Per Shri T. Venkatappa, Judicial Member - This is an appeal against the order of the Commissioner dated 20-3-1984 passed under section 263 of the Income-tax Act, 1961 (the Act) directing the ITO to recompute the deduction under section 80HH and 80J of the Act after excluding the premia on import entitlements, exports house premia and drawbacks and revise the assessment.
2. The assessee is engaged in the business of export of sea foods under the name and style Bharath Sea Foods. The assessment for the assessment year 1979-80 was completed on 27-3-1982 by the ITO on a total income of Rs. 1,62,910. In this assessment, the ITO allowed deduction of Rs. 80,000 under section 32A of the Act, Rs. 35,368 under section 80HH and Rs. 17,226 under section 80J. Subsequently, the Commissioner was of the view that the assessment order made by the ITO is erroneous and prejudicial to the interests of the revenue. Accordingly, he issued noticed under section 263 in response to which the assessee filed reply objecting to invoking the provisions of section 263. The assessee was heard by the Commissioner. After considering the submissions of the assessee, he passed the order dated 20-3-1984 under section 263. He held that the ITOs order allowing deduction under section 80HH and 80J after taking into accounts receipts such as import entitlements, drawbacks, etc., was clearly erroneous and the decision of the Kerala High Court in Cochin Co. v. CIT  114 ITR 822 would be applicable.
Thus, he directed the ITO to recompute the deductions under sections 80HH and 80J after excluding the premia on import entitlements, export house premia and drawbacks and revise the assessment accordingly.
Against the same, the assessee has preferred this appeal.
3. The learned counsel for the assessee strongly urged that the order of the ITO is not erroneous and the Commissioner cannot invoke the provisions of section 263. The assessee is an industrial undertaking.
It purchases fish and after processing and producing exportable sea foods exports the same and on account of the exports made, the assessee is entitlements which are part of the business activities of the assessee. It is only by taking into account the import entitlements to which the assessee is entitled to, the price of the export commodity is determined. Thus, the import entitlements are very much part of the business activity of the industrial undertaking. In fact, the sale of the import entitlements is considered as business income of the assessee. If that is the position, it cannot be said that the import entitlements are not directly connected with the business activity of the assessee. Thus, he submitted that the relief under sections 80HH and 80J has been rightly allowed by the ITO on the same analogy he submitted that the export house premia and drawbacks cannot be excluded for computing the deduction under section 80HH and 80J. They are very much part of the business activity of industrial undertaking and have to be included under section 80HH. He placed strong reliance on various decisions.
4. The learned counsel departmental representative strongly urged that the sale of import entitlements is not a business activity of the assesse and it is not directly connected with the business of the industrial undertaking. On account of exports it might be entitled for import entitlements but that does not mean that it is part and parcel of a business activity. That is only an indirect benefit the assessee may derive. But the assessee will not be entitled to relief under section 80HH and for the purpose of deduction under sections 80HH and the 80J the import entitlements, export house premia and drawbacks premia have to be excluded. He placed reliance on the decisions in Cochin Co.s case (supra) and CIT v. Cochin Refineries Ltd.  135 ITR 278 (Ker.). He explained that the export house premia and the drawbacks are not part of then business activities of the assessee. He has obliged a third party for showing him as an exporter in respect of the goods shipped by the assessee. But that cannot be considered as a business activity of the assessee, even though he might have got some commission from the third party. Similarly in respect of drawbacks the assessee has not manufactured any packing materials for which excise duty is levied. So the question of refund of excise duty did not arise at all. Further, packing materials have been manufactured by somebody else who might have paid excise duty. Getting the drawbacks cannot be considered as a business activity of the assessee. Thus, he supported the order of Commissioner.
5. We have considered the rival submissions. Section 80HH (1) and 80J (1) read as under : "80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof." "80J. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under section 80HH and the section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the reate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) :" The words used in the above sections are any profits and gains derived from an industrial undertaking. The words derived from have been considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84. It was observed as follows : ".... It cannot be disputed that the expression attributable to is certainly wider in import than expression derived from. Had the expression derived from been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity ...." (p. 93) Thus, it was held that the expression attributable to is wider in import than the expression derived from. In CIT v. Raja Bahadur Kamakhaya Narayan Singh  16 ITR 325 the Privy Council observed as under : "The word derived is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." In that case, the Privy Council held that the interest on rent was not agricultural income as it was not revenue derived from land. The above decision of the Privy Council was applied by the Supreme Court in Mrs.
