Skip to content


Ahmedabad Manufacturing and Calico Printing Co. Ltd. Vs. Commissioner of Income-tax, Gujarat-i. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax References Nos. 83 and 84 of 1976
Reported in(1982)25CTR(Guj)263; [1982]137ITR616(Guj)
AppellantAhmedabad Manufacturing and Calico Printing Co. Ltd.
RespondentCommissioner of Income-tax, Gujarat-i.
Excerpt:
- - the income-tax appellate tribunal (hereinafter referred to as 'the tribunal') has negatived the claim of the assessee-company on the ground that the condition precedent for the grant of deduction (earning of profit in export business) is not satisfied. the ito took the view that the onus was on the assessee-company to prove that it had derived such profits and gains and sine it failed to discharge the onus, its claim for rebate was disallowed for the assessment year 1963-64. the fact situation in the assessment years 1964-65 and 1965-66 was not different from the one which obtained in the assessment year 1963-64. under the circumstances, the ito, following his decision in the assessment year 1963-64, rejected the assessee-companys claim for rebate under the aforesaid provisions of.....mankad j. - the assessee, a public limited company, is engaged in the manufacrture of cotton textiles at ahmedabad. the assessee-company effected exports out of india of various products manufactured by it during the previous years relevant to the assessment years 1964-65 and 1965-66. it claimed the benefit of deduction admissible to assessees whose total income includes any profits or gains derived from exports under s. 2(5)(a)(i) of the finance act, 1964, for the assessment year 1964-65 and under s. 2(5)(a)(i) of the finance act, 1965, for the assessment year 1965-66. both these provisions are in identical terms. the question which is raised in these references is whether the assessee-company is entitled to claim such deduction or rebate, even though the assessee-company, which has not.....
Judgment:

MANKAD J. - The assessee, a public limited company, is engaged in the manufacrture of cotton textiles at Ahmedabad. The assessee-company effected exports out of India of various products manufactured by it during the previous years relevant to the assessment years 1964-65 and 1965-66. It claimed the benefit of deduction admissible to assessees whose total income includes any profits or gains derived from exports under s. 2(5)(a)(i) of the Finance Act, 1964, for the assessment year 1964-65 and under s. 2(5)(a)(i) of the Finance Act, 1965, for the assessment year 1965-66. Both these provisions are in identical terms. The question which is raised in these references is whether the assessee-company is entitled to claim such deduction or rebate, even though the assessee-company, which has not maintained separate accounts pertaining to the export business, is unable to establish that the export business resulted in any profit whatsoever. The Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') has negatived the claim of the assessee-company on the ground that the condition precedent for the grant of deduction (earning of profit in export business) is not satisfied.

In the course of assessment for the assessment year 1964-65, the assessee-company contended that its total direct and indirect export sales came to Rs. 1,85,325. Out of these sales, sales worth Rs. 25,82,240 were direct export sales. It is not in dispute that sales other than such direct export sales do not qualify for rebate under s. 2(5)(a)(i) of the Finance Act, 1964. In other words, the claim which was made by the assessee-company before the ITO was that it was entitled to such rebate in regard to direct export sales of Rs. 25,82,240. In the assessment year 1965-66, the total export sales, including the direct and indirect, came to RS. 2,03,14,853. Out of these sales direct export sales were to the tune of Rs. 49,21,323. The assessee-company claimed rebate in regard to these direct sales of Rs. 49,21,323, under s. 2(5)(a)(i) of the Finance Act, 1965. The assessee-company had not maintained separate accounts in respect of its export trade. It must be mentioned that it is not the case of the assessee-company that it was not possible to maintain separate accounts for any special reason or that such a separate account cannot be reconstructed from its books of account. It did not produce any evidence or material before the ITO to establish whether or not it had made any profit out of direct export sales and if so what was the extent of such profit. In the course of the assessment proceedings for the assessment year 1965-66, it appears that the ITO had specifically called upon the assessee-company to produce details regarding the cost of production of the cloth exported, expenses incurred in exporting the cloth, etc. The assessee-company expressed sits inability to produce such date. It was stated that no separate date as requested by the ITO was available with the assessee-company. It is not in dispute that in either of the two assessment years under consideration the assessee-company did not produce any evidence or material to prove whether or not it had derived any profits and gains out of direct export sales. It appears that the assessee-company had made a similar claim for rebate in the assessment year 1963-64. In that year also, the assessee-company had not produced any material or evidence to prove that it had derived any profit from export sales which qualified for such rebate. The ITO took the view that the onus was on the assessee-company to prove that it had derived such profits and gains and sine it failed to discharge the onus, its claim for rebate was disallowed for the assessment year 1963-64. The fact situation in the assessment years 1964-65 and 1965-66 was not different from the one which obtained in the assessment year 1963-64. Under the circumstances, the ITO, following his decision in the assessment year 1963-64, rejected the assessee-companys claim for rebate under the aforesaid provisions of the relevant Finance Acts in the assessment years 1964-65 and 1965-66.

