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TMI Blog1985 (8) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... issued notice under section 263 in response to which the assessee filed reply objecting to invoking the provisions of section 263. The assessee was heard by the Commissioner. After considering the submissions of the assessee, he passed the order dated 20-3-1984 under section 263. He held that the ITO's order allowing deduction under sections 80HH and 80J after taking into account receipts such as import entitlements, drawbacks, etc., was clearly erroneous and the decision of the Kerala High Court in Cochin Co. v. CIT [1978] 114 ITR 822 would be applicable. Thus, he directed the ITO to recompute the deductions under sections 80HH and 80J after excluding the premia on import entitlements, export house premia and drawbacks and revise the assessment accordingly. Against the same, the assessee has preferred this appeal. 3. The learned counsel for the assessee strongly urged that the order of the ITO is not erroneous and the Commissioner cannot invoke the provisions of section 263. The assessee is an industrial undertaking. It purchases fish and after processing and producing exportable sea foods exports the same and on account of the exports made, the assessee is entitled to import en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wbacks cannot be considered as a business activity of the assessee. Thus, he supported the order of the Commissioner. 5. We have considered the rival submissions. Sections 80HH(1) and 80J(1) read as under: "80HH. (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, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof." "80J. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under section 80HH or section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity is the immediate and effective source of the said profit or gain. There should be direct nexus between the activity and the earning of the profit or gain. Merely because the activity has helped to earn the income or profit in an indirect way it cannot be held that the income or profit or gain has been derived from the industrial undertaking. The business of the industrial undertaking in the instant case is export of sea foods. On account of exports the assessee was entitled for import entitlements. The profit on the sale of import entitlements is to be treated as a business income as held by the Kerala High Court in D.K. Industries v. CIT [1984] KLT 697. In this decision, it was further observed that the import entitlement is not derived from export but it is the very right which gives rise to import. In our view the profit on sale of import entitlements is not directly attributable to the immediate source being the business of export of sea foods of the industrial undertaking. The profit derived on sale of import entitlements is only earned in an indirect way. That cannot be treated as a business activity of the industrial undertaking. 6. We may refer to the decision or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Refineries Ltd.'s case the Kerala High Court observed as under: "No doubt these decisions lend weight to the argument of the learned counsel for the revenue, Shri P.K.R. Menon, that the words 'derived from' in section 80J of the Act cannot have a wide import so as to include any income which can in some manner be attributed to the business. The derivation of the income must be directly connected with the business in the sense that the income is generated by the business. It would not be sufficient if it is generated by the exploitation of a business asset. In the case before us, the income by way of interest from the deposits is no doubt an income derived by investing surplus cash of the assessee generated as profits of the industrial undertaking. But, it is not money derived from the business activity of the industrial undertaking but by the business activity of deposit of the business asset in banks. Within the meaning of the term 'derived from' it will not be possible to hold that the income so generated is the income falling within section 80J...." It was held therein that the derivation of the income must be directly connected with the business in the sense that the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the entire receipts inclusive of the sale proceeds of the entitlements. The Commissioner invoked the provisions of section 263 and set aside the assessment and directed the ITO to redo the same after excluding the sale proceeds of import entitlements. The Tribunal upheld the order of the Commissioner. On reference, the Karnataka High Court observed as under: "Section 80HH was meant to give a tax rebate to certain categories of assessees and one who wants to claim such relief must strictly satisfy the requirements prescribed thereunder. He must establish that his profits and gains were derived from his industrial undertaking or the business of a hotel. It is just not sufficient if a commercial connection is established between the profits carried and the industrial undertaking. The law requires that such profits must have been derived from the industrial undertaking. The industrial undertaking must itself be the source of that profit. The business of that industrial undertaking must directly yield that profit. It must be the direct source of that profit and not a means to earn any other profit. 'Source' means not a legal concept but something which a practical man wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an exporter from whom he receives commission. The business of the assessee is one of exporting sea foods and not earning income by way of commission from the third party who is shown as an exporter. Thus, this commission described as export house premia earned by the assessee is not derived from the industrial undertaking as that is not the business activity of the industrial undertaking. Thus, the assessee will not be entitled to relief under sections 80HH and 80J in respect of profits and gains derived from the sale of import entitlements and the export house premia since the order of the ITO is erroneous and prejudicial to the interests of the revenue, the Commissioner had jurisdiction to invoke section 263 and we uphold his action in invoking section 263. 13. But so far as the drawbacks to which reference is made by the Commissioner are concerned, the full facts are not available. It is not known whether it is in respect of the excise duty on the packing materials collected from the manufacturer and whether the customs department has given refund as customs duty with reference to the excise duty collected on the packing materials. No doubt, the decision of the Madhya Prade ..... X X X X Extracts X X X X X X X X Extracts X X X X
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