T. Kochu Thommen, J. - The question for consideration is whether the sale proceeds of import entitlement constituted income chargeable to income-tax u/s. 28 of the IT Act, 1961 (the 'Act'). By the impugned order (Ext. P3) dt. 30-3-1982, the CIT held that a sum of Rs. 2,37,283 received by the petitioner during the period relevant to the asst. yr. 1973-74 was income chargeable to tax u/s. 28 of the Act.
2. The petitioner is an exporter of sea foods. On the basis of the foreign exchange earned through export, the petitioner was granted by the government the right to import a certain quantity of goods. This right is called the import entitlement. In stead to importing goods under the import entitlement, the petitioner sold the entitlement for the above mentioned sum. The contention of the petition of the petitioner is that this sum, representing the sale proceeds of the import entitlement, which is in the nature of a right conferred by the government under the relevant scheme, constituted capital asset within the meaning of s. 2(14) and is, therefore, not a trade or income receipt which can be brought to tax under the head 'profit and gains of business or profession', as it is sought to be done by the impugned order.
3. Appearing for the petitioner, Shri C. K. Viswanatha Iyer contends : The petitioner has not carried on the business of import of goods. It is solely an exporter of goods. By virtue of its contribution towards export trade, the government have conferred upon it a certain right which entitled it either to import goods from foreign countries or to sell the entitlement for a price. What is realised as the price of the entitlement represented not the price of goods, which the petitioner did not import, or amounts realised in the course of business of import which the petitioner did not conduct, but the price of a right which the petitioner did not avail of, but sold to others. The amount thus represented the value of an asset. It is in the nature of a capital receipt or represented capital assets, and is, therefore, not liable to be taxed u/s. 28 of the Act. Nor is liable to be taxed under the head 'capital gains' as the cost of the import entitledment is not capable of determination.
4. The revenue has no case that the amount in question is liable to be taxed as capital gains. Their case is that the sale proceeds are a benefit arising from business within the meaning of cl. (iv) of s. 28 or profits and gains of business within the meaning of cl. (i) of that section.
5. The definition of income u/s. 2(24) includes :
'Income includes :
(i) profits and gains;..........;
(va) the value of any benefit ............
taxable under clause (iv) of
6. Section 28 reads :
28. 'Profits and gains of business or profession.
The following income shall be chargeable to income-tax under the head Profits and gains of business or profession, -
(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;..................................;
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession...................................;
7. If the amount in question was received by the assessee either as profit and gains of business or as the value of any benefit arising from business, such amount is liable to be assessed as 'profits and gains of business'. The question, therefore, is whether the petitioner is right in contending that the proceeds of sale of import entitlement do not fall u/s. 28, but are only capital receipts.
8. A capital asset is described u/s. 2(14) as follows :
'2(14) capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include :
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;
(ii) personal effects, .......;
(iii) agricultural land in India, .......;
(iv) 61/2 per cent Gold Bonds, 1977,......................;
(v) Special Bearer Bonds, 1991,...................'
9. The petitioners counsel contends that the import entitlement is not a stock-in-trade or any one of the other items specifically excluded by the section from the definition of capital asset. Accordingly, he submits that the proceeds of sale of an import entitlement represented capital asset or constituted capital receipt which cannot be taxed u/s. 28.
10. The petitioner carries on the business of export. Its investments are stated to be directed to that end. But the very business involves more than export, for in the course of its business its gains the right to import articles by virtue of the import entitlements.
11. It is true that the sum realised by the sale of the import entitlement is not in the nature of profits and gains derived from the export of goods or merchandies, as this court held in Cochin Company v. CIT : 114ITR822(Ker) . This court in that case rejected the claim of the assessee that the sale proceeds of the import entitlement were profits and gains derived from the export of goods so as to entitle it to the benefit of rebate of tax u/s. 2(5)(a)(i) of the Finance Act. 1966 which provided :
'(i) where his total income includes any profits and gains derived from the export of any goods or merchandies out of India, he shall be entitled to a deduction ..........'