Being aggrieved by the rejection of its claim, the assessee-company carried the matter in appeal before the AAC. So far as the assessment year 1964-65 was concerned, the AAC, who heard the assessee-companys appeal, by his order dated August 18, 1972, took the view to the effect that the ITO had made a technical approach in disallowing the assessee-companys claim for rebate. In his view the ITO ought to have worked out the profits and gains derived from direct export sales under sub-r. (3) of r. 2 of the Income-tax (Determination of Export Profits) Rules, 1964 (hereinafter referred to as 'the Rules'). According to the AAC, the assessee-company was entitled to a rebate of an amount of Rs. 76,508 on the basis that the total turnover of the assessee-company was Rs. 15,66,27,255 and its direct export sales were to the tune of Rs. 25,92,240. He, therefore, directed the ITO to allow a rebate to the assessee-company on the amount of Rs. 76,508.

So far as the assessment year 1965-66 is concerned, the AAC who heard the assessee-companys appeal for the assessment year 1965-66, by his order dated March 5, 1972, took a similar view. He held that the ITO should have worked out the profits and gains on the export sales under sub-r. (3) of r. 2 of the Income-tax (Determination of Export Profits) Rules, 1965 (which is in pari materia with sub-r. (3) of r. 2 of the Rules, which provides for a computation of the qualifying income for rebate, where, in the opinion of the ITO the profits and gains on such exports cannot be ascertained. The AAC, therefore, directed the ITO to calculate the qualifying income as provided in sub-r. (3) of r. 2 of the said Rules. He further directed that in case the computation of such profits and gains in the manner specified in sub-r. (3) of r. 2 presents any difficulty, the qualifying income should be computed in the manner provided in sub-r. (4) of r. 2 of the said Rules. The ITO was directed to allow a rebate of tax under s. 2(5)(a)(i) of the Finance Act, 1965.

Being aggrieved by the view taken by the AAC in the assessee-companys appeals for the assessment years 1964-65 and 1965-66, the Revenue carried the matter in appeal before the Tribunal. The Tribunal following its earlier decision in the assessee-companys appeal being Appeal I.T.A. No. 1625 of 1968-69 for the assessment year 1963-64, allowed the Revenues appeal and rejected the assessee-companys claim for rebate for the assessment years 1964-65 and 1965-66. It may be mentioned here that the assessee-company had unsuccessfully appealed against the rejection of its claim for rebate by the ITO for the assessment year 1963-64. Its further appeal to the Tribunal also failed. While rejecting the assessee-companys claim for rebate for the assessment year 1963-64, the learned Accountant Member of the Tribunal observed :

'Even before us the assessee has expressed its inability to produce any material which would go to show that it had actually earned some profits or gains on the export business done in the previous year. Even though the computations made by the ITO were challenged, no other computations are coming forward from the assessee to show that in fact there was a profit on the export of cloth. The position, therefore, remains that the assessee has not furnished before us material to show that in fact profit was made by it on the sale of goods outside India. The assessee is amongst the topmost textile manufacturers of the country. Instead of furnishing statistical figures which could establish that in fact profit was earned by the assessee on sales outside India, general propositions are put forward and reference is made to export entitlement schemes and cash premiums on exports. No material has been put forward before us to show that the licences obtained by the assessee under the Export Promotion Schemes were actually sold by the assessee for cash and to that extent the assessee had made profit.

