1995 (3) TMI 134 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of sale proceeds of export quota as business income.
2. Applicability of section 28(iiia) of the Income-tax Act.
3. Determination of whether the sale proceeds constitute capital receipt.
4. Liability for capital gains tax on the sale proceeds.

Issue-Wise Detailed Analysis:

1. Taxability of Sale Proceeds of Export Quota as Business Income:

During the assessment proceedings, the Assessing Officer observed that the assessee, a private limited company engaged in the export of garments, did not export any garments during the year. The receipts consisted of duty drawback and sale of R.E.P. licence from earlier exports. The officer found that the assessee did not include Rs. 7,25,854 received from the sale of the export quota in the taxable income, arguing it was a capital receipt related to the capital structure of the business. The Assessing Officer disagreed, stating that the export entitlement was received in the regular course of business, thus constituting trading receipts and taxable income. This view was upheld by the CIT(A).

2. Applicability of Section 28(iiia) of the Income-tax Act:

The assessee argued that section 28(iiia) was inapplicable as it pertains to profits on the sale of licences under the Imports (Control) Order, 1955, while the case involved an export licence under the Exports (Control) Order, 1977. The assessee contended that the sale proceeds of the export licence were a capital receipt, as the licence was integral to the business structure. Various authorities were cited to support this, including cases where the sale of licences was considered a capital receipt.

3. Determination of Whether the Sale Proceeds Constitute Capital Receipt:

Upon reviewing the facts, authorities, and contentions, it was concluded that the assessee's business did not involve dealing in export licences, thus the export licence was not stock-in-trade. The Exports (Control) Order, 1977, required a licence for exporting garments, making the licence a capital asset. The Madras High Court in Seshasayee Bros. Ltd. and the Bombay High Court in CIT v. Automobile Products of India Ltd. supported the view that the sale of such licences constitutes a capital receipt. The Supreme Court in Kettlewell Bullen & Co. Ltd. and CIT v. Maheshwari Devi Jute Mills Ltd. further clarified that compensation for loss of a source of income is a capital receipt, not taxable income.

4. Liability for Capital Gains Tax on the Sale Proceeds:

The question of capital gains tax liability arose as a consequence of the receipt being a capital receipt. The assessee argued there was no cost of acquisition for the export licence, referencing CIT v. B. C Srinivasa Setty and Ganapathi Raju Jogi. It was found that the assessee paid non-refundable service charges and council charges to the Apparel Export Promotion Council, but these were not costs of acquisition for the licence itself. Therefore, following the Supreme Court's judgment, it was concluded that there was no liability for capital gains tax due to the absence of a cost of acquisition.

Conclusion:

The Tribunal held that the sale proceeds of the export licence were a capital receipt and not taxable as business income. Consequently, there was no liability for capital gains tax due to the absence of a cost of acquisition. The addition of Rs. 7,25,854 to the taxable income was deleted.