9911796707
TMI Blog1984 (11) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee claimed that this sum of Rs. 1,35,020 was a capital receipt and not taxable. The IAC did not accept this plea. In his view, the entitlements had been received on account of business activities and, hence, closely interlinked with business receipts. He, therefore, held the receipts to be taxable. The Commissioner (Appeals), however, accepted the assessee's claim. He held that the receipt in question was on account of transfer of capital assets. These capital assets were also self-generated and, hence, even capital gains tax could not be levied on the said receipt. The matter went up in appeal to a Division Bench of the Tribunal. 3. The learned Accountant Member held that the import entitlements arose in the course of the assessee's business and, hence, sale of such entitlements constituted business receipts taxable in the hands of the assessee. The learned Judicial Member took a contrary view. He held that the import entitlements certificate issued to the assessee was a capital asset and was not a trading asset. The transfer of this certificate for consideration represented a capital transaction which resulted in capital gains, either long-term or short-term. No capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Allahabad High Court in Agra Chain Mfg. Co. v. CIT [1978] 114 ITR 840 had referred to the provisions of section 28(iv) of the Income-tax Act, 1961 ('the Act'), and was of the view that such rights could be brought to tax under that provision. Hence, the stand for the assessee that the right did not cost the assessee anything and that, therefore, it had no value, was not acceptable. A thing which does not cost anything to a person can still have a considerable value, as is the case with such import entitlements. (iv) The import entitlements arose in the course of business and any receipt on the sale of such entitlements had to be looked upon as business receipts in the hands of the assessee. Business activities, in such cases, cannot be bifurcated on the basis that the business activities ended on receipt of the entitlements and that thereafter a new transaction started. Hence, the amount of Rs. 1,35,020 was rightly brought to tax as business income. There was also strong judicial authority available for this conclusion. 6. The learned Judicial Member passed a separate order of dissent. The points made by him in this order are briefly as under : (i) No cash was received as subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was also the decision of the Calcutta High Court in K.N. Daftary v. CIT [1977] 106 ITR 998. In that case the Calcutta High Court, proceeding on the basis that the amount received on sale of import entitlements being capital in nature, held that, a short-term capital gain arose therefrom. No doubt, in the latter case of Kesoram Industries & Cotton Mills Ltd., the Calcutta High Court itself observed that in K.N. Daftary's case, the Court was not really concerned with the question whether the import entitlement was of the nature of capital or revenue and had proceeded on the basis that the receipt there was a capital receipt. But then in Kesoram Industries & Cotton Mills Ltd.'s case, the Court was not concerned with the question of sale of import entitlements. Hence, the only direct authority of the Calcutta High Court on such an issue was K.N. Daftary's case and that supported the assessee's stand in the instant case. (vi) There was also the decision of the Gujarat High Court in Ahmedabad Mfg. & Calico Printing Co. Ltd. v. CIT [1982] 137 ITR 616. In this case, the question was whether the profit from the sale of entitlements could be looked upon as the profit of the export bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t certificate, it held it as a capital asset and not as a trading asset. Hence, the transfer of the certificate was a capital transaction which resulted in capital gain, either long-term or short-term. It was not a sale in the course of the regular business of the assessee. Like goodwill, the import entitlement certificate was a self-generated asset. It accrued to the assessee from the exports made by it. Capital gain resulting from the sale of an asset like goodwill cannot be subjected to tax under section 45 of the Act. For the same reason, the sale of the import entitlement also did not lead to any assessable capital gain under section 45. 7. Shri G.C. Sharma, the learned counsel, appeared for the assessee. Shri S.D. Kapila appeared, for the revenue. The various aspects, legal and factual, relating to the issue in question were argued by them from their respective positions at great length. We derived considerable benefit from their labours. It would be our endeavour here to find a solution that could be reasonably described as in line with the facts on record and the position in law. 8. The material facts appears to be : the assessee received Rs. 1,35,020 on the sale of impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entives like cash compensatory support, grant of import replenishment licences to exporters and the improvement in the export services. 10. The whole question of the export policy and performance of the Government, including allied aspects, was looked into by the Estimates Committee (1981-82) and its findings are available in its 23rd Report (7th Lok Sabha). As noted by it in July 1963, the Government constituted a market development fund for financing schemes and projects for the development of foreign markets for Indian products and commodities. Over the years, the operations of the fund had been considerably expanded to cover activities like market research, export publicity, grants to export promotion councils, etc. The schemes of export assistance and export incentives were extended and improved upon. These included : (a) Cash Assistance Scheme. (b) Import Replenishment Scheme. (c) Duty Drawback Scheme. (d) Tax Concession Scheme for selected type of expenditure for market development abroad. (e) Provision for raw materials, including indigenously available raw materials, at international prices and the provision for export credit insurance at relatively cheaper rates. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Scheme deals with the benefits available under the Scheme. These were : (a) Import entitlements : Against exports of the products mentioned in Annexure V, the registered exporter will be entitled to the import entitlements as indicated in the same annexure. (b) Allocation and supply of indigenous raw materials, etc., in accordance with Annexure VI. (c) In the case of any export product failing within the scope of the Scheme but not specifically mentioned in Annexure V, the extent of import entitlement to be determined by the Department of International Trade. For this purpose, the Council should furnish information regarding the "f. o. b. value of the export product, the quantities of different materials (imported and indigenous) used in its manufacture and the c.i.f. value of such quantities of imported materials. " (d) Once an exporter is registered as an exporter under the Scheme, exports effected by him from a date not earlier than three months prior to the dated of application for registration would be considered for the import and other benefits under the Scheme. 14. Clause 6 of the Scheme dealt with the application for import entitlement. Clause 7 dealt with the use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sudden need of legislative action. For many such needs, delegated legislation is the only convenient or even possible remedy. "Parliament and Government would grind to a halt if there were not built into our Constitution an adequate system of executive legislation. " (iv) The Export Control Orders are legislative in character--Union of India v. Anglo Afghan Agencies AIR 1968 SC 718. These orders are statutory instruments and can be amended from time to time. The power to make such statutory instruments or rules, regulations or bye-laws carries with it the power to revoke, amend or re-enact them. Being legislative in character, such orders cannot be assailed on the basis of the doctrine of estoppel. Such orders represent delegated legislation. Such delegated legislation is not to be regarded as some form of inferior legislation. It carries out the maker's commands as effectively as does an Act of the Parliament. 15. How is the import entitlement received by the assessee here as an exporter of engineering goods and sold for consideration this year to be related to the above kind of delegated legislation ? Here also, we have the assistance of the decision of a High Court. The ans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was put into action for improving the foreign exchange position of the country. This was the National Defence Remittance Scheme, 1965. Reference was made to this Scheme by the counsels for both the parties as some of the decisions, which we shall be considering presently, had to decide the taxability of certain receipts arising under this Scheme. Here again, we are recording the salient features of this Scheme from the decision of the Calcutta High Court, viz., CIT v. Satya Paul [1984] 148 ITR 21. In October 1965, the Government of India promulgated the National Defence Remittance Scheme, so that foreign exchange might become available for the country's requirements. Under the Scheme, Indian nationals abroad could remit money from foreign countries on and after 26-10-1965 by way of gifts, remittances for family maintenance, transfer of capital, etc. Neither the remitters nor the recipients were liable to income-tax on such amounts. It was also assured that the source of such remittances from abroad would not be questioned. It was further provided that the recipient or the remitter or his nominee would, in such a case, be also given transferable import licence of the value of 60 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held in CIT v. S.A. Rajamanickam [1984] 149 ITR 85 (Mad.). It was also emphasised that once it was accepted that the import entitlement was received by the assessee as a bounty or reward from the State, it followed that such a bounty was exempt under section 10(17B) of the Act. 16. On the position brought out before us, it does not appear all that the assessee received a bounty or a reward here, and which bounty or reward had nothing to do with the carrying on of the business of the assessee. Shri Kapila had emphasised that there was no question of any bounty here and that this was the opinion recorded by not one but by several High Courts. Two of these decisions require notice : 1. Agra Chain Mfg. Co.'s case--The facts and the ratio of this decision have already been noticed briefly in para 15 supra. In that case also, a specific submission raised was that the nature of the entitlement was bounty or gift. In rejecting this submission, the Court observed : " ...A thing given is said to be bounty when it is bestowed with a view to give a favour, reward, premium or subsidy. In the instant case, the entitlement does not have the qualification of a bounty. The object of giving the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to in para 12 supra. The brief facts were : The assessment years involved were 1965-66 and 1966-67. The assessee-company there (engaged in the business of aluminium goods) exported such goods under the Special Export Promotion Scheme for engineering goods already noted above. The assessee got import entitlements. No specific arguments appear to have been taken before the Court to the effect that the import entitlements represented a bounty or a gift but from the Court's observations, it is seen that the Court's view was : having regard to the terms of the Scheme in question, it could be said that by virtue of making certain export, an exporter 'had the right' to import certain goods whereby he could import the goods for himself and/or he could transfer the said entitlement of the right, and receive cash in lieu thereof, to another member of the Export Promotion Council registered as such and subject to the fulfilment of certain conditions. 