It is difficult to believe that a concern like the assessee should carry on its business without knowing the cost of articles manufactured by it. If the cost is not disclosed to us the assessee may have its sown reasons for doing so.

I am inclined to accept the contentions of the departmental representative that it is for the assessee to establish that it had earned profits or gains from its export business which would entitle it to claim allowance or reduction under s. 2(5)(i) of the Finance Act, 1963. This the assessee has signally failed to do and as such it is not entitled to any rebate or reduction under s. 2(5)(i) of the Finance Act, 1963.'

The assessee-company had urged before the Tribunal that as the profits and gains on export sales made by it were not ascertainable, such profits and gains should have been computed under sub-r. (3) of r. 2 of the said Rules of 1963. It was urged that otherwise the provisions contained in the said sub-r. (3) of r. 2 would be redundant. Dealing with this argument, the learned Accountant Member observed :

'I am not impressed with this argument. Rules have been made to carry out the provisions of the statute. The provisions of the rules cannot, therefore, be used to give to the statute an interpretation which on a plain reading thereof is not tenable. The primary condition which an assessee has to satisfy before it becomes entitled to relief u/s. 2(5)(i) of the Finance Act, 1963, is that he had made some profits on the export of goods. It is only after the assessee has established the factum of profits having been earned on its exports that the question of computing such profits arise. It is only for the purpose of computation that the Income-tax (Determination of Export Profits) Rules can be pressed into service... In these circumstances, I would uphold the finding of the revenue authorities that the assessee is not entitled to any relief under sec. 2(5)(i) of the Finance Act, 1963.'

The learned Judicial Member agreed with the conclusions reached by the learned Accountant Member but on different grounds. He held that the working made by the ITO showed that the assessee had not earned profits on export sales. The assessee had not been able to show as to how the ITO had erred. Consequently, the learned Judicial Member took the view to the effect that as the assessee had not earned profits on export sales it was not entitled to any rebate under s. 2(5)(i) of the Finance Act, 1963.

The learned Members of the Tribunal, who heared the assessee-companys appeals for the assessment years 1964-65 and 1965-66, while rejecting the claim for rebate on export sales, agreed with the view taken by the learned Accountant Member of the Tribunal in the assessee-companys appeal for the assessment year 1963-64. It was held that the primary condition to enable the assessee-company to claim rebate, namely, that the assessee-company should establishes that it had made profits on export business, was not satisfied.

The Tribunal has, at the instance of the assessee-company, referred the following two questions for our opinion under s. 256(2) of the I.T. Act, 1961 :

Reference No. 83 of 1976 :

'Whether, on the facts and circumstances of the case, the Tribunal was justified in rejecting the assessees claim for deduction under section (2)(a)(i) of the Finance Act, 1964, on account of export of cloth out of India during the accounting year ending on 31st March, 1964 ?'

Reference No. 84 of 1976 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the assessees claim for deduction under section 2(5)(a)(i) of the Finance Act, 1965, on account of export of cloth out of India during the accounting year ending on 31st March, 1965 ?'

The answer to the questions referred to us mainly turns on the interpretation of the provisions contained in s. 2(5)(a)(i) of the Finance Act, 1964, and s. 2(5)(a)(i) of the Finance Act, 1965. These provisions contained in Finance Act, 1964, and Finance Act, 1965 are in identical terms except for the year mentioned in cl. (a) of s. 2(5). In the provision contained in the Finance Act, 1964, the year mentioned in 1964, while in the Finance Act, 1965 the year mentioned is 1965. Instead of reproducing the provisions of both the Acts, for the sake of convenience, we reproduce hereinbelow the provisions contained in s. 2(5)(a)(i) of the Finance Act, 1965 :

'2. (5)(a) In respect of any assessment for the assessment year commencing on the 1st day of April, 1965 -

(i) an assessee being an India company or any other company which has made the prescribed arrangements for the declaration and payment of dividends within India or an assessee (other than a company) whose total income includes any profits and gains derived from the export of any goods or merchandise out of India, shall be entitled to a deduction, from the amount of income-tax with which he is chargeable, of an amount equal to the income-tax calculated at one-tenth of the average rate of income-tax on the amount of such profits and gains included in the total income.'