See also Hindustan Lever Ltd. v. CIT : 121ITR951(Bom) and Ahmedabad Mfg. & Calico Printing Co. v. CIT : 137ITR616(Guj) . The petitioners counsel seeks to gain support from these decisions.
12. The revenue, however, has no case that the sale proceeds of import entitlement were derived from export. Their case is that the sale price of the entitlement was derived or arose from business. Whether or not the word 'arising' u/s. 28(iv) is synonymous with 'derived' as u/s. 2(5)(a)(i) of the Finance Act [see Commissioner of Taxation v. Kirk (1900) A.C. 588 (PC)], the right obtained under the entitlement is not a right which has 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 assessees business, although export oriented, basically and essentially, involves not only export, but also the consequence of export which is the right to import goods arising from 'the entitlement'. The moment the assessee makes 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 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 of 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.
13. The petitioners counsel does not dispute that, if goods had in fact been imported under the entitlement and had been sold by the assessee, the proceeds of the sale would have constituted income chargeable to tax u/s. 28. But he says that the proceeds of sale of the right which is the import entitlement cannot be characterised as money realised by the sale of goods.
14. The entitlement is a right to import goods. It has 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. The amount realised by the sale of that right is thus money constituting profits and gains or benefits arising from business. These receipts are not of a casual or non-recurring nature, but the sale proceeds of rights arising from business simultaneously with the export of goods. I am fortified in this by the decisions of other High Courts. In Metal Rolling Works Pvt. Ltd. v. CIT : 142ITR170(Bom) , the Bombay High Court held :
'...... In these circumstances, it is impossible to regard these import entitlements as capital asset of the assessee. It is equally clear that in these circumstances, the amount realised by the assessee on the sale of these import entitlements must also be regarded as profits of the assessee in its business.'
See also CIT v. Swadeshi Cotton Mills Co. Ltd. : 121ITR747(All) ; Agra Chain Mfg. Co. v. CIT : 114ITR840(All) and Kesoram Industries & Cotton Mills v. CIT : 115ITR143(Cal) .
15. The petitioners counsel, however, contends that any right which is not specifically excluded from the definition of 'capital asset' must be included within that definition. The conversion of such an asset, he says, cannot give rise to any income falling u/s. 28. I cannot accept this contention. As stated by the Supreme Court in Raghuvanshi Mills Ltd. v. CIT 0043/1952 : 22ITR484(SC) :
'...... This may not be a 'profit' but it is something which represents the profits and was intended to take the place of them and is therefore, just as much income as profits or gains received in the ordinary way. Section 4 is so widely worded that everything which is received by a man and goes to swell the credit side of his total account is either an income or a profit or a gain.'
16. Income, profits and gains may be realised in the form of mordals worth as well as money. It may be in kind or in cash. It may constitute the stock-in-trade or the circulating capital in the form of merchandies or goods kept for sale as distinguished from fixed capital which alone is capital asset [see 84 Corpus Juris Secundum pp. 282, 654; ibid. Vol. 83, pp. 97, 98; and ibid. Vol. 47, p. 291. See also re Richardson 50 L.J. Ch. 468; and Karanpura Development Co. v. CIT : 44ITR362(SC) ].
17. Whether a certain sum represents capital assets or profits and gains of 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 [see Golden House Shoe (Rew) Ltd. v. Thurgood (H. M. Inspector of Taxes) (1931) 18 T.C. 280. See also Ven Den Pergha Limited v. Clerk (H.M. Inspector of Taxes) (1933) 19 T.C. 390].
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 s. 2(14). The sale of this right has given rise to profits or gains or benefits taxable u/s. 28. The CIT, has, therefore, rightly upheld the addition of the amount in question as part of the total income of the assessee. The original petition is accordingly dismissed. I do not, however, make any order as to costs.