1. The short question raised by the petitioners here relates to the proper construction of the expression 'any profits and gains derived from a ship' occurring in section 80J of the Income-tax Act, 1961, and the question arises thus :
The petitioner-company is a public joint-stock company incorporated under the Indian Companies Act, 1913, and its main object is to carry on business of deep sea fishing. It appears that for the purpose of that business the petitioner-company obtained as many as 8 trawlers from a Japanese concern which could be used for deep sea fishing and it actually used these 8 trawlers for catching fish in deep sea and there is no dispute that because of such user of the said trawlers, the total tonnage of fish caught by the petitioner-company, since these 8 trawlers were utilised by it for the purpose of this business in the accounting years ending, 31st March, 1968, and 31st March, 1969, being the relevant previous years for the assessment years 1968-69 and 1969-70, the petitioner-company became entitled to relief under section 80J and section 80K of the Income-tax Act, 1961, and, therefore, an application dated 9th September, 1969, was made to the 1st respondent (Income-tax Officer, Companies Circle II(7), Bombay), through the petitioner-company's auditors and after stating that the company was entitled to get the benefits of these two sections it applied for the relevant certificate under section 197(3) of the Income-tax Act, to enable it to declare the dividend as tax-free dividend. Along with that application the petitioner-company annexed the statements of the exempted profits under section 80J relating to the two years, out of which profits the dividends were to be declared. The company also enclosed a certificate of Indian registry being the specimen certificate in respect of the ships owned and used by the petitioner-company for earning the income. Certain further information was required by the letter dated 11th October, 1969. The 1st respondent, however, by his order dated 12th March, 1970, refused to issue the relevant certificate as applied for on the ground that the petitioner-company's total gross income did not include 'any profits and gains derived from a ship' and that the trawlers in question were merely used as instruments for its business activity of catching fish and selling fish. It is this order passed by the 1st respondent that is being challenged by the petitioner-company by the present petition filed under article 226 of the Constitution.
2. On behalf of the petitioner-company Mr. Dilip Dwarkadas has pointed out that the trawlers in question fulfil all the conditions mentioned in subsection (5) of section 80J, particularly the first condition mentioned therein that there were owned by the petitioner-company, which was an Indian company, and that these were wholly used for the purposes of the business of the petitioner-company and he, therefore, contended that since the profits and income earned by the petitioner-company, in the two relevant years, or at least a substantial portion thereof could be said to have been derived from ships owned by the petitioner-company, the petitioner-company was entitled to the benefits of section 80J and section 80K and that the order passed by the 1st respondent, refusing to issue the relevant certificate, is contrary to the proper interpretation of section 80J.
3. In order to appreciate this contention of Mr. Dilip Dwarkadas it would be desirable to set out the relevant provisions of section 80J being subsections (1) and (5) thereof. Sub-section (1) of section 80J being sub-sections (1) and (5) thereof. Sub-section (1) of section 80J runs as follows :
'80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases. -
(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 aggregate of the deductions, if any, admissible to the assessee under section 80H and sector 80I) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year).'
4. Sub-section (5) of section 80J runs as follows :
'This section applies to any ship, where all the following conditions are fulfilled, namely :-
(i) it is owned by an Indian company and is wholly used for the purposes of the business carried on by it :
(ii) it was not, previous to the date of its acquisition by the Indian company, owned and used in Indian territorial waters by a person resident in India; and
(iii) it is brought into use by the Indian company at any time within a period of twenty-eight years next following the 1st day of April, 1948.'
5. It is true that the trawlers owned by the petitioner-company could be said to have fulfilled all the conditions mentioned in sub-section (5) of section 80J and Mr. Joshi appearing for the 1st respondent has not disputed that position before me. The only question that falls to be considered is as to whether the gross total income of the petitioner-company during the relevant years includes any profits and gains derived from a ship and there would be no dispute that if the gross total income of the petitioner-company during the relevant years includes any profits and gains derived from a ship and there would be no dispute that if the gross total income of the petitioner-company includes any such profits and gains derived from a ship the petitioner-company would be entitled to the deduction provided for in sub-section (1) of section 80J and correspondingly to the benefit of section 80K.