The question is when would an assessee, who falls in one of the categories mentioned in the above provision, be entitled to claim deduction from the amount of income-tax payable by it. In order to become eligible for rebate under the said provision, the total income of the assessee concerned should include 'any profits and gains derived from the export of any goods or merchandise out of India'. In other words, unless the assessee concerned has derived profits and gains from the export of goods or merchandise out of India, he would not be entitled to claim rebate. Derivation of profits and gains from export of goods and merchandise is a sine qua non for entitlement to the rebate. It is not enough that the assessee should have earned income liable to to income-tax and super-tax from other business carried on by him, but he must positively establish that such income includes profits and gains derived by him from export of any goods or merchandise. In other words, earning of income liable to tax from the overall business including export, does not make him eligible for rebate unless he also shows that he in fact earned income from the export. For example, if the assessee suffers loss in the export trade, but having regard to the income derived by him from his business other than exports, there is positive or taxable income, he would not be entitled to a rebate. The primary and the first requirement in order to claim rebate under the aforesaid provision is that there is profit from the export of goods. Unless, therefore, this primary condition is satisfied, the question of granting any rebate to the assessee would not arise. We are, therefore, in full agreement with the view taken by the Tribunal that in order to become entitled to the rebate the assessee-company must establish that it had derived profits and gains from the direct export sales. If the assessee-company has failed to produce any evidence or material to establish that it had derived profits and gains from export of goods, it must fail. The Tribunal has recorded a finding of fact that the assessee-company has not established that it had derived profits and gains from the direct export sales and in view of this finding, which is not alleged or proved to be unreasonable, the assessee-companys claim for rebate under s. 2(5)(a)(i) of the relevant Finance Acts, in each of the assessment years under consideration, must be rejected.

It is, however, urged by Mr. B. R. Shah, learned counsel for the assessee-company, that the assessee-companys claim should not be rejected merely on the ground that it had not maintained separate accounts in respect of the export trade and consequently failed to prove by positive evidence that it had derived profits and gains from direct export sales. Mr. Shah submitted that in each of the assessment years under consideration, the assessee had made an overall profit though it could not be shown whether profit was derived from export business and if so to what extent. According to Mr. Shah, it was a case where profits and gains on export sales cannot be ascertained. Mr. Shah submitted that the revenue authorities should have worked out such profits and gains under sub-r (3) or sub-4 (4) of r. 2 of the relevant Rules, namely, the Rules of 1964 to 1965. Provision of sub-r. (3) of r. 2 is made to compute profits and gains on exports in a case like the case of the assessee-company. According to Mr. Shah, it is immaterial as to for what reason the profits and gains on exports are not ascertainable. Once it is found that such profits and gains are not ascertainable, sub-r. (3) of r. 2 would come into play, and the ITO must compute such profits and gains as provided therein and in case such computation presents any difficulty, he should proceed under sub-r. (4) of r. 2 to compute such profits and gains.

