1. The assessee is a private limited company manufacturing electric switchgears. It did substantial business in the export of this commodity. Under the export trade policy of the Government of India, outlined for the year 1977-78, such exports made by the assessee resulted in some import entitlements, i.e., the assessee acquired the right to import certain commodities, which it required for its manufacturing business. It could either import such commodities or it could also, under the import entitlements, transfer the entitlements to other parties, who could in turn import the goods in question for the purposes of manufacture.
2. During the relevant previous year (year ended 31-3-1978), the assessee sold the import entitlements it had received for Rs. 1,35,020.
The 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 gains tax also could be levied, as there was no cost of acquisition of such an asset. In this view, the learned Judicial Member upheld the Commissioner (Appeals)'s order. The following question was then referreds for decision by a Third Member : Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,35,020 was to be included as the business income of the assessee 4. The matter came up before the learned Third Member. In his view, there were judicial authorities supporting both points of view. Some held the receipt of the above nature to be capital and some as revenue.
There was also the point that the asset being a self-generated one, no capital gains tax could be levied. This aspect had not been considered in the cases reported as regards the taxability of amounts received on sale of import entitlements. There were also conflicting views expressed on this issue by different Benches of the Tribunal itself. In these circumstances, the learned Third Member suggested that this case be referred to a Bench of three members to decide the issue raised by the differing members of the Division Bench. The. President, accordingly, constitut6d a Bench of three members as a Third Member Bench to resolve the point of difference that had been referred by the Division Bench. This is how the matter has come up before us.
5. The learned Accountant Member has written the leading order. In reaching the conclusion that the sale proceeds of Rs. 1,35,020 were taxable as the business income of the assessee for this assessment year, the learned Accountant Member recorded, inter alia, the following : (i) The assessee sold the import entitlements during the relevant previous year and received also the sale consideration of Rs. 1,35,020 during the relevant previous year.
(ii) There was no substance in the plea for the assessee that the entitlements had no value at the time of the acquisition. The very fact that the scheme (under which the import entitlements were acquired by the assessee) contemplates that the recipient can sell those shows that it has a market and that it has a value. The import entitlements, it was common knowledge, fetched good prices depending on the commodity covered by the entitlements. The entitlements could not at all be described as a scrap of paper, as contended by the assessee. It was a valuable encashable right.
(iii) The Allahabad High Court in Agra Chain Mfg. Co. v. CIT  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 subsidy by the assessee during the relevant previous year from Government under the Export Promotion Scheme in question. The assessee merely received an import entitlement certificate and no entry was made in the accounts, when this certificate was received by the assessee. It was the sale of this certificate that fetched Rs. 1,35,020, that had been brought into the accounts this year.
(ii) There was strong judicial authority available, supporting a conclusion contrary to that recorded by the learned Accountant Member. For example, the decisions of the Madras High Court in Addl.
CIT v. K.S. Sheik Mohideen  115 ITR 243 (FB) and Nonsuch Tea Estates Ltd. v. CIT  129 ITR 28.
(iii) Nor was the reliance placed by the learned Accountant Member (for his conclusion) on the decision of the Calcutta High Court in Kesoram Industries & Cotton Mills Ltd. v. CIT  115 ITR 143 correct. This was because the facts were quite different in that case. There the assessee, a manufacturer of textile goods, exported its products and under an Export Promotion Scheme of the Government of India, received on account of such exports (what was described as) a premium of Rs. 5,85,700. It was not a case of sale of import entitlements as in the instant case. The premium so received was hardly different from a cash subsidy or cash grant. In the instant case, there was no receipt of any cash incentive or subsidy. What the assessee received here, was only a right to import raw materials on the basis of the exports made by it.
(iv) In the case of the assessee here, such a right to import raw materials can be transferred to another person for consideration ; and only then there would be an opportunity of earning the premium.
Till such transfer takes place, it could not be said that a premium had been received by the assessee from the Government under the Export Promotion Scheme. Hence, Kesoram Industries & Cotton Mills Ltd.'s case (supra) was not applicable at all.
(v) No doubt, the Allahabad High Court in the case of Agra Chain Mfg. Co. (supra) had considered a similar issue as in this case but then as against the Allahabad High Court's view to the effect that the consideration received on the sale of import entitlement was a revenue receipt, two High Courts are seen to have taken a contrary view, viz., the Madras High Court in K.S. Sheik Mohideen's case (supra) and Nonsuch Tea Estates Ltd.'s case (supra) ; and there was also the decision of the Calcutta High Court in K.N. Daftary v. CIT  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. (supra), the Calcutta High Court itself observed that in K.N. Daftary's case (supra), 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 (supra), "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 (supra) 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  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 business of the assessee for the purposes of a rebate under the Finance Act, 1965. The observations of the Gujarat High Court were to the effect that the sale of such entitlements was a transaction separate from the export business itself. This decision also, therefore, supported the assessee's stand.
(vii) Thus, the decisions of three High Courts, viz., the Madras, Calcutta, and Gujarat supported the assessee's stand. The only contrary decision was that of the Allahabad High Court in Agra Chain Mfg. Co.'s case (supra). It had to be held, therefore, that the profit realised on the sale of import entitlements was not a revenue receipt. It was a capital receipt.
(viii) There were also other aspects for consideration, which supported the assessee's stand. Firstly, what the assessee received under the 'Export Incentive Scheme' was only a right to import raw material. That this right was subsequently converted into the sum of Rs. 1,35,020, did not go to show that the sale amount so received in exchange was a revenue receipt. It cannot be equated with a cash grant or cash subsidy received under the 'Export Promotion Scheme'.
Secondly, no entry was made in the accounts, when the import entitlement was received. It was not evaluated at that time. Entry was made only when the sale took place and the premium was received.
