1. The assessee in appeal is Bharat Carpets Ltd., a company incorporated under the Companies Act. The year of assessment involved is 1978-79 for which the previous year ended on 31-1-1978. As in the past, during the year under consideration the assessee carried on the business of manufacture of tufted woollen carpets and cotton tufted bed covers, etc., and also their sales in India and abroad.
2. The I AC on going through the profit and loss account of the assessee found that a sum of Rs. 1,56,632 was credited by the assessee in that account under the head 'Sales of import entitlements' and that the assessee had returned the same as part of its total income in the original return filed by it. In the revised return, the assessee, however, claimed that the income from sale of import entitlements was of the nature of capital receipt and the same was not taxable. This plea of the assessee was not acceptable to the IAC who has observed that 'the import entitlement arises directly by carrying out the export business and the assessee has earned the right of import entitlement from the business and being incidental to business, is a revenue receipt. Moreover, it is not an asset; it cannot be termed as capital asset and, therefore, it does not fall within the definition of 'capital asset' under Section 2(14) of the Income-tax Act, 1961 ('the Act'). The main objective for the grant of import entitlement is to provide the exporters to replenish the material which is used by the assessee in the manufacture of its trade or other certain permitted material in which the company deals. The assessee gets the benefit of 10 per cent of the Free On Board (FOB) value of the total export, as per the import policy announced by the Government from time to time, on the exported products. Thus, it is an income directly arising from export of the product of the company ... It is, therefore, a trading receipt and the profit earned on it is a revenue profit.' 3. Aggrieved by the aforesaid assessment order of the IAC, the assessee brought the matter by way of appeal before the Commissioner (Appeals), who after going through the Import Trade Control Policy and facts of the case and in the light of the ratio of the following decisions, agreed with the IAC that the receipt on the sale of import entitlements constitutes business income assessable under Section 28(iv) of the Act-Agra Chain Manufacturing Co. v. CIT  114 ITR 840 (All.), Kesoram Industries & Cotton Mills Ltd. v. CIT[ 1978] 115 ITR 143 (Cal.) and Addl. CIT v. Abbas Wazir (P.) Lid.  116 ITR 811 (All.).
4. The Commissioner (Appeals) further held that the import entitlements constitute stock-in-trade and did not have the colour of a 'capital asset' and basing himself on the ratio of the decision of the Delhi High Court in Dalmia Dadri Cement Ltd. v. CIT  126 ITR 851, held that the sale proceeds of import entitlements constitute the assessee's trading receipt and is business income under Section 28(0 of the Act.
5. In the appeal before the Tribunal, the departmental representative for the assessee, Mr. Pradeep Dinodia, urged that the assessee had imported machinery for manufacture of carpets. One of the conditions of the said import, as envisaged by the import licence, was that the assessee was to export carpets. That being the position, the assessee on the exports made in accordance with the terms and conditions of the aforesaid import license obtained the import entitlements. The object of the issuance of import entitlements to the assessee by the Government was not to compensate for low price obtained by the assessee on exports of the carpets. Rather the object was to shift the product (carpets) from the domestic market to the foreign market. This process, according to Mr. Dinodia, was not in the nature of a trading operation.
The import entitlements, on the facts and in the circumstances of the case, accrued to the assessee in the capital sphere. The profit in the present case was due to the transfer of import entitlements to the export houses or the actual user. The import entitlements cannot be termed as stock-in-trade. The import entitlements constituted 'capital asset' as defined in Section 2(14) of the Act. Since the obtaining of the import entitlements did not cost the assessee anything, there was no taxable capital gains on the transfer of the said capital asset as laid down in the following decisions: CIT v T. Kuppmwamy Pillai & Co.  106 ITR 954 (Mad.), K.N. Daftary v. CIT 106 ITR 998 (Cal.), CIT v. Home Industries & Co. [19771 107 ITR 609 (Bom.), Addl. CIT v. K.S Sheik Mohideen  115 ITR 243 (Mad.) (FB) and CIT v. B.C. Srinivasa Setty  128 ITR 294 (SC).
6. These arguments were strenuously controverted by the departmental representative, who has relied on the order of the Commissioner (Appeals), who, according to him, has examined the issue at great length on all aspects of the case.
7. We have given consideration to the above arguments. Initially, we would like to clarify that it. was never the case of the assessee before the tax authorities that the exports of carpets in the year under consideration, resulting in the winning of import entitlements, was in pursuance of the terms and conditions of the import licence issued to the assessee in May 1962 for the import, of machinery for the manufacture of carpets. Since this was never the case of the assessee before the tax authorities and the case now set up before us was never investigated by the tax authorities, we are slow to accept the case now set up in this behalf. The case has proceeded before the tax authorities on the admitted basis that the assessee was a manufacturer of carpets and that sizeable part of the carpets so manufactured were exported by the assessee in the years under consideration. It may be added that out of the total sales of the year, of Rs. 2,02,40,144, the local sales stood at Rs. 1,23,87,677, while the exports stood at Rs. 78,52,467. To say in other words, the local sales accounted for 61 per cent of the total turnover and the exports stood at 39 per cent. In respect of the exports so made, the assessee was issued by the Government the import entitlements. Those import entitlements were issued to the assessee pursuant to the import trade control policy as contained in the Import Trade Control Policy published by the Government of India, Ministry of Commerce. According to that policy, the objective of the import policy for registered exporters was to provide them by way of replenishment from the most preferred sources, the imported materials required in the manufacture of the products exported by them. Some of the salient features of the import replenishment licence scheme are : (i) Only certain specified types of export will qualify for import replenishment.