17. Judicial authority available, therefore, does not support the contention for the assessee that the import entitlement in question represented a bounty or a gift from the Government. On the other hand, it was a right conferred on the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to import ; and hence such a right was in the nature of a capital asset. A further argument taken there in this regard was that the assessee also could not be said to be a dealer in import entitlements. Hence, the realisation made in disposing of the same could not be treated as revenue receipt ; that the assessee having got something in lieu of an enduring right, i.e., to say, a right to import, such a receipt was in exchange of that right and could be considered to be a capital receipt. It will be noticed that the argument taken for the assessee, in the instant case, is substantially the same. The Calcutta High Court, however, rejected this contention. It referred to its own decision in Kesoram Industries & Cotton Mills Ltd.'s case. The cash subsidy under an Export Promotion Scheme for textile goods (in that case) was held by the Court to be taxable as received by that assessee in the course of carrying on its business. It then went on to observe that it was the nature of the right that was decisive in conjunction with other factors and not whether cash had been received under the Export Promotion Scheme from the Government. Thus, the Calcutta High Court rejected the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said there was any intention to deal with it, this flowed directly in the course of his business dealing and part of the carrying on of its business as an exporter. " 22. In D.K. Industries v. CIT [1984] 19 Taxman 399 (Ker.), the assessee was an exporter of sea foods. On the basis of the exports made by it, it was granted by the Government the right to import a certain quantity of goods. Instead of importing goods under the import entitlement, it sold the entitlement for Rs. 2,37,283. The assessee contended that the sale proceeds represented the sale of a capital asset within the meaning of section 2(14) of the Act. The Court rejected this claim. It held that the import entitlement was not a right having a direct nexus with export, but a right forming part of the business of the assessee and, therefore, a right or a benefit arising from business or a profit or gain of such business. The assessee's business though export-oriented, basically and essentially, involved not only export but also the consequences of export, which was the right to import goods arising from the entitlement. The moment the assessee made use of that right, "that right directly forms the source of a stream ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee dealt with a trading asset in the capacity of an owner of a business and the consequences of the same will follow. Shri Kapila for the department gave out a simile to make clear the situation under discussion. He said the import entitlement was the fruit of the tree of business carried on by the assessee. The fruit and the tree represented as organic whole and did not have independent existence, when the fruit came into being, i.e., when the assessee received the entitlement. The assessee sold the fruit and not the tree and, hence, the receipt in question here is a revenue receipt. There is no doubt, a risk in stretching too far any figure of speech. The learned counsel for the assessee, in fact, refuted the aptness of the figure of speech of the departmental representative. According to him, the export business of the assessee could be said to represent the tree. The fruit, however, was not the import entitlement ; it was the foreign exchange earned by the tree of export business (for augmenting the resources of the Government) that was the fruit. This fruit, i.e., the foreign exchange earned, was itself not available to the owner of the tree. The import entitlement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn in the Special Export Promotion Scheme for engineering goods. It could not, therefore, be said that when the assessee sold the import entitlement for cash consideration, such a receipt was derived or arose from the assessee's 'export trade'. There was no nexus between the receipt in question which arose out of the transfer of import entitlement and the assessee's 'export trade'. The proximate cause of the receipt was the act of the transfer of the import entitlement. The assessee does not carry on a trade in import entitlements and, hence, the receipt could not be traced directly to any trade carried on by the assessee. It was the further contention of the learned counsel for the assessee that if it was assumed that what was at the point of acquisition, a capital asset, viz., import entitlement, had been converted into a trading asset by a simple act of volition on the part of the assessee to so convert the said capital asset and to deal with it as a trading asset, the assessee was entitled to substitute for the cost of the said asset, the market value thereof, at the point of conversion. Such market value could be nothing else but the price for which it was sold and, hence, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was entitled to such a rebate on the sale of import entitlements to the extent of Rs. 5,79,382. The ITO rejected the claim. The matter came up to the Kerala High Court. The Court rejected the assessee's claim. In its view, profit or gain can be said to have been derived from an activity carried on by a person only if the activity is the immediate and effective source of the profit or gain. There must be a direct nexus between the activity and the earning of the profit or gain. Income, profit or gain cannot be said to have been derived from an activity merely by reason of the fact that the activity may have helped to earn the income or profit in an indirect or remote manner. 