We are unable to agree with Mr. Shah. The question of computation of profits and gains from export of goods or merchandise would arise only in a case where it is first established that such profits and gains have actually be derived by the assessee. If the assessee fails to establish that it has derived such profits and gains, the question of taking the second step of computation thereof does not arise. Therefore, it was the duty of the assessee-company to first prove that it had derived profits and gains from the export of goods. We, however, find that it has failed to do so for both the assessment years under consideration. Therefore, the Revenue authorities were not required to enter into the question of computation of such profits and gains. The claim of the assessee-company fails at the threshold. Again, we are not able to agree with Mr. Shah that, for whatever reason, if there is no material or evidence to show whether or not the assessee-company derived any profits and gains from export of goods, if there is an overall profit from the totality of the business carried on by the assessee-company (including exports business), it is a case where profits and gains derived from the export of goods is not ascertainable and consequently the aid of sub-r. (3) of r. 2 of the Rules should be taken for the computation of such profits and gains. As already pointed out above, it is not enough for the assessee-company to prove that it had derived or earned income from its entire business including export. What is required to be proved is that its total income includes profits and gains derived from export of goods. If it has earned overall taxable income from the entire business including export, but has incurred loss in the export business, it would not be entitled to any rebate under s. 2(5)(a)(i) of the relevant Finance Acts. If what Mr. Shah says is the correct position, even in a case where the assessee-company has suffered loss in the export business, it would be entitled to rebate if it has made an overall profit in its business including the export business, which would be inconsistent with the precondition (earning of profits) embedded in the said provision. In our opinion, this is as wrong reading of s. 2(5)(a)(i). There is hardly any scope for two interpretations of the provisions of s. 2(5)(a)(i). On a plan reading of the said provision, there cannot be any doubt whatever that unless and until it is proved that the assessee-company derived profits and gains from export of goods or merchandise, there is no question of granting any rebate to it under the said provision. Rule 2 of the Income-tax (Determination of Export Profits) Rules, of 1964 and 1965, is in identical terms and it reads as under :

2. 'Computation of qualifying income. - (1) Where the total income of an assessee referred to in sub-clause (i) of clause (a) of sub-section (5) of section 2 of the Finance Act, 1964 (5 of 1964), includes any profits and gains derived from the export of any goods or merchandise out of India, the amount of such profits and gains in respect of which deduction of income-tax and super-tax is admissible under that sub-clause (hereinafter referred to as the qualifying income) shall be computed in accordance with the provisions of sub-rule (2) or sub-rule (3) or sub-rule (4) of this rule, as the case may be.

(2) Where in the opinion of the Income-tax Officer, it is possible to ascertain the profits and gains on such exports, the qualifying income shall be taken to be the amount by which the profits and gains so ascertained in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961) (hereinafter referred to as the Act), and included in the total income exceed the aggregate of the amount or any portion thereof on which income-tax or super-tax is not payable and the amount in respect of which a deduction of income-tax or super-tax has been granted under any of the provisions of the Act.

(3) Where in the opinion of the Income-tax Officer, the profits and gains on such exports cannot be ascertained the qualifying income shall be taken to be the amount which bears to the profits and gains of the whole business of which such exports form a part and included in the total income (as reduced by the aggregate of the amount of any portion thereof on which income-tax or super-tax is not payable and the amount in respect of which a deduction of income-tax or super-tax has been granted under any of the provisions of the Act), the same proportion as the value of the turnover in respect of such exports bears to the turnover of the business of which such exports form a part.

(4) Where in the opinion of the Income-tax Officer a computation of such profits and gains in the manner specified in sub-rule (3) presents exception difficulties, the qualifying income shall be taken to be the amount by which such profits and gains as ascertained by the Income-tax Officer on any other reasonable basis on the data available and included in the total income exceed the aggregate of the amount or any portion hereof on which income-tax or super-tax is not payable and the amount in respect of which a deduction of income-tax and super-tax has been granted under any of the provisions of the Act.'

