1997 (4) TMI 9 - SC - Income Tax

Assessee claim that it was a company whose main business was manufacture of leather processing of hides and skins with chemical process and the provisions of section 104 do not apply in view of sub-section (4) of section 104 - Whether the profit obtained during the relevant previous year by the sale of chemicals imported both manufactured and purchased by it was rightly held as not attributable to the manufacturing activity carried on by it - Held yes

Summary

Issues:
Interpretation of section 104(4) of the Income-tax Act, 1961 regarding income attribution to manufacturing activity for tax assessment purposes.

Analysis:
The case involved an appeal by an assessee against the Madras High Court's judgment related to the assessment year 1966-67. The assessee, a private limited company engaged in tanning hides and skins, claimed that its profit from the sale of imported chemicals should not be taxed under section 104(4) of the Income-tax Act. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal held that the profit from the sale of chemicals was not attributable to the manufacturing activity of the assessee, resulting in additional tax imposition.

The Tribunal noted that the assessee's export sales were primarily goods of third parties purchased on a commission basis, with only a small percentage being goods manufactured by the assessee. The High Court upheld the decision that the profit from the sale of imported chemicals was not directly connected to the manufacturing activity of the assessee, despite the connection through export entitlements.

The assessee argued that the income from the sale of chemicals should be considered attributable to its manufacturing business based on the wide interpretation of the term "income attributable to" in the Explanation to section 104(4). The court acknowledged the broader meaning of "attributable to" but emphasized the necessity of a direct causal connection between the income and the manufacturing activity for it to be considered attributable.

The Supreme Court concurred with the High Court and Tribunal's findings, stating that the profit earned from the sale of imported chemicals, obtained through export entitlements, did not have a direct or proximate connection with the manufacturing activity of the assessee. Therefore, the income was not attributable to the manufacturing business for tax assessment purposes. The appeal was dismissed, and no costs were awarded.

Additionally, special leave petitions related to the same issue for the assessment year 1967-68 were also dismissed in line with the decision in the main appeal.