1987 (12) TMI 6 - HC - Income Tax

Summary

Issues:
1. Whether the sum received by the assessee on the sale of import entitlements represented a capital receipt for the income-tax assessment year 1974-75.

Analysis:
The judgment of the High Court of Andhra Pradesh pertains to a reference made by the Income-tax Appellate Tribunal regarding the income-tax assessment year 1974-75. The primary issue was whether the sum of Rs. 11,98,787 received by the assessee on the sale of import entitlements was to be considered a capital receipt. The assessee, a company engaged in various businesses including processing and sale of tobacco, ginning cotton, and dealing in pesticides, had sold import entitlements for cash, realizing the aforementioned sum. The Tribunal had accepted the assessee's contention that only a portion of the sum was liable to be assessed in its hands for the assessment year 1973-74, and that the remaining amount was not taxable until the following year.

The Revenue included the entire sum of Rs. 11,98,787 in the assessment for the year 1974-75, leading to an appeal by the assessee to the Commissioner of Income-tax (Appeals). The Commissioner accepted the assessee's contention and deleted a portion of the income from the assessment. Subsequently, both the Revenue and the assessee filed appeals to the Tribunal. The Revenue argued that the entire sum should be taxed, while the assessee claimed that a portion of the sum represented capital receipt and should not be taxed as business income.

The Tribunal rejected the Revenue's contention and accepted the assessee's plea that the sum of Rs. 5,15,140 was a realization of capital from the sale of import entitlements and not liable to be taxed. However, the High Court disagreed with the Tribunal's decision, stating that the import entitlements were directly related to the assessee's business activities. The Court cited various judgments supporting the view that cash realized by a businessman on the sale of import entitlements constituted income from business and not capital gain.

Therefore, the High Court ruled in favor of the Revenue, holding that the sum assessable should be Rs. 5,15,140 and not the entire amount of Rs. 11,98,787 as specified in the question referred to them. The Court emphasized that the sum realized from the sale of import entitlements was to be treated as income from business and not as a capital receipt, based on the direct connection between the entitlements and the assessee's business activities.