Entry could not be made earlier as the assessee had not received any cash under the Export Promotion Scheme. Thirdly, what the assessee sold was not the import entitlement certificate but the right to import, as 'indicated by the certificate'. Thus, the premium the assessee got was for the sale of the right and not for the sale of the certificate. If the certificate happened to get lost, a duplicate certificate could always be got issued. Hence, 'whatever value attaches to the sale is to be attributed to the right to import ensured under the certificate and not to the document of import entitlement certificate.' (ix) If the issue was looked at in the above light, "it would not take anyone more than a second to reach the finding that what the assessee had received by way of premium was for the sale of transfer of a right and not for the transfer of a document". Hence, the premium received could only be considered as a capital receipt.
(x) It is not the business of the assessee to deal in import entitlement certificates. When it held the import entitlement 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 import entitlements during the relevant previous year. It is also to be noted that no entry was made by the assessee in its books of account, when the import entitlement certificate was received by it against the exports made by it earlier.
The first question to be decided is : does the amount of Rs. 1,35,020 represent a revenue receipt taxable this year wholly as such ; or does it represent a capital receipt and if so, is there a taxable gain embedded therein for assessment this year There are several facets touched upon by the counsels on both sides with regard to this and they have to be considered. It would perhaps be useful (to begin with) to notice briefly the national policy background that made possible such a receipt by the assessee. The counsels for both the parties have placed certain material before us in this regard and we would draw upon this in this regard. Under the Export Policy Resolution, 1970 (passed by the Parliament), the Government of India took a close look at its foreign trade policy. In the context of the objectives, strategies and priorities of the fourth five year plan, the Government came to the view that expansion of export earnings was as crucial for financing the plan as the mobilisation of domestic resources. It decided to expand the export earnings at a high rate. For this purpose, it was necessary to have a continuous development and expansion of export-oriented production. The development of the economy's export sector had, thus, a vital role to play in the achievement of the plan's social and economic goals. The needs of this sector, it was considered, had, therefore, to receive very high priority. The Government noted in this regard that the main responsibility for the task of improvement of their competitive ability in international markets was on the Indian industries themselves. At the same time, the Government decided to provide the necessary assistance to build up efficient production and in the meanwhile, endeavour to compensate exports for the temporary handicaps due to transitional difficulties inherent in a developing economy; and to alleviate the disadvantages arising from domestic physical policies or tariff barriers in importing countries.
9. In terms of the above Resolution, the Government's effort for promotion of exports has been mainly towards provision of facilities for export production, provision of incentives 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 : (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.
Apart from the above under the policy, export obligation was imposed on all units in selected industries deemed to have sufficient export potential for the purpose of developing export markets for their products. The Committee approved in this regard the three strategies adopted by the Government, viz., improving the production base, curtailing imports and boosting exports.
11. The Committee also noted while dealing with export promotion measures undertaken by the Government that material input facilities and fiscal incentives were two forms of assistance extended to exporters. Under material input incentives, one of the benefits provided to exporters was under the Import Replenishment Licensing Scheme. These licences are issued only to replenish the import content in the products exported in respect of banned and canalised items.
Another form of assistance was supply of certain domestic materials at international prices. A third kind of assistance was preferential allotment of certain key materials.
12. In the light of the above general background, details of a more specific nature relating to the kind of business which the assessee here carried on may now be noticed. Shri Kapila submitted (and it was not disputed by Shri Sharma) that details relating to the export incentives offered for exporters of engineering goods have been recorded in the decision of the Calcutta High Court in Jeewanlal (1929) Ltd. v. CIT  139 ITR 865. We would, therefore, turn to this judgment for assistance. The Court noted that there was a Special Export Promotion Scheme for engineering goods drawn up by the Government of India, Ministry of Commerce and Industry, Department of International Trade. This Scheme applied to the exports of Indian goods other than 'rolled steel', which had not undergone any substantial processing but the exports had to be effected by those registered with the Engineering Export Promotion Council, Calcutta. The Scheme came into force from 1-4-1973, and was applicable to export of goods covered by the Scheme with effect from or after 1-4-1963. The Scheme was to remain in force on a permanent basis until further orders. All the previous Schemes in this regard were superseded as regards export of such goods effected from 1-4-1963.
13. The Scheme provided for the registration of the exporters, re-registration and other ancillary matters. Clause 5 of the 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 falling 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 of import entitlements. This provided, inter alia, as under : (i) The import entitlement may be used for the import of the materials, as mentioned in Annexure VII, subject to the conditions, if any, mentioned therein.
(ii) Articles imported against such import entitlement may be used in the exporter's own factory or sold to any other manufacturer/manufacturers who manufactured products covered by the Scheme and who directly export a part of their products or who sell a part of their products for export.
(iii) If the exporter wants to transfer or sell his import entitlements to another manufacturer/manufacturers, the application for import licence should be filled in by such manufacturer/manufacturers. An import licence will be issued in the name of such party/parties, provided such party/parties satisfied the conditions as regards transferees as noted above. Alternatively, an exporter getting an import licence in his own name will be eligible to obtain a letter of authority in favour of any manufacturer/manufacturers who satisfied such conditions. No objection to be raised to the letter of authority being amended in the name of any other manufacturer/manufacturers, satisfying the above conditions before the original authorisation is actually used.
We may now go back in time, as it were, and note the source of the authority under which the above Export Incentive Scheme was notified by the Government. Here again, Shri Kapila suggested that it would be profitable to look at a Full Bench decision of the Delhi High Court, which has recorded the relevant position. This is in the case of Bansal Exports (P.) Ltd. v. Union of India and Indo Foreign Import & Export Corpn. v. Union of India  145 ITR 642. The Court recorded the following position : (i) Section 3 of the Imports and Exports (Control) Act, 1947, delegates the legislative powers to the Central Government to prohibit, restrict or control the import or export of commercial commodities. In exercise of this delegated power, the Government issues Export Control Orders from time to time.
(ii) The delegation of legislative power is inevitable and indispensable. It facilitates administration, and the various Export Control Orders made under Section 3 of the said Act from time to time are a standing proof of sudden need of legislative action.