(ii) Exports on consignment basis will qualify for replenishment only after the export proceeds have been realised against final sale and surrendered to the Indian Exchange Control.
(iii) Exports effected will qualify for replenishment only if such exports are made in accordance with the provisions of the export trade control orders as amended from time to time.
(iv) The scheme of import replenishment licences is highly structured. The products against the export of which replenishment will be allowed have been enumerated. The extent of replenishment that will be permissible against each type of product has also been specified in terms of a percentage of the FOB value of the export.
The articles permitted to be imported against the various types of exports are also specified.
(v) Where the licensing authority considers that the value of the goods exported is over-invoiced or there has been other raisdeclarations, it shall be open to it either to refuse to issue any licences against such exports or to reduce the value of the licences as it deems fit.
(vi) Import licences under the scheme will he issued only to registered exporters who fall into three categories : (vii) Nomination/transfer of the import licences have also been provided for.
(ix) Applications for import licences should be made at the end of each quarter (since amended to every month). These applications have to furnish several details relating to the relevant exports including export promotion, copies of shipping bills duly authenticated by customs, bank certificates regarding realisations of the sale price of the goods exported in foreign exchange, manufacturing licences, etc. The application also contains several material undertakings and declarations relating to the assessee's export business.
It was pursuant to the above scheme that the assessee-company in respect of the exports made by it was granted the import entitlements which the assessee, instead of utilising the-same for importing the material required in the manufacture of the carpets, sold the same to others resulting in the sale proceeds of Rs. 1,56,632.
8. In Agra Chain Mfg. Co. (supra), the Allahabad High Court was considering the nature of the sale proceeds of the import entitlements to which an exporter was entitled under the Special Export Promotion Scheme for engineering goods. After going through the whole of the said scheme as well as the provisions of the Imports and Exports (Control) Act, 1947, their Lordships of the Allahabad High Court came to the conclusion that an exporter was entitled to get the import entitlements admissible under the said scheme as of right provided, of course, he satisfied its requirements. The nature of the entitlements was not a bounty or gift. As such, it was held that the sale proceeds of the import entitlements received by the assessee was taxable in its hands as profits and gains of business, or as benefits under Section 28(iv) of the Act.
9. In Kesoram Industries & Cotton Mills Ltd.'s case (supra) the assessee-company was engaged in the manufacture of cotton textiles, rayon, yarn, etc. In order to acquire foreign exchange, the Government of India started an export promotion scheme. Under the scheme, an exporter of cotton cloth or yarn was eligible for grant of import licences to the extent specified. The assessee under the said scheme made certain exports and on the basis of those exports it received under the aforesaid export promotion scheme an amount totalling Rs. 5,85,701. The Tribunal held that the said sum was assessable income of the assessee. The Calcutta High Court agreed with the Tribunal and held that the aforesaid amount was received by the assessee in the course of carrying on of its business. There was no question of any subsidy or grant. The fact that the amount may be used as capital in the hands of the assessee was irrelevant. Hence, it was taxable income. While so holding, their Lordships of the Calcutta High Court distinguished the ratio of its earlier decision in K.N. Daffury's case (supra), relied upon by the departmental representative for the assessee before us, by observing that in that decision the High Court was not concerned with the question whether an entitlement of this nature was capital or revenue. But the High Court in the case of K.N. Daftary (supra) proceeded on the basis that this was a capital receipt.
10. In Abbas Wazir (P.) Ltd. (supra) the Allahabad High Court while considering the question whether a company would be deemed to be an 'industrial company' within the meaning of Section 2(6)(c) of the Finance Act, 1974, has observed that the import entitlement or its sale proceeds, though, received from sources other than the actual manufacturing and export of carpets, were directly connected with that activity. But for the actual export of carpets the assessee would not have earned the import entitlements. The receipt from the sale of import licences was hence held as attributable to the activity of manufacturing carpets within the meaning of Section 2(6)(c) of the Finance Act, 1974.
11. It cannot also be disputed that the import entitlement, in the light of the aforesaid import replenishment licence scheme, is a real commercial activity intimately and inextricably connected with the business of the assessee of manufacture and sale of carpets. The assessee manufactured carpets and exported them, For the exports made under the aforesaid scheme it regularly and systematically applied for import entitlements. The object of applying for those import entitlements was to utilise it either for import of diverse, scarce material required in the manufacture of the products exported by the assessee or to sell the import entitlements, which would guarantee profit, considering the prevailing market for imported commodities in this country. The import entitlements are thus an expected,, pre-arranged, anticipated bargain and a bye-product of the assessee's business so as to constitute a trading receipt and business income under Section 28(iv) of the Act.
We, therefore, in the light of the above discussion, hold that the premium received by the assessee on the sale of the import entitlements constitutes business income assessable either under Section 28(iv) or 28(i) of the Act.
12. We now come to the decisions relied upon by the representative for the assessee. The decision of the Calcutta High Court in K.N. Daftary's case (supra) has already been distinguished by us and so also the Calcutta High Court's decision in Kesoram Industries & Cotton Mills Ltd. (supra). So is the position regarding the decisions of the Madras High Court in V.T. Kuppuswamy Pillai & Co. (supra) and K.S. Sheikh Mohideen (supra). In Home Industries & Co. (supra) the question was regarding the taxability under the head 'Capital gains' arising, if any, from the sale of goodwill, which was taken as 'capital asset'.
Same is the position in the decision reported in the case of B.C.Sirinivasa Setty (supra). The decisions relied upon by the representative for the assessee are, therefore, distinguishable.
13. The sum and substance of our above discussion is that the decisions of the tax authorities on the point at issue are upheld.14. to 27. [These paras are not reproduced here as they involve minor issues.]