6. On the question of proper interpretation of the expression 'any profits and gains derived from a ship' two rival interpretations have been canvassed before me. Mr. Dwarkadas for the petitioner-company has contended that this expression occurring in sub-section (1) of section 80J should be read along with the first condition appearing in sub-section (5) of section 80J and, if it is so read, it would be clear that the profits and gains earned by the petitioner-company during the relevant years, if not whole at least substantial part thereof, could be said to have been derived from a ship (meaning the trawlers in question), for it is clear that but for the fact that the petitioner-company owned these 8 trawlers and used them for its business of deep sea fishing the substantial part of their profits and income would not have been earned at all by the petitioner-company. He pointed out that it was an undisputed fact that these trawlers had been equipped with (1) fish finders, (2) echo sounders and (3) special thick type winches for hauling huge loads of fish, and had also been fitted with refrigerated holds to store fish caught by them and, according to him, it is by reason of user of these 8 trawlers that the petitioner-company could be said to have derived its profits or gains during the relevant years and as such the petitioner-company was entitled to the reliefs under sections 80J and 80K. He relied on the Privy Council decision in Commissioners of Taxation v. Kirk, where the expression 'derived' was construed by their Lordships and the word was treated as synonymous with 'arising' or 'accruing' and according to him in this case the profits and gains did arise or accrue from the use of the trawlers. On the other hand, Mr. Joshi for the 1st respondent has contended that in order that the benefits of sections 80J and 80K could be availed of by an assessee it must be shown that the profits and gains must have been derived directly from a ship or ships owned by an assessee and not by using the ships as instruments with which the business of the assessee is carried on. In other words, according to Mr. Joshi, the ship or ships concerned must be a direct source of the income produced or earned by the assessee, as for instance when ships are plied for earning freight by transporting passengers or cargo, and, according to him, it is in that sense the expression 'profits and gains derived from a ship' has been used in section 80J. On a matter of construction Mr. Joshi relied upon the scheme of the Income-tax Act which classified sources of income into four or five categories, namely, income from salary, securities, property, business, and any other source of income and urged that the ship, the profits or gains derived from which are entitled to certain deduction, must be regarded as a direct source of income. Mr. Joshi pointed out that it was an admitted position in the case of the present assessee that according to the memorandum of association of the petitioner-company the principal business of the company was to carry on business of deep sea fishing. In other words, the profits and gains were derived by the petitioner-company from its business activity of catching fish and selling the same and the trawlers in question were simply instruments for earning such income and that is the reason for which the 1st respondent has rightly refused to issue certificate that was applied for by the petitioner-company from its business activity of catching fish and selling the same and the trawlers in question were simply instruments for earning such income and that is the reason for which the 1st respondent has rightly refused to issue certificate that was applied for by the petitioner-company. Mr. Joshi also relied upon the statement of objects and reasons given for the enactment of this particular provision to show that the real intention of inserting this provision was to confer the benefits on Indian companies owning ships used in shipping trade or business. He pointed out that it was by the Finance (No. 2) Act of 1967, that for the first time such benefits were conferred upon an assessee and the relevant clause in the Finance (No. 2) Bill, 1967, was clause No. 24 and the object with which this provision was introduced has been explained thus :
'The proposed sub-section lays down various conditions which have to be fulfilled before the profits and gains derived by an Indian company from the plying of a ship or ships can quality for the tax concession under this section'
7. and then the conditions are set out. According to Mr. Joshi, the statement of objects and reasons clearly show what was the real intention of the legislature in inserting this new provision in the Finance (No. 2) Act of 1967. He, however, fairly stated before me that the statement of objects and reasons was not being relied upon by him for the purpose of giving any aid to the proper construction of the relevant section, but he urged that the said statement of objects and reasons could be looked at for the purpose of knowing the circumstances which prevailed when the enactment was sought to be introduced, the mischief sought to be prevented by the proposed enactment or the benefit that was sought to be given by the proposed enactment and it is for this purpose that he invited my attention to the statement of objects and reasons. On the other hand, Mr. Dwarkadas contended that though the statement of objects and reasons stated that the benefit was intended to be given to an Indian company deriving profits and gains from plying of ship or ships, the legislature could have made it clear in enacting section 80J itself that it was only the profits and gains of an Indian company owning ships and doing shipping business that would be entitled to the benefits under that section but it had not done so; on the other hand, while laying down the conditions of sub-section (5) it has been stated that the ship concerned should be owned by an Indian company and the same should be wholly used for the purposes of the business carried on by the Indian company and not that it should be wholly used for the purposes of shipping business of the company. In other words, the business for which the ship should be used by the company has nowhere been qualified while incorporating conditions in sub-section (5). He, therefore, urged that if the petitioner-company satisfied the said condition as is to be found in sub-section (5), namely, that the petitioner-company is an Indian company which owns the ships and has used the ships for the purpose of its business, the petitioner-company should be held to be entitled to the benefits conferred by section 80J.