(iii) In a modern State, there are many occasions when there is 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.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 answer is spelt out in the decision of the Allahabad High Court in Agra Chain Mfg. Co.'s case (supra). While noticing this aspect, we think it would be convenient to briefly notice the facts and the ratio also of that case. In this case, the assessee-firm was a manufacturer of iron bars, aluminum chains and wires. It exported aluminum chains to other countries. The assessment years involved were 1966-67 to 1969-70. The exports were made under the Special Export Promotion Scheme for engineering goods formulated by the Government of India. It was common ground before us that the import entitlements, which the assessee before us received and sold for consideration during the previous year relevant for the year in appeal before us, were also received under the same Export Promotion Scheme as noticed by the Allahabad High Court. As already noted, a major benefit available under the Scheme consisted of import entitlements against exports as specified in Annexure V to the Scheme. In lieu of its exports, the assessee-firm was granted certain import entitlements and they were sold by the assessee to other manufacturers during the relevant years. The sale consideration varied between Rs. 15,886 (assessment year 1969-70) and Rs. 64,743 (assessment year 1966-67). The question was whether these receipts were taxable in the hands of the assessee. The Court held that a reading of the whole of the Scheme as well as the provisions of the Imports and Exports (Control) Act indicated that an exporter was entitled to get the import entitlements admissible under the Scheme as of right, if he satisfied its requirements. The Scheme itself was formulated by the Government of India under Section 3 of the aforesaid Act, being entitled thereunder to make an order controlling imports and exports. It was in exercise of the powers under Section 3 of the said Act that the Special Export Promotion Scheme for engineering goods had been formulated by the Government of India. The benefit under the Scheme, which the asses-see got, was an advantage or profit arising out of the business in which the assessee was engaged at the relevant time. It was not a bounty or a gift. Under the Scheme, the exporter was entitled to get it as of right if he qualified himself for the same. It was, therefore, taxable under Section 28(iv).
15.1 It is now necessary to note yet another Scheme of the Government of India, which 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  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 per cent of the rupee equivalent of such remittance. The Government clarified on 31-12-1965 that the amount received by the transfer of such import licence would be treated as a long-term capital gain. [In the case before the Calcutta High Court, the assessee had obtained in India by way of remittance under the Scheme a sum of Rs. 2,44,737. This was in December 1965. Thereby, he secured import entitlement for goods of the value of 60 per cent of the said remittance. Instead of importing the goods, the assessee sold the entitlement to another party for Rs. 3,05,343. In the assessment proceedings, the assessee claimed that 60 per cent of the rupee value of the remittance was the cost of acquisition of the import entitlement and offered the balance of Rs. 1,58,589 out of the total sale proceeds as capital gain. The ITO said no. He held that cost of acquisition was nil. He, therefore, taxed the entire amount of the sale proceeds of the entitlement as capital gain.
The Calcutta High Court agreeing with the Tribunal, held that the cost of acquisition was nil; that the right which the assessee got under the Scheme was the result of some reward or inducement and was not at the cost of any asset of the assessee and that in view of the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty  128 ITR 294, no capital gains could be assessed, there being no cost of acquisition.
Having cleared the decks, so to speak, the specific issues involved in the dispute before us may now be taken up. As already noted in para 8 above, the first question is on the nature of the amount of Rs. 1,35,020 received by the assessee. Is it revenue or capital in nature If capital, is there any taxable capital gain this year It was argued by the learned counsel for the assessee that the receipt in question was only a bounty from the Government. The assessee did nothing overt to get it. It was in fact a reward which the Government gave to the assessee for earning foreign exchange, so vital to the functioning of the Government. Hence, it was wholly outside the trading area of the assessee. It was de hors the assessee's business in manufacture and exports. It could not, therefore, be brought under the income-tax net at all as a revenue receipt. There was, in any case, no quid pro quo in the grant of import entitlement and, hence, no question arose of taxing the same, as was indeed held in CIT v. S.A. Rajamanickam  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 at 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 (supra) - 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 entitlement was to enable the exporter to earn profits in the exports done by it. It is given to an exporter for carrying on a trade or business for the services rendered. It was not of a benevolent nature. Its giving was not dependent on the gracious and liberal attitude of the Government. An exporter is entitled under the Scheme to get it as of right if he qualifies himself to the same. On fulfilling the qualifications, an exporter could not be denied the entitlement. Accordingly, from its very nature, it is impossible to treat the entitlements as bounty or subsidy. The use of the word 'entitlement' itself indicates that the person getting it gets a title and right and not a gift or a reward.
We have already noticed the two cases of the Supreme Court where the nature of entitlement under the Scheme formulated by the Government of India under Section 3 of the Imports and Exports (Control) Act, 1947, was considered. These rulings lay down that after having exported goods up to the value of certain limit, an exporter is entitled to an import licence being issued to him, and that the same cannot be arbitrarily rejected. It is, therefore, not correct to say that the nature of the entitlement receipts was only a bounty.Probhudas Morarjee Rajkotia v. Union of India AIR 1966 SC 1044 and Anglo Afghan Agencies case (supra) The Allahabad High Court, after noting that the nature of this Scheme for engineering goods (the same Scheme under which the taxpayer in Agra Chain. Mfg. Co.'s case (supra) received the entitlements), came up for consideration before the Supreme Court in the two decisions referred to above, commented : ...In both these cases, it was clearly ruled that where a person had acted upon representations made in the Special Export Promotion Scheme that import licences up to the value of. the goods exported will be issued, his claim for import licence could not be arbitrarily rejected. These authorities assist us in understanding the nature of the import entitlement which is available to an exporter under the Scheme formulated by the Government of India under Section 3 of the Imports and Exports (Control) Act, 1947. It would be found from these decisions that import entitlements have not been treated as merely either a bounty or gift.
2. Jeewanlal (1929) Ltd.'s case (supra) - This decision has already been referred 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 aluminum 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 (p. 879), 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 fulfillment 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 assessee, as explained by the Allahabad High Court in Agra Chain Mfg. Co.'s case (supra). The grant of import entitlement did not depend on the gracious and liberal attitude of the Government. The exporter was entitled as of right under the Scheme to get the entitlement, if he fulfilled the conditions stipulated. This view of the Allahabad High Court, as noted already, is based on two decisions of the Supreme Court, viz., Probhudas Morarjee Rajkotica's case(supra) and Anglo Afghan Agencies' case(supra). Since, in our view, there is no bounty or gift or reward involved here, the question of examining the assessee's claim for exemption under Section 10(17B) does not arise.