Sub-rule (1) of r. 2 provides that profits and gains derived from export of any goods or merchandise out of India (hereinafter referred to as the qualifying income) shall be computed in accordance with the provisions of sub-r. (2) or sub-r. (3) or sub-r. (4) of the Rule, as the case may be. Sub-rule (2) lays down the method of computation of qualifying income, where in the opinion of the ITO it is possible to ascertain profits and gains on the exports. Sub-rule (3), on which strong reliance was placed by Mr. Shah, provides for the computation of the qualifying income where, in the opinion of the Income-tax Officer, profits and gains on the export cannot be ascertained. If the computation of profits and gains in the manner specified in sub-r. (3) presents exceptional difficulties, the ITO is empowered to determine the qualifying income on any other reasonable basis on the data available. In the instance case, Mr. Shah has not been able to satisfy us as to why the assessee-company was not in a position to work out profits and gains derived by it from export of goods. It is submitted that the assessee-company is not in a position to do so because it has not maintained separate accounts in regard to its export trade. Now, sub-r. (3) will be attracted where the ITO has formed the opinion that profits cannot be ascertained. It must be his opinion having regard to the circumstances of the case. Applicability of sub-r. (3) cannot depend on the failure to maintain separate accounts by the assessee. If the assessee chooses not to maintain separate accounts, he cannot on that account ask the ITO to take recourse to sub-r. (3). By his own failure to do so, he cannot oblige the ITO to form the requisite opinion. Why could separate accounts be not maintained Is it because it is not possible to do so, or it is because the assessee chooses to do so presumably because it suits him. The assessee does not explain. Nor does the assessee explain even now why separate accounts of export trade cannot be reconstructed from its account books. In our opinion, the difficulty in ascertaining profits and gains derived from the export of goods should arise on account of some special reasons and not on account of some act or omission on the part of the assessee-company. The mere fact that the assessee-company has not maintained separate accounts for export trade cannot lead us to the conclusion that the profits are not ascertainable. There was nothing to prevent the assessee-company from maintaining separate accounts in respect of its export trade. If it chose not to do so, it must suffer its consequence. It is not as if it is not possible to maintain separate accounts in respect of export trade. The assessee-company is bound to possess evidence and material in regard to the profits and gains it derived from the export of goods. As rightly pointed out by the Tribunal, the assessee-company is one of the leading textile mills of the country and one finds it difficult to believe that it has no material whatsoever to prove that it derived to believe that it has no material whatsoever to prove that it derived profits and gains from its export business. The assessee-company has at its command the services of chartered accountants and cost accountants and with the aid of modern methods and machines such as computers, the assessee-company would not have any difficulty in working out the profits and gains it derived from export business or the direct export sales which would qualify for earning the rebate.

For the purpose of application of sub-r. (3) of r. 2 of the Rules, the question cannot be whether there was a profit or loss, but it should be that the profit was not ascertainable. Again, profit should not be ascertainable not on account of any act or omission on the part of the assessee but for genuine and special reasons. What such genuine and special reasons are, would depend upon the facts of each case. In the instant case, if there is any difficulty in ascertaining the profits and gains derived from the export sales, it is because the assessee-company chooses not to keep or reconstruct separate accounts and not because of its helplessness. The assessee-company cannot by its own act or omission make profits on export unascertainable and then come forward and claim that as such profits and gains are unascertainable, they should be computed under sub-r. (3) of r. 2. Before the aid of sub-r. (3) can be taken, the ITO has to be satisfied that such profits and gains have in fact arisen or accrued but they cannot be ascertained. As already pointed out above, the requisite satisfaction can be reached only in a case where unascertainability of the profits is on account of genuine and special reasons and not on account of any act or omission on the part of the assessee. The assessee-company has, in our opinion, failed to bring its case within the four corners of sub-r. (3) of r. 2 of the said Rules. We are not satisfied that profits and gains on the export made by the assessee-company cannot be ascertained. Therefore, the question of applying sub-r. (3) of r. 2 of the said Rules does not arise.