Bacha F. Guzdar v. CIT  27 ITR 1. In the light of the above decisions we have to give only restricted meaning to the words derived from used in sections 80HH and 80J. If we read the section from that angle, it would be clear that the profits and gains should be one which is derived from the industrial undertakings which means that that profit or gain should be directly from the very business activity of the industrial undertaking and the said activity is the immediate and effective source of the said profits and gain. There should be direct nexus between the activity and the earning of the profit and gain.
Merely because the activity has helped to earn the income or profit and indirect way it cannot be held that the income or profit and gain has been derived from the industrial undertaking. The business of the industrial undertaking in the instant case is export of sea foods. On account of exports the assessee was entitled for import entitlements.
The profit on the sale of import entitlements is to be treated as a business income as held by the Kerala High Court in D. K. Industries v.CIT  KLT 697. In this decision, it was further observed that import entitlement is not derived from export but it is the very right which gives rise to import. In our view the profit on sale of import entitlements is not directly attributable to the immediate source being the business of export of sea foods of the industrial undertaking. The profit derived on sale of import entitlements is only earned in an indirect way. That cannot be treated as a business activity of the industrial undertakings.
6. We may refer to the decision of the Kerala High Court in Cochin Co,s case (supra). It was observed as under : "The argument advanced on behalf of the assessee is that since the assessee had become eligible for the import entitlements only on account of its having exported goods out of India, the income derived by conversation of the import entitlements into money by a process of sale should be regarded as profits or gains derived from the said activity of the export of goods. We are unable to accept this contention. Profit and gain can be said to have been derived from an activity carried on by a person only if the said activity is the immediate and effective source of the said profit or gain. There must be a direct nexus between the activity and the earning of the profit and gain. The income, profit or gain cannot be said to have been derived from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner -CIT v. Raja Bahadur Kamakhaya Narayan Singh  16 ITR 325 (PC) and Mrs. Bacha F. Guzdar v. CIT  27 ITR 1(SC). When this principle is applied to the facts of the present case it becomes clear that the profits earned by the assessee by the sale of the import entitlements cannot be regarded as profits or gains derived from the export of goods out of India. We find that a similar question had arisen before this Court in ITR No. 99 of 1971 and by judgment dated 29th May, 1973, which is not so far reported, a Division Bench of this Court held that the profits realised by the assessee in that case by the sale of the import licences obtained by it on the strength of import entitlements could not be said to be profits derived by the assessee from export of goods out of India. We are in respectful agreement with the said view. It then follows that the Tribunal was right an assessees claim for rebate under section 2(5) (a) (i) of the Finance Act, 1966. ..." (p. 830) It has been held therein that the income, profit or gain cannot be said to have been derived from an activity merely by reason of fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner. The profits realised by the sale of the import licences obtained by it on the strength of import entitlements could not be said to be profits derived from the export of goods out of India.
7. In Cochin Refineries Ltd. case (supra) the Kerala High Court observed as under : "No doubt these decisions lend weight to the argument of the learned counsel for the revenue, Shri P. K. R. Menon, that the words derived from in section 80J of the Act cannot have a wide import so as to include any income which can in some manner be attributed to the business. The derivation of the income must be directly connected with the business in the sense that the income is generated by the business.
It would not be sufficient if it is generated by the exploitation of a business asset. In the case before us, the income by way of interest from the deposits is no doubt an income derived by investing surplus cash of the assessee generated as profits of the industrial undertaking. But, it is not money derived from the business activity of the industrial undertaking but by the business activity of deposit of the business asset in banks. Within the meaning of the term derived from it will not be possible to hold that the income so generated is the income falling within section 80J ...." (p. 287) It was held therein that the derivation of the income must be directly connected with the business in the sense that the income is generated by the business. Within the meaning of the term derived from it will not be possible to hold that the income to generated is the income falling within section 80J.8. The decision of the Kerala High Court in Cochin Co.s case (supra) was followed by the Bombay High Court in Hindustan Lever Ltd. v. CIT  121 ITR 951. It was observed as under : "It is thus clear the Privy Council restricted the effect and the meaning to be ascribed to the word derived. In its view, if an inquiry was to be made as to be stopped as soon as the effective source is discovered. To translate the principle and apply the same to the facts of the case before us, the answer to the inquiry, viz. what is the source of the savings effected by the assessee-company on the palm oil, would have to be ended by giving the answer that the source was the import entitlements or the licence which permitted the assessee-company to import this palm oil at international prices which were lower than those prevailing in the home market. This then must be considered to be the source of the saving and the further inquiry as to how or why the assessee-company got the import entitlements or licence is not permitted in the view taken by the Privy Council ...." (p. 961) In this decision it was held that the word derived from exports cannot be accepted as equivalent to referable to export.