8. In my view, it is difficult to accept the contentions urged by Mr. Dwarkadas. In the first place, sub-section (1) and sub-section (5) cannot be read together in the manner suggested by him. It is true that sub-section (5) of section 80J prescribes certain conditions which must be fulfilled before the section could be applied to any ship owned by an Indian company. But sub-section (5) merely prescribes conditions and that sub-section will have no bearing on the question as to what should be the proper interpretation of the expression 'any profits and gains derived from a ship' occurring in sub-section (5) of section 80J. Sub-section (5) is not the section which confers any benefit; the benefit has been conferred by the operative part which is contained in sub-section (1) and it is the expression 'any profits and gains derived from a ship' occurring in the operative part of sub-section (1) of section 80J that is to be construed. The conditions mentioned in sub-section (5) must of course be fulfilled by a ship, and it is only after these conditions are satisfied by a ship that the question arises as to whether the profits and gains earned by an Indian company owning the ship are 'derived from the ship' or not. Secondly, on the question of proper interpretation of the expression concerned, the scheme of the Income-tax Act mentioned by Mr. Joshi would be very relevant. Section 5 clearly indicates that the total income from whatever source it is derived and the Act undoubtedly classifies income from various sources in different categories such as income from salary, interest from shares and securities, income from property, profits and gains of business and income from any other source and each category has its own rules of computation and deductions and having regard to this scheme of the Act it would be reasonable to construe the expression 'profits and gains derived from a ship' occurring in sub-section (1) of section 80J as meaning profits and gains derived directly from a ship, that is to say, the ship must be the direct source of income and not a ship when it is used as instrument for carrying on business activity which produces the income. Further, the other two sources which have been included in sub-section (1) of section 80J would also indicate that the relief thereunder is conferred in respect of profits and gains which are derived directly from those two other sources. Sub-section (1) provides that where the gross total income of an assessee includes any profits and gains derived from (i) an industrial undertaking, or (ii) a ship, or (iii) the business of a hotel, to which this section applies, there shall be a particular deduction as provided for in the latter part of that sub-section. The fact that these three different sources have been grouped together in sub-section (1) clearly shows that the legislature intended to confer benefits of the said sub-section upon the profits and gains derived directly from the source mentioned therein and, therefore, in my view, the expression 'any profits and gains derived from a ship' occurring in sub-section (1) will have to be construed as profits and gains directly derived from that source and the benefit of that provision cannot be availed of if the assessee is using the ship or ships as instruments for carrying on his business activity which produces the income. If profits and gains derived from the business activity like catching fish and selling the same are to be regarded as profits and gained derived from a ship simply because the ship is used for catching fish, then profits and gain derived from a business carried on by using the building where the business is housed will have to be regarded as profits and gains derived from the house property. I am, therefore, of the view that the construction submitted by Mr. Joshi is the proper construction.
9. The Privy Council decision in Commissioners of Taxation v. Kirk relied upon by Mr. Dwarkadas is not applicable to the present case. In that case, undoubtedly, the expression 'income derived from lands' came to be construed by the Privy Council, but it was a case where the company carried on the business of 'mining' and extracted ore from lands of the Crown in New South Wales Colony held under a lease or license issued by and on behalf of the Crown and the ore so extracted was put in merchantable condition and then sent to the Colony of Victoria for sale. The Privy Council pointed out that there were four processes in the earning or production of the income of a mining company : (1) the extraction of the ore from the soil; (2) the conversion of the crude ore into a merchantable produce, which is a manufacturing process; (3) the sale of the merchantable produce, and (4) the receipt of the monies arising from the sale, and their Lordships held that, since the first two processes took place in New South Wales, that part of the profit which was attributable to those two processes did accrue or arise in New South Wales and was assessable under the New South Wales Land and Income-tax Assessment Act of 1895. In other words, the proposition established in that case was that part of the profits may accrue in a country although all the acts which result in the profits do not take place there. In my view, the principle of that case would not be applicable to the facts of the present case. In the present case, those considerations (which arose in that case) are not involved and all that I am concerned is what should be the proper interpretation of the expression 'any profits and gains derived from a ship' occurring in section 80J and I have no doubt that the expression 'derived from a ship' must mean originating from that ship as a source of direct income.
10. In this view of the matter, it seems to me clear that the interpretation put by respondent No. 1 on the relevant expression occurring in section 80J was proper and the refusal to issue certificate applied for was perfectly justified.
11. Rule will, therefore, be discharged. There will be no order as to costs.