18. It was then argued for the assessee that in any case, the import entitlement in question could only be looked upon, if at all, as a right which accrued to the assessee and which did not represent income at the point of receipt. It represented a capital asset in the hands of the assessee. The assessee had a right to transfer this capital asset.
With that right, the assessee could have produced income, i.e., import of goods thereunder, use thereof in the assessee's manufacturing business and sale of the finished product therefrom. But the assessee did not do this. It simply transferred the right for consideration destroying in the process the right itself. Such consideration could only be capital in nature. Such a capital receipt represented by the sale consideration received for the import entitlement carried no element of taxable capital gain also. This was because, there was no cost of acquisition and as held by the Supreme Court in B.C. Srinivasa Setty's case(supra), there could be no capital gain either for taxation in such a case.
19. In the light of the judicial authorities already noted by us, it is difficult to agree with the submission of the learned counsel for the assessee that either there was no quid pro quo in the matter or that the import entitlement did not represent something which the assessee got as a matter of right on the basis of its export performance under a duly spelt out and specific scheme of the Government of India. We have already referred to the decision in Jeewanlal(1929) Ltd.'s case(supra).
The counsel for the taxpayer there had urged, on the authority of K.T.M.T.M. Abdul Kayum v. CIT  44 ITR 689 (SC), that what was obtained by way of import entitlement was not goods themselves but the right 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(supra). 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 (at p. 872) 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 contention for the taxpayer in this regard in Jeewanlal(1929) Ltd.'s case (supra).
20. One other decision was also considered in this context by the Calcutta High Court in Jeewanlal (1929) Ltd.'s case (supra). This was a decision of the Supreme Court, viz., Pingle Industries Ltd. v. CIT  40 1TR 67. The Court considered this decision but did not accept it as an authority for the claim that the receipt in question in Jeewanlal (1929) Ltd.'s case (supra) was a capital receipt as the facts in Pingle Industries Ltd.'s case (supra) 'were entirely different'.
21. Another decision noticed by the Calcutta High Court in Jeewanlal (1929) Ltd's case (supra) was CIT v. H. Dear & Co. Ltd.  52 ITR 65. That was really a case of an expenditure, i.e., whether it was in the nature of capital or revenue. In H. Dear & Co. Ltd.'s case (supra), the Court noted (at p. 77) that if a trader or a businessman bought a quantity of goods which formed his stock-in-trade (he might do this in an infinite number of ways), then it was a revenue expenditure, i.e., he was buying stock-in-trade to carry on his business and, hence, the expenditure was one for the purpose of his business ; but a distinction had to be made if in spite of buying his stock-in-trade, he acquired a right whereby he would be in a position to acquire his stock-in-trade and then it would be capital expenditure. In Jeewanlal (1929) Ltd.'s case (supra), the Court noted the above exposition in H. Dear & Co.
Ltd.'s case (supra) and then took note of the argument for the assessee before it to the effect that by exporting the goods the assessee in Jeewanlal (1929) Ltd.'s case (supra) acquired a right not of the imported materials but a right to acquire imported materials, i.e., the right was in the nature of an enduring right and, hence, parting with such a right meant parting with a capital asset. The Court rejected this argument as under : ...We are, however, unable to accept this contention, because as we have said the right was acquired in the very course of dealing as an exporter. The nature of the right flowed from the capacity as a dealer in export. The acquisition of the right under the scheme itself envisaged the right to import goods as well as the right to part with the same and dealing with that, either by using or transferring the same, would only be dealing with a trading asset in the capacity of an owner of a business and the consequences of the same will follow. Though it might not 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  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 of import from which flow the consequential benefits, such as the goods imported or the proceeds of sale of such goods, or of the sale of the right itself where no goods are imported. In other words, parallel to the outward stream of export, pursuant to which or on the strength of which the assessee becomes entitled to import goods, there arises in the opposite direction a new stream commencing with the right under the entitlement and ending with the money realised by the sale o the goods imported or of the right itself. Entitlement is, thus, not derived from export, but it is the very right which gives rise to import. Viewed in this light, export and import together constitute the business of the assessee." (p. 401). In recording the conclusion that the sale consideration received for the import entitlement represented sale proceeds of the right received from business simultaneously with the export of goods (and hence profits and gains or benefits arising from business), the Court referred with approval to the decision of the Bombay High Court in Metal Rolling Works (P.) Ltd. v. CIT  142 ITR 170. The Bombay High Court's conclusions here were firstly, that it was impossible to regard the import entitlements as the capital asset of the assessee and that secondly, it was equally clear that the amounts realised by the assessee on the sale of the import entitlement had to be regarded as the profits of the assessee in its business. The Kerala High Court went on to observe that whether a certain sum represents capital assets or profits and gains from business depends in no way upon what may be the nature of the asset in fact or in law. The determining factor is the nature of the trade in which the asset is employed. The Court observed : 18. The import entitlement permits import of goods. It confers a right which is capable of being valued in money and arising directly in the course of business. By no stretch of imagination, can it be regarded as or representing capital asset within the meaning of Section 2(14). The sale of this right has given rise to profits or gains of benefits taxable under Section 28.