9. In Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. CIT  143 ITR 590, the Madhya Pradesh High Court held that it may be that it was because of export business that the assessee got import licence, yet the connection of the income resulting from import entitlements to the export business is indirect and the direct source of this income is the import licence. Hence, there is no room for including the value of import entitlements in the turnover of exports under rule 2(3).
10. Sterling Foods v. CIT  150 ITR 292 (Kar.) is a case directly on the point dealing with section 80HH. In that case, the assessee-firm was engaged in the processing and export of prawns and other sea foods.
The assessee also earned import entitlements. The assessee sold such import entitlements and earned some profits. The total income of the assessee included the sale proceeds of such import entitlements. The ITO allowed relief under section 80HH in respect of the entire receipts inclusive of the sale proceeds of the entitlements. The Commissioner invoked the provisions of section 263 and set aside the assessment and directed the ITO to redo the same after excluding the sale proceeds of import entitlements. The Tribunal upheld the order of the Commissioner.
On reference, the Karnataka High Court observed as under : "Section 80HH was meant to give a tax rebate to certain categories of assessee and one who wants to claim such relief must strictly satisfy the requirements prescribed thereunder. He must establish that his profits and gains were derived from his industrial undertaking or the business of a hotel. It is just not sufficient if a commercial connection is established between the profits earned and the industrial undertaking. The law requires that such profits must have been derived from the industrial undertaking. The industrial undertaking must itself be the source of that profit. The business of that industrial undertaking must directly yield that profit. It must be direct source of that profit and not a means to earn any other profit.
Source means not a legal concept but something which a practical man would regard as a real source of income. [The assessee may have separate sources of income - see section 3(3) of the Act.] All taxable income must necessarily have a definite source [see the Law and Practice of Income-tax by Kanga and Palkhivala, p. 162. ] If that is the concept of the source, can we legitimately say that the profits and gains derived by the sale proceeds of the import entitlements must be held to have been derived from the industrial undertaking of the assessee. Far from it, the import entitlements were awarded by the Central Government under a scheme to encourage exports.
The source referable to the profits and gains arising out of the sale proceeds of the import entitlements would, therefore, be the scheme of the Central Government and not the industrial undertaking of the assessee." (p. 297) It was held therein that the assessee is not entitled to relief under section 80HH in respect of the profits and gains derived from the sale of import entitlements. The facts of this case are identical with the facts of our case and the ratio laid down therein squarely applied. We respectfully follow the above decisions.
11. The case law relied on by the assessees counsel in the following cases supports the assessees contention that the receipt from the sale of import licence was attributable to the activity of manufacturing and it is very much the business activity of the industrial undertaking - CIT v. Wheel & Rim Co. of India Ltd.  107 ITR 168 (Mad.), ITAT v.B. Hill & Co. (P.) Ltd.  142 ITR 185 (All.), Jeewanlal (1929) Ltd. v. CIT  139 ITR 865 (Cal.), Addl. CIT v. Abbas Wazir (P.) Ltd.  116 ITR 811 (All.), Bharat Carpets Ltd. v. IAC  2 ITD 278 (Delhi) and ITO v. Mahalkshmi Glass Works (P.) Ltd.  2 ITD 646 (Bom.).
But a contrary view has been taken in the cases to which we have earlier referred to. We prefer with respect to follow those decisions in preference to the decisions relied on by the assessees counsel.
12. The import entitlements were obtained under the scheme of the Central Government and so the source for getting the profits and gains from the sale of import entitlements could be the scheme of the Central Government and not the industrial undertaking of the assessee. This finding would equally apply in respect of the export house premia. The assessee ships its own goods but he will show a third party as an exporter from whom he receives commission. The business of the assessee is one of exporting sea foods and not earning income by way of commission from the third party who is shown as an exporter. Thus, this commission described as export house premia earned by the assessee is not derived from the industrial undertaking as that is not the business activity of the industrial undertaking. Thus, the assessee will not be entitled to relief under section 80HH and 80J in respect of profits and gains derived from the sale of import entitlements and the export house premia since of the revenue, the Commissioner had jurisdiction to invoke section 263 and we uphold his action in invoking section 263.
13. But so far as the drawbacks to which reference is made by the Commissioner are concerned, the full facts are not available. It is not known whether it is in respect of the excise duty on the packing materials collected from the manufacturer and whether the customs department has given refund as customs duty with reference to the excise duty collected on the packing materials. No doubt, the decision of the Madhya Pradesh High Court in Gwalior Rayon Silk Mfg. (Wvg.), Co.
Ltd.s case (supra) is in favour of the assessee so far as the drawbacks are concerned. But in the assessees case the facts have to be enquired.
Hence, to that extent we direct the ITO to make afresh in accordance with law. To that extent the order of the Commissioner is modified and in other respects we uphold his order.