1999 (4) TMI 1 - SC - Income Tax

Assessee-firm is engaged in processing prawns and other sea food, which it exported - It also earned some import entitlements granted by the Central Government under an Export Promotion Scheme. The assessee was entitled to use the import entitlements itself or sell the same to others - Held 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

Summary

Issues:
1. Interpretation of section 80HH of the Income Tax Act, 1961 regarding the inclusion of income from the sale of import entitlements in the computation of relief.
2. Application of the principle of profit and gain derived from the industrial undertaking in the context of the sale of import entitlements.
3. Relevance of the amendments to section 28 of the Income-tax Act, 1961 in determining the taxability of income from the sale of import entitlements.

Issue 1: Interpretation of section 80HH:
The case involved a question of whether the income derived from the sale of import entitlements should be included in the computation of relief under section 80HH of the Income Tax Act, 1961. Section 80HH allows a deduction for profits and gains from industrial undertakings. The High Court initially ruled in favor of the assessee, but the Supreme Court disagreed. The Court analyzed the provision and emphasized that the profits and gains must be directly derived from the industrial undertaking to qualify for the deduction.

Issue 2: Profit and Gain from Industrial Undertaking:
The Division Bench of the High Court had to determine if the income from the sale of import entitlements was profit and gain derived from the assessee's industrial undertaking of processing sea food. The Court referred to precedents and concluded that for the income to be considered derived from the industrial undertaking, there must be a direct source of profit from the undertaking itself. It highlighted the importance of establishing a direct nexus between the profits earned and the industrial undertaking rather than a mere commercial connection.

Issue 3: Amendments to Section 28 and Taxability:
The later Division Bench of the High Court considered the amendments to section 28 of the Income-tax Act, 1961 in a subsequent assessment year. The amendments included profits on the sale of licenses and cash assistance against exports as taxable income. However, the Supreme Court found that these amendments were not relevant to the case at hand. The Court emphasized that the source of income from the sale of import entitlements was the Export Promotion Scheme of the Central Government, not the industrial undertaking. Therefore, the income could not be considered profit and gain derived from the industrial undertaking.

In conclusion, the Supreme Court set aside the judgment of the High Court, ruling in favor of the Revenue. The Court held that the income from the sale of import entitlements did not qualify for the deduction under section 80HH as it was not directly derived from the assessee's industrial undertaking. The decision reaffirmed the principle that for income to be eligible for deductions, there must be a direct nexus with the industrial undertaking itself.