23. From the above, the position in law appears to be that the import entitlements do not represent a capital asset. When the assessee here sold it for consideration, it could be said, following the Calcutta High Court in Jeewanlal (1929) Ltd.'s case (supra), that 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 merely represented a facility like water that could be used to nourish the tree to greater yields. It is, of course, not possible to decide complicated issues wholly on the strength of similes. If, however, a choice is given, that of the department appears to fit in more with the facts and the legal position supported by the specific authority of the Calcutta High Court in Jeewanlal (1929) Ltd.'s case (supra), 24. The learned counsel for the assessee, in fact, assailed the decision of the Calcutta High Court in Jeewanlal (1929) Ltd.'s case (supra) as incorrect. The submission is that the Court went wrong on the nature of the taxpayer's right to get import entitlements on the basis of the exports made. Such a right did not flow under any contractual arrangement with the State. A contract with the State had to be in terms of article 299 of the Constitution of India. That was not the case here. It was, further, argued that the Supreme Court has held that the said right of acquisition of import entitlement flowed only on the basis of the doctrine of promissory estoppel in Anglo Afghan Agencies' case (supra), whereas what is of relevance is to see whether there was any contractual relationship with the State from which the said right flowed. Perhaps the counsel, who appeared for the taxpayer before the Calcutta High Court in Jeewanlal (1929) Ltd.'s case1(supra), considered that the issue involved in Anglo Afghan Agencies' case (supra) was different from the one in Jeewanlal (1929) Ltd.'s case (supra). That was why perhaps it was not cited before the Calcutta High Court. The facts of Jeewanlal (1929) Ltd.'s case (supra) show a close parallel with the facts of the instant case and, hence, it is not possible to accept the submission of the learned counsel for the assessee that the Calcutta High Court failed to notice any important aspect of legal principles in recording its decision in Jeewanlal (1929) Ltd.'s case(supra).
25. Another facet of the objections taken for the assessee concerned the source from which the receipt in question arose. Shri Sharma had contended with much emphasis that the assessee had no trading relationship with the Government. The receipt in question could not, therefore, be said to be out of the 'any trade' carried on by the assessee so as to bring it to tax as its business receipt. The import entitlement was received because the assessee had effected exports and had fulfilled the conditions laid down 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 profits and gains arose for taxation.
26. The counsel for the revenue, on the other hand, pointed out that it was not necessary to consider whether the receipt in question was derived from an export trade. He says, the revenue's case is very simple : the receipt in question represents the profits and gains of the assessee's business and, hence, taxable under Section 28(i). This business cannot be split up into 'export trade' and other such component activities. That would go against the very meaning of the word 'business', as judicially explained. Business connotes a systematic activity or organized course of activity or conduct with a set purpose. The assessee was not carrying on a separate business or 'trade' in export. It was carrying on a business comprising many activities such as, purchase of raw materials, manufacture of switch-gears, sales and exports of the manufactured products as also sale of import entitlements received against the exports so made. All these activities were part of an organic whole and there was no room for picking out any particular activity or transaction as a separate 'trade' carried on by the assessee. Nor was it the case of the revenue that the assessee was a dealer in import entitlements. The question of bringing in the import entitlements at market value as stock-in-trade was, therefore, Irrelevant. There were no doubt decisions in which the term 'derived' occurring in the Annual Finance Acts has been interpreted in the context of allowing rebate thereunder on export profits, but the revenue's case was not based on any contention that the sale proceeds of the import entitlements were taxable because they were derived or not derived from the export activity of the assessee.
That was not the department's case at all. Reference, however, was made to some of these decisions to draw support for the revenue's broader case that the receipt in question here is really taxable as business income under Section 28. Some of these decisions may be noticed here.
27. In Cochin Co. v. CIT  114 ITR 822 (Ker.), the Court considered the question whether profit derived by the sale of import entitlements were profits derived from the export of any goods or merchandise out of India within the meaning of Section 2(5)(a)(i) of the Finance Act, 1966. Profits which were so derived, were entitled to a rebate of income-tax. The assessee claimed 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  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(supra), 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.  107 ITR 168. However, as we said before, it is not necessary to dwell on this line of decisions at length. The question for decision by us is, whether the sum of Rs. 1,35,020 is taxable as the business income of the assessee here. The revenue's main case before us is : it is so taxable under Section 28(i) and that it is also so taxable under Section 28(iv). Section 28(0 does not use the word 'derived' at all. In Section 28(iii), the word 'derived' is found and that provision clearly is not applicable to the instant case. As regards Section 28(iv), that reads as under : (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
This provision was introduced by the Finance Act, 1964, with effect from 1-4-1964. This will come in for comments later on.
29. One of the points urged before us on behalf of the assessee was that at the point of acquisition, the import entitlement had no monetary value. It was argued that no doubt, a premium could be realised on its transfer but that factor by itself did not amount to there having been any cost of acquisition. Hence, no value as regards such import entitlements 'up to the point of acquisition or utilisation' could be brought into the accounts while computing the profits of the exporter in any commercial sense. This aspect, we find, has been dealt with specifically by the Kerala High Court in D.K.Industries' case (supra). The Court held that the entitlement had a value convertible into money because it is that right, which allows the assessee to import goods with all the consequential benefits derived from that right. On this reasoning, the Court went on to hold that the amount realised by the sale of that right was thus money constituting profits and gains or benefits arising from business and such receipts were not of a casual or a non-recurring nature. On the contrary, they represented sale proceeds of rights arising from business simultaneously with the export of goods. Hence, the argument taken for the assessee before us in this regard is not found valid. A further argument for the assessee in this regard was that once it is accepted that the import entitlement did not cost anything to the assessee at the point of acquisition, there could be no question of any trade resulting therefrom. Any attempt to tax the sale proceeds of the import entitlement in such an 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(supra), 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(0- 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)  16 TC 333 ; and Clenboig Union Fireclay Co. Ltd. v. CIR  12 TC 427. As explained by the Supreme Court in Bengal Textiles Association v. CIT  39 ITR 723, 729, in the former case, a grant was given by the Government not as a supplementary trading receipt but for the specific purpose of enabling the party to undertake works of relief of unemployment and it was held not to be taxable income. The latter case was not found relevant at all by the Supreme Court in deciding the taxability of cash payments received from the Government by the Bengal Textiles Association's case (supra) (towards administrative expenses, establishment charges, etc.) under the Business Profits Tax Act, 1947.