28. In Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951 (Bom.) a similar question came up, i.e., interpretation of section 2(5)(i) of the Finance (No. 2) Act, 1962. The Court following the decision of the Kerala High Court in Cochin Co.'s case, held that the phrase 'derived from exports' in the said provision cannot be accepted as equivalent to 'referable to exports'. The Madras High Court, it may be noted here, took a contrary view in CIT v. Wheel & Rim Co. of India Ltd. [1977] 107 ITR 168. However, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event, would be only to tax the capital content of the entitlement. This was not permissible under section 28(i). It is not necessary to pursue the import of this argument in detail because in D.K. Industries' case, the Court gave out the simile of 'parallel' streams to make the position in law clear as regards such import entitlement. We have extracted the relevant passage in para 22 supra and in the light of this exposition, it appears difficult to accept the plea that the sale consideration for the import entitlement cannot be brought under section 28(i). 30. The learned counsel for the assessee placed much emphasis on the word 'trade' in the course of his arguments. He contended that the assessee had been carrying on an export 'trade'. Reliance was placed on some authorities also to show what a trade is. Some English decisions were referred to in this regard but we find that the factual context and the issues involved in these decisions are dissimilar and, hence, these decisions do not afford much guidance. Two of these decisions were Seaham Harbour Dock Co. v. Crook (Inspector of Taxes) [1931] 16 TC 333 ; and Clenboig Union Fireclay Co. Ltd. v. CIR [1924] 12 TC 427. As expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that such a receipt is taxable as profits and gains of a business. In view of this position, we find that the English case law, cited for the assessee dealing with different factual contexts, does not offer guidance in the matter. 32. Another submission for the assessee was that the receipt in question could only have been on capital account and could not have been a trading receipt so as to be covered by the expression 'profits and gains', as the import entitlement was not for compensating any loss or profits of the export business, if any ; that in the decisions relied upon by the revenue for its claim, the real nature of the right (to get import entitlement) was not analysed fully and the fact that the immediate source of the receipt in question was the transfer of the right itself, was also not given due weight. The question whether the sale consideration for the import entitlement was a capital receipt or not, has already been discussed in the paragraphs supra. Relevant judicial authorities also have been noticed in support of the view that the sale consideration was a revenue receipt taxable as profits and gains of business. The submissions to the contrary from the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1922 ('the 1922 Act'). 33. The facts of the above case and the ratio have been specially referred to because firstly, it was a decision of the Supreme Court and the learned counsel for the assessee had referred to it in support of his stand. We, however, find that this decision is of no assistance in the present case. The facts were totally different and the principle laid down by the Supreme Court cannot be extended to the instant case. 34. One other aspect requires notice in deciding, whether the receipt is of a revenue or of a capital nature. It would be useful to have a look at the so-called remittance cases in this regard. We have already referred to one of them in paragraph No. 15.1 supra. Another such case is CIT v. T. Kuppuswamy Pillai & Co. [1977] 106 ITR 954 (Mad.). As in the Calcutta High Court's case of Satya Paul, here also the assessee having got an import licence, after affecting a foreign exchange remittance, transferred the same to a third party and got Rs. 67,125. This was assessed by the ITO himself as a capital gain. The Tribunal held that no capital gain was involved as the licence had not cost anything to the assessee in terms of money in its creation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gains. These cases apparently proceeded on the common ground that the import licences obtained (under the National Defence Remittance Scheme or otherwise) were capital assets. That is not the position here and this line of cases does not lend much assistance to the point made out for the assessee before us. 36. Before parting with this aspect, a decision of the Gujarat High Court, that has been relied upon by the learned Judicial Member in his order of dissent, must be considered. We have already referred to this decision while summarising the reasoning of the learned Judicial Member in paragraph No. 6 supra. This is the decision in Ahmedabad Mfg. & Calico Printing Co. Ltd.'s case. The assessee in this case, a public limited company, was engaged in the manufacture of cotton textiles. It made exports of the products manufactured by it in the previous years relevant for the assessment years 1964-65 and 1965-66. It claimed the benefit of deduction admissible to assessees, whose total income included any profits or gains derived from exports under section 2(5)(a)(i) of the Finance Acts, of 1964 and 1965. The assessee had not maintained separate accounts pertaining to its export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... narrow meaning and only the proximate source had to be considered. The benefits in question had to be derived from exports and not simply referable to exports. Cash subsidy or allowance by the Government could be held to be directly connected with the export of goods. Hence, this alone had to be considered for the grant of rebate. But income derived by sale of transferable import entitlements or savings effected as a result of the import of materials at prices lower than the home market prices under import entitlements, which were not transferable, stood on a different footing. In the case before the Gujarat High Court, the question of transferable or saleable import entitlement did not arise. The Court concerned itself only with the cash subsidy and the savings effected by import of raw materials. It specifically stated that it would not express any final opinion as regards income from sale of transferable import entitlements. As regards the savings effected by import of raw materials, the Court held that it could not be said to be derived from export. 38. It is difficult to see how this decision is of assistance to the assessee here, as recorded by the learned Judicial Member. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual submissions in this regard for the revenue were not controverted for the assessee. 40. Two further submissions were raised before us for the revenue. It was submitted that it would be correct to contend, supported by the judicial authorities referred to above, that the receipt in question arose in the course of business as the acquisition of the right was so connected with the carrying on of the business, that the right arose as part of the assessee's business. A look at the Export Promotion Scheme itself would show such an integral connection. Every exporter was not entitled to the benefits under the Scheme. Only exporters of certain specified items, e.g., engineering goods, were entitled. Further, such an exporter has to abide by various conditions laid down. The exporter has to register himself as prescribed, with the Export Promotion Council. This also shows that the whole scheme did not represent a mere unilateral act of the State from which a bounty flowed to the assessee. There was an inter-connection between the exporter and the State by way of mutual obligations to be fulfilled before the Scheme could operate. The counsel for the revenue in fact pointed out from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 4(3)(vii) of the 1922 Act as a receipt of casual and non-recurring nature. It held that even assuming the receipt was of such a nature, it arose from the exercise by the assessee of his profession as a lawyer and advocate and it was part of his income. The counsel for the revenue before us relied on this case to stress the point that for taxability, direct trading or business relationship need not be shown. It is enough to show that the amount in question formed part of the profits and gains of a business. (ii) Bengal Textiles Association's case--This is referred to in para graph No. 30 supra. The facts and the ratio are also noticed there. This decision was stressed for the revenue to show that the payment received from the Government by the assessee there was held to be taxable by the Court, notwithstanding the fact that there was no trading relationship between the assessee and the Government there. (iii) V.S.S.V. Meenakshi Achi v. CIT [1966] 60 ITR 253 (SC)--The assessee-firm owned a rubber plantation outside Penang in the former Federated Malay States. Out of a fund into which cesses collected under the Rubber Industry (Replanting) Fund Ordinance, 1952, on rub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade, but also the profits earned by the assessee as an integral part of its business activities and which are embedded in the various kinds of trading receipts which are ancillary or incidental to such business. 42. So much for the arguments from both sides, as regards the following aspects : (a) The right to import entitlements being a capital asset or not. (b) The sale consideration on the transfer of the said entitlements being a capital receipt or not. (c) If a capital receipt, there being no assessable capital gains. (d) The sale consideration received being taxable as profits under section 28(i). We have in the preceding paragraphs considered the relevant factual position, the relevant case law and the submissions for the parties before us. As we have indicated supra, the weight of judicial authority does incline strongly in favour of the revenue. Our view, therefore, is that the amount in question is to be included as the business income of the assessee, in terms of section 28(i). 43. Another aspect of the case before us was the taxability of the sale consideration in question under section 28(iv). We have reproduced the language of section 28(iv) already in paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or perquisite had to flow from a trading source, i.e., a party with whom the assessee had a trading relationship. The assessee had no such relationship with the Government. It merely received a piece of paper, i.e., the import entitlement, which had no value at the point of receipt from the Government. When the assessee sold the import entitlement, it received the sale consideration therefor. But that was a different transaction. That was not the source from which the assessee had received any benefit or perquisite. Hence, section 28(iv) cannot be applied. The learned counsel for the revenue, on the other hand, submitted that firstly, the method of accounting of the assessee was cash so far as the benefit in question was concerned, i.e., the receipt was shown in the accounts on the sale of the import entitlements. Till then, the assessee itself made no entries in the books of account. It was also not correct to say that it had no cost of acquisition. The import entitlement was received in the course of carrying on business, which included incurring of obligations laid down under the Special Export Promotion Scheme itself, e.g., the payment of subscription to the Export Promotion Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is called for in such a case. No doubt, if a decision of a High Court has been given without consideration of any relevant Supreme Court decision or a change in law has occurred in the meanwhile or if there are conflicting decisions from other High Courts, it would be possible for us to consider, whether a different approach has to be taken. But none of these circumstances is present here, and we may not, therefore, proceed on an independent enquiry in this regard. Reason for our not doing it, however, is : we cannot go into the merits of the applicability of section 28(iv). This is because, this Bench is a Third Member Bench. Its enquiry and final decision will have to be within the question-frame placed before it. It has to record its agreement with the conclusion of one of the two dissenting members. The point of difference referred to us (extracted in para 3 supra), raises the question whether the sum of Rs. 1,35,020 'was to be included as the business income of the assessee'. We have already answered this question, agreeing with the conclusion recorded by the learned Accountant Member. What else survives ? Two points are of interest here. The first is the way in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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