the law as it was, at
the relevant time that is relevant for the
assessment year 1979-80. Both the amendments
have been effected from 1962-63 and
therefore, in 1979-80, the income received
from the Govt. of India by sale of import
licences and incentives for export was income
within the meaning of Section 28 assessable
to tax as income from profits and gains of
business or profession. It is in that light
that we have to answer the question.”
It appears to us that the later Division Bench did not fully
appreciate what had been held by the earlier Division Bench
and to what had so held the provision of Section 28 as
amended made no difference. Therefore, in our view, the
judgment under appeal would have to be set aside in as much
as it did not follow an earlier binding judgment of the High
Court itself.
But learned counsel for the assessee submitted that
he was entitled to urge since this matter related to a
different assessment year, that the earlier Division Bench
judgment of the High Court was erroneous. Since we are of
the view that the earlier judgment was not erroneous, it is
not necessary to decide whether the assessee could so urge.
In learned counsel’s submission, the profits and
gains were derived from the assessee’s industrial
undertaking and were, therefore, entitled to the deduction
prescribed by Section 80HH. Learned counsel cited the
judgment of the Madras High Court in Commissioner of
Income-Tax, Madras-I vs. Wheel and Rjn Company of India
Ltd. (107 ITR 168) which, no doubt, is squarely on the
point and holds in favour of the assessee. To quote what
would be fully explanatory, “In the fast place as we pointed
out already, the receipt by way of subsidy and the receipt
by way of the profits due to the sale of import entitlement
are directly referable to the export of the cycle rims made
by the assessee and consequently they can be said to be
profits and gains derived from the export of cycle rims even
on the basis of any theory of proximity.”
Our attention was also invited to the judgment of
this Court in National Organic Chemical Industries Ltd. vs.
Collector of Central Excise, Bombay (106 STC 467). The
relevant portion of the judgment is contained in paragraphs
10,11,& 12 and they read thus:
“10. The dictionaries state that the
word “derive” is usually followed by the word
“from”, and it means : get to trace from a
source; arise from, originate in; show the
original or formation of.
11. The use of the words “derived
from” in item 11-AA(2) suggests that the
original source of the product has to be
found. Thus, as a matter of plain English,
when it is said that one word is derived from
another, often in another language, what is
meant is that the source of that word is
another word, often in another language. As
an illustration, the word “democracy” is
derived from the Greek word “demos”, the
people and most dictionaries will so state.
That is the ordinary meaning of the words
“derived from” and there is no reason to
depart from that ordinary meaning here.
12. Crude petroleum is refined to
produce raw naphtha. Raw naphtha is further
refined, or cracked to produce the said
products. This is not controverted. It
seems to us to make no difference that the
appellants buy the raw naphtha from others.
The question is to be judged regardless of
this and the question is whether the
intervention of the raw naphtha would justify
the finding that the said products are not
derived from refining of crude petroleum.
The refining of crude petroleum produces
various products at different states. Raw
naphtha is one such stage. The further
refining, or cracking of raw naphtha results
in the said products. The said products must
therefore, be held to have been derived from
crude petroleum.”
We do not think that the source of the import entitlements
can be said to be the industrial undertaking of the
assessee. The source of the import entitlements can, in the
circumstances, only be said to be the Export Promotion
Scheme of the Central Govt. whereunder the export
entitlements become available. There must be for the
application of the words “derived from”, a direct nexus
between the profits and gains and the industrial
undertaking. In the instant case the nexus is not direct but
only incidental. The industrial undertaking exports
processed sea food. By reason of such export, the Export
Promotion Scheme applies. Thereunder, the assessee is
entitled to import entitlements, which it can sell. The sale
consideration therefrom cannot, in our view be held to
constitute a profit and gain derived from the assessees’
industrial undertaking.
In the result, the appeals are allowed. The judgment
under appeal is set aside. The question is answered in the
affirmative and in favour of the Revenue. No order as to
costs.