The Court held that the payment was made by the Government to the assessee there to assist it in carrying on its trade or business and for the services it was rendering to the Government by doing so and that, the payments were not of a benevolent nature and were not in the nature of a gift. It is not the case of the revenue before that the assessee carries on a trade in import entitlement, so as to describe it as a dealer in import entitlements, i.e., that it buys and sells entitlements. The revenue's primary reliance is on the phraseology of Section 28(i) itself, i.e., "profits and gains of any business...which was carried on by the assessee...during the previous year". For the proposition that the sale consideration for the import entitlements constituted such profits under Section 28(0, authorities were cited on behalf of the revenue and we have also taken note of the same in the preceding paragraphs-D.K. Industries' case(supra) and Jeewanlal(1929) Ltd.'s case(supra).
31. There was also some argument on the meaning of the term 'profits and gains'. According to the assessee's learned counsel, the term 'profits and gains' had to be understood as referring to profits and gains ascertained on ordinary principles of commercial trading. There could be no serious objection to this. However, the learned counsel submitted further that the term 'profits and gains' implied something in the nature of a credit and debit account in which the receipts appear on one side and the costs and expenses appear on the other side.
Here again, nothing much follows from the proposition itself. As the facts of the instant case show what is under dispute is the nature of the amount received on the sale of import entitlements and judicial authority has been cited by the revenue, supporting the view 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 assessee's learned counsel are not supported by any direct judicial authority.
Reference has been made in this regard by the assessee's learned counsel to the decision in P.H. Divecha v. CIT 48 ITR 222 (SC).
We find, however, that in this case the factual context was totally different. There was an agreement entered into by a firm, a dealer in electrical goods and a company manufacturing electric lamps. Under an agreement with the company, the firm was given exclusive rights to purchase and sell electric lamps manufactured by the company in certain areas. A commission was payable under the agreement to the firm based on the gross invoice amount. There was no provision in the agreement for payment of compensation to the firm on the termination of the agreement or for temporary suspension of supplies. After 16 years, the company decided to take over the distribution of its products in those areas, but the firm was free to deal in the lamps as regular lamp dealers. Accordingly, it served notice on the firm. There were negotiations and exchange of details on various relevant aspects such as execution of local orders, outstanding contracts, payment of commission thereon, disposal of the stocks of the firm, etc. Finally, as a gesture of goodwill, the company agreed to pay in installments Rs. 40,000 per annum for a period of 3 years to each of the partners of the firm. This was in addition to the profit the firm would realise as regular lamp dealer of the company even after the company took over the distribution of lamps in the same area. The question was, whether the sum of Rs. 20,000 received in the previous year ended 31-12-1954 by the assessees, who were partners of the firm, was assessable to income-tax.
The Supreme Court held that under the agreement, the firm secured an advantage of enduring nature, i.e., monopoly rights of purchase and monopoly rights of sale in certain areas. There was nothing to show that the amount payable represented likely profits of the firms that would have arisen if the agreement had not been terminated. It was also not payment for any services rendered. The payment was out of regard for the qualities of the three partners of the firm, who had built up a vast network of sales organisation which benefited the company. It was not related to any business done. It was, therefore, exempt under Section 4(3)(VII) of the Indian Income-tax 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 bad 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.  106 ITR 954 (Mad.). As in the Calcutta High Court's case of Satya Paul (supra), 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 1TO 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 or acquisition. The High Court confirmed the conclusion of the Tribunal, following its decision in CIT v. K. Rathnam Nadar  71 ITR 433 (Mad.). The next two decisions in the same line are K.S. Sheik Mohideen's case (supra) and Nonsuch Tea Estates Ltd.'s case (supra).
Both were noticed by the learned Judicial Member in his dissenting order (See paragraph No. 6 supra). In both these decisions also, the question was regarding the taxability of the sale consideration of the import entitlements obtained by the assessee against remittance of foreign exchange under the National Defence Remittance Scheme. In both these decisions, the Madras High Court followed K. Rathnam Nadar's case (supra) and held that there was no taxable capital gain. It may be mentioned that in both these cases, the ITO himself sought to assess the amount in question as capital gains. This attempt of the ITO failed.
35. Another decision for notice in this context is that of the Bombay High Court in CIT v. Modiram Laxmandas (P.) Ltd.  142 ITR 702.
Here the assessee-company was manufacturing art silk. It sold this business to a firm. On such transfer, import licences standing in the name of the assessee also stood transferred to the firm along with the goodwill of the assessee-company. On the basis of these import licences, the firm imported yarn. On account of the import licences transferred to the firm, the firm made a profit of Rs. 86,119. For the assessment year 1964-65, (the transfer to the firm was made in September 1963 by the assessee-company) the ITO sought to assess the assessee-company on this profit of Rs. 86,119 as a short-term capital gain. The Tribunal took the view that existing quota rights, which had a limited duration, could not be treated as a capital asset. The Tribunal, therefore, deleted the capital gains. Thereupon, the revenue obtained a reference. The question referred for the opinion of the High Court was as regards the quota rights (for obtaining import licences), i.e., on the taxability of the said sum under the head 'Capital gains'.
The Court answered this question in favour of the assessee. It proceeded on the common ground that the said import licences represented a capital asset. It then held, following B.C. Srinivasa Setty's case (supra) and K.S. Sheik Mohideen's case(supra) that no capital gain arose. In other words, all these cases concerned the taxability of the sale consideration or the surplus in question, as capital 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 (supra). 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 exports business. It was unable to establish that its direct export sales had resulted in any profit. The Court held that the primary requirement for granting the rebate was that there should be profit from the export of goods. It was not enough to earn income liable to tax from other businesses carried on by the assessee. The expression 'derived from exports' cannot be equated with 'referable to exports'. There had to be a direct nexus between the activity and the earning of profits or gains. The assessee, therefore, failed in this regard.
37. One of the arguments taken before the Court was that in considering the allow ability of the rebate under the Finance Act, the fact that the assessee had made an overall profit for the two assessment years under consideration should be given weight even though it could not show whether any profit was derived from export sales and if so, to what extent ; and that the revenue authorities must have worked out such profits and gains relating to export sales under the rules and allowed the rebate on that basis. The Court rejected this contention as the statutory requirement was : it should be shown that there was profit from the export activity and in this the assessee failed.
Another argument taken was that as a result of the direct export sales made, it became entitled to : (ii) an import entitlement expressly made transferable or saleable ; and (iii) an import entitlement that was not transferable but which could be utilised by the assessee to import scarce items or commodities to import items and raw materials at prices less than the prevailing home market prices and, hence, resulting in savings to the assessee which were capable of being measured in terms of money.
The submission was that these benefits also, acquired as a direct result of the exports made must go into the computation of the profits and gains derived by the assessee from the export of goods. The Court was of the view, however, that such benefits could not be said to be profits and gains derived from such exports. In dealing with this aspect, the Court referred to the decisions in Cochin Co.'s case (supra), Wheel & Rim Co. of India Ltd.'s case (supra) as also Hindustan Lever Ltd.'s case (supra). It expressed its agreement with the view taken in Cochin Co.'s case (supra) and Hindustan Lever Ltd.'s case (supra). In its view, the word 'derived' has to be given 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. Firstly, what was being interpreted by the Gujarat High Court was the term 'derived from the exports of any goods' appearing in the Finance Acts.
The question of taxability of the sale consideration for import entitlements under Section 28(i) was not before the Court at all.
Secondly, even within the narrow sphere of the questions posed to the Court, it was found that the facts of the case did not call for any decision on the nature of the income derived from transferable or saleable import entitlements. The position, therefore, is that this case supports, in no way, the assessee's claim that the receipt in question here cannot be brought under Section 28(0- 39. Reverting now to the arguments on the taxability of the sum in question before us under Section 28(i), a point made for the assessee was that if the import entitlements represented a right arising to the assessee in the course of its dealings in export then that right or the monetary value of the right would be taxable in the year when the assessee became entitled to it and not when a transfer was effected of these entitlements and a cash amount was received in exchange. Firstly, that situation, it is common ground, does not prevail before us. At any rate, it has not been so pleaded before us. Further, this argument was raised before the Calcutta High Court in Jeewanlal (1929) Ltd.'s case (supra) and this is how the Court disposed of this submission : ...This argument sounds attractive. But on a closer examination we are, however, unable to accept this contention. It is true, even though the import entitlement, as the scheme envisaged, was a right acquired in the course of carrying on the assessee's business of export, but it is the nature of dealing with the entitlements that resulted in the receipt of the money and it is dealing with that entitlement in the year in question, i.e., the carrying on of the assessee's business, and, therefore, the taxability arises in that year.
We are in respectful agreement with this view. Apart from this, it was pointed out for the revenue that so far as the assessee here is concerned, the cash method of accounting is followed by it for the amounts received on sale of import entitlements. The sale consideration was received this year and on the method of accounting regularly followed by the assessee, it cannot be considered for assessment for any other year. The factual 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 profit and loss account of the assessee for this year, that there was a revenue debit of Rs. 6,715 raised this year in the accounts under the head 'Subscription paid' and that this included the subscription paid by the assessee to the Export Promotion Council. This expenditure was claimed and allowed as the expenditure of the assessee's business, of which exporting was an inextricable part. The submission is that if such an expenditure could be looked upon both by the taxpayer and the assessing authority as a proper debit in the ascertainment of the profits and gains of the assessee's business, included in which was the export activity, then it followed that the benefits accruing from the export activity also would be taxable as the profits and gains of the same business. Nexus after all stands clearly proved. Once the act of export is done under the conditions laid down by the Scheme, the benefit accrues, i.e., the fruit that comes out of the tree of export activity.
After all the exporter has to adjust his export prices to be competitive in the international market and there is a systematic activity behind the effort of export along with the other activities in running the assessee's business as an indivisible whole and the earnings from all these activities result in revenue receipts.
41. As regards the contention raised for the assessee that there was no trading relationship with the State, the submission for the revenue is that the test of a receipt, which can be described as profits of a business, is not confined to trading relationship invariably. Three decisions were referred to in this regard. These may be considered briefly below : (i) Susil C. Sen, In re.  9 ITR 261 (Cal.) - The assessee here was attorney and an advocate. He acted for one K, a shareholder in a company. In this capacity, he interviewed the managing agents of the company. He attended a meeting of the shareholders under a proxy from K, and also made a speech at the meeting, securing a substantial issue of new shares to the public. X, a firm of stock-brokers who were also benefited by the issue of the new shares, paid Rs. 10,000 to the assessee, even though the assessee had not acted for them and they were not legally bound to pay anything to the assessee. The Calcutta High Court upheld the taxation of this sum to income-tax. It rejected the assessee's claim that it was exempt under Section 4(3)(VIII) 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(supra) - This is referred to in paragraph 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  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 rubber produced in Penang and rubber exported from the Federation other than Penang, were paid, proportionate parts of the cesses so collected, after defraying expenses, were credited to the accounts of the assessee, corresponding to the amount of rubber produced by it, and payments were made to the assessee from the amounts so credited against the expenditure incurred on the maintenance of the plantation. The Court held that as the amount from the fund earmarked for the assessee on the basis of the rubber produced by it were paid against the expenditure incurred by it for maintaining the rubber plantations and producing the rubber, the amount received by the assessee was a revenue receipt and liable to be included in the assessable income. Shri Kapila urged that the facts of the instant case were squarely covered by this decision and the sum of Rs. 1,35,020 had to be held as taxable under Section 28(i). From these decisions, it could certainly be argued that what is relevant or necessary is to see how the amount in question arose, i.e., whether it arose in the course of the business carried on by the assessee.
The fact that there was no trading relationship with the Government of India or a contract, as envisaged in article 299, in our view, is not of significance here. Shri Kapila had referred in this regard to the case of CIT v. Malayalam Plantations Ltd.  53 ITR 140, 150 (SC). The Court explained there (in relation to business expenditure) the meaning of expression 'for the purpose of business' occurring in Section 10(2)(xv) of the 1922 Act, corresponding to Section 37(1) of the 1961 Act, as wide in range : that it would take in not only the day-to-day running of a business but also include measures for the preservation of the business that it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business. The argument for the revenue was that if the scope of business expenditure could be so wide, the scope of inclusion of receipts arising from the course of business under Section 28(0 should not be narrowed down on the ground of absence of any contract or trading relationship with the State. In short, the submission for the revenue was that the profits and gains of a business have to be arrived at not merely by considering the profits derived by an assessee on the sale of its stock-in-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 : (b) The sale consideration on the transfer of the said entitlements being a capital receipt or not.
(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 paragraph No. 28 supra. The learned counsel for the assessee contended that the revenue had not attempted to tax the receipt in question under Section 28(iv) at all and that, therefore, we had no jurisdiction to go into that question.
On the other hand, the departmental representative pointed out that the difference of opinion referred for decision is phrased in language wide enough to include consideration of Section 28(iv) also. Secondly, he pointed out that the learned Accountant Member had considered the decision in Agra Chain Mfg. Co.'s case (supra) in para 37 of his order and had noted specifically that the receipt in question was held by the Court to be assessable under Section 28(iv). Again, in paragraph No. 41 of the order, the learned Accountant Member had referred to the Allahabad High Court decision in Agra Chain Mfg. Co.'s case (supra) and noted that the receipt in dispute was held to be assessable under Section 28(iv). In paragraph No. 42 of his order, he has followed the said decision and has confirmed the taxability of the sum of Rs. 1,35,020. Hence, the submission was that Section 28(iv) was very much relevant in the present dispute. This preliminary objection was not a simple one for decision and it could not be decided without further reflection. The felt necessity of the time, however, required the hearing to go on, for reasons which have no bearing on the merits of the dispute before us. We, therefore, heard the parties on the merits of the case for Section 28(iv). We would also set down below the major submissions on this aspect for the sake of completeness and then take up the fundamental point, whether a decision on merits on Section 28(iv) is called for at all.
43.1 The learned counsel for the assessee then addressed us on the merits of the applicability of Section 28(iv) to the sum of Rs. 1,35,020. It was pointed out that this provision relates to the value of any benefit or perquisite, whether convertible into money or not, arising from the business or the exercise of a profession. How can sale proceeds of import entitlements represent the value of 'benefit' or 'perquisite' In fact, the import entitlement had no value when the assessee received it as the assessee had not spent anything to acquire it, i.e., there was no cost of acquisition. It was nobody's case that the import entitlement had to be taxed at the point of receipt.
Secondly, such benefit 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 Council. Apart from all this, there was also judicial authority available directly for invoking Section 28(iv) in Agra Chain Mfg. Go's case(supra).
44. Shri Sharma, the learned counsel for the assessee, however, submitted that the various facets of assess ability under Section 28(iv) of such a sum, as in dispute in this case, have not been considered by any High Court and, therefore, we should not follow the reported case law. He referred in this regard to the object of the Government under its national policy in giving such export incentives as allotting import entitlements on the basis of export performance. It was only one of the incentives given for development of the export market. Cash subsidies were also given and under the policy of the Government there were other incentives such as a Duty Drawback Scheme, Tax Concession Scheme for selected types of expenditure and provision for raw materials at international prices and so on. In particular, the learned counsel referred to Section 35B of the Act, which, read with Section 37(1), allows a deduction of 133 1/3 and a one-third per cent for expenditure of certain types. The counsel contended that it would be illogical to so interpret the tax law as to make it appear that the Government takes away with the left hand what it gives with the right hand. Surely, it was not the Government's intention to tax the sale consideration received on import entitlements also. If that were so, then even the relief given under Section 35B could be held to be taxable. The counsel, therefore, submitted that we should avoid such an interpretation. Not every incentive should be taken as a benefit and brought to tax. The whole purpose and nature of the Scheme, under which the import entitlements came to be received by the assessee, should be kept in view. A further argument was that the word 'benefit' takes its colour from the word 'perquisite' following it. The import entitlement in question cannot, in any case, be described as in the nature of a 'perquisite', especially looking to the other sections in the Act in which the word is found.
45. We may observe (in parenthesis) there being a direct authority of a High Court in the matter [Agra Chain Mfg. Co.'s case (supra) relied on by Shri Kapila in reputing the assessee's case], it would not perhaps be in keeping with judicial property for us to go into the very philosophy of interpretation that 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 assessment has been made. The IAC assessed the sum as having been received 'by the assessee on account of its business activities of export' and, hence, it constituted a 'revenue receipt in the hands of the assessee'. There was no reference to Section 28(iv) by the IAC. Evidently, it was brought to tax under Section 28(i) The learned Accountant Member's conclusion is found in paragraph No. 42 of his order. He confirms specifically therein the order of the IAC. He does not indicate that the inclusion is to be under Section 28(iv).
46. The second point is the language of the question for decision by the Third Member. The only question we have to answer thereunder is : Is the sum of Rs. 1,35,020 to be included as the business income of the assessee for this year As we said before, we have already answered this question. Once this is done, the Third Member Bench's jurisdiction comes to an end in terms of Section 255(4) of the Act. It cannot, thereafter, proceed to consider issues, which, however, closely connected, do not fit into the precise outlines of the question-frame placed before it. It can neither stretch the frame nor lop it off even infinitesimally. Such an exercise is not within its power. Hence, we do not find it necessary to express any opinion on the taxability of the amount in question under Section 28(iv).
47. We may mention in particular that the issue whether the impugned sum was a capital receipt or not was specifically considered by the Commissioner (Appeals), who decided this in favour of the assessee. His decision was reversed by the learned Accountant Member but endorsed by the learned Judicial Member. Hence, this aspect was fully within the frame of the question referred to us. We have also given our finding in this regard.
48. In the result, we would agree with the conclusion recorded by the learned Accountant Member in paragraph No. 42 of his order, wherein he has reversed the order of the Commissioner (Appeals) and restored the order of the IAC. The matter will now go back to the Bench, which originally heard the matter for disposal in accordance with Section 255(4).