But even if we were to agree with Mr. Shah that the profits and gains on the export should have been worked out or computed in the manner provided in sub-r. (3), the material which is produced by the assessee-company is not sufficient or adequate to work out such profits and gains in the manner provided under the said sub-r. (3). There is absolutely no material on record to show what goods were the subject-mater of direct export sales by the assessee-company. It is true that in the question which is framed by the Tribunal in each of the references, it is mentioned that deduction under s. 2(5)(a)(i) was claimed on account of the export of cloth out of India; but there is no finding recorded by the Tribunal that it was cloth alone which was exported out of India by the assessee-company. The record also does not disclose as to what were the different varieties of cloth which were exported by the assessee-company out of India. It is likely that only certain items out of various products manufactured by the assessee-company were exported. The assessee-company manufactures and sells ready made garments also. There is no material on record to show whether what was exported was ready-made garments or cloth. Therefore, unless it is shown which were the products which formed part of the export business, it would be difficult to work on profits and gains on export under sub-r. (3). The key words in working out profits and gains under sub-r. (3) are : 'the amount which bears to the profits and gains of the whole business of which such exports form a part' . Therefore, for the purpose of computation of the profits and gains under sub-r. (3) only that business of which export forms a part is relevant. The argument advanced by counsel for the assessee that the expression 'whole business' is capable of being interpreted as the entire business inclusive of export as also non-export business (manufacturing and trading activities in its entire business within India) has merely to be stated to be rejected. The basic idea is to encourage exports and offer incentives, provided the exports result in profits. One cannot be oblivious to this basic design. How can 'profits from exports' be ever derived by reference to profits from non-export business One can conceive of profits in export business in respect of a company which incurs overall loss in non-export business or entire business. It would be taxing ones commonsense to place an interpretation which would countenance drawing an inference that the export business resulted in a profit if the non-export business resulted in profit or that by any rational process one can guess at the profits from the export business as bearing any percentage of the non-export profit. We, therefore, have no hesitation in repelling the specious plea. Therefore, unless we know what goods are exported, it would be difficult to ascertain the 'whole business' of which such export forms part of the purpose of sub-r. (3). We are not examining this aspect of the matter in detail but only indicating that even if sub-r. (3) were attracted, there is no material on record on the basis of which a computation of profits and gains of export could be made under the said sub-r. (3). We are not examining this aspect in detail for the obvious reason that the assessee-company has failed to make out a case for the application of sub-r. (3). The assessee-company has not placed on record the relevant facts to prove whether or not it had derived profits and gains from the export of goods, and if so, what is the extent of such profits and gains. What in reality and substance it is arguing is that the Revenue authorities and the Tribunal should investigate the facts and give it relief of the rebate as claimed by it. In this connection we agree with the following observations made by the Allahabad High Court in L.H. Sugar Factories & Oil Mills v. CIT : [1980]124ITR58(All) :

'We are of the view that it is not the function of the Tribunal to assist an assessee who has not placed on the record relevant facts, by launching a fact-finding inquiry on its own. For, it is no part of the Tribunals function to act as an investigative agency either for the assessee or the Department in cases where ample particulars have not been given by parties. The Tribunal was, therefore, right in rejecting the assessees claim.'

We will now proceed to deal with the other aspects which have an important bearing on the question as to what is includible in the profits and gains derived from export of goods. In the view which we are taking, those aspects, so far as the instant case is concerned, lose their importance; but since both the parties have addressed us on these aspects, we have thought it fit to deal with them. It was urged that as a result of the direct export sales made by the assessee-company, it became entitled to the following benefits : (i) cash subsidy or allowance by the government; (ii) an import entitlement or import licence which is expressly made transferable or saleable, which may result in income by way of their sale proceeds; and (iii) an import entitlement or import licence which is not transferable and, therefore, not saleable, but, which could be utilised by the assessee to import scarce items or commodities or to import items and raw materials at prices which are less than the ruling home market prices and, therefore, result in savings to the assessee, which are capable of being measured in terms of money. It was surged that the above benefits which the assessee acquired as a direct result of the exports made by its must go into the computation of the profits and gains derived by it from the export of goods. In the statement submitted on behalf of the assessee-company it is stated that in the assessment year 1964-65, the cash incentives on export amounted to Rs. 30,56,101 and incentives in kind amounted to Rs. 54,46,219. The cash incentives and incentives in kind were Rs. 30,29,667 and Rs. 60,34,455, respectively, in the assessment year 1965-66. It was contained that both the cash incentives and incentives in kind must be taken into account while computing the profits.

As already pointed out above, the assessee whose total income includes any profits and gains derived from export of goods or merchandise out of India is entitled to the benefit of rebate under s. 25(a)(i) of the relevant Finance Act. The question which arises for our consideration is whether the benefits which were acquired as a result of the export of goods could be said to be profits and gains derived from such exports. What is the meaning of the word 'derive' The meaning given to the word 'derive' in the Concise Oxford Dictionary is : 'get, obtain (from a source, or with the source present in thought) have ones or its origin, etc., from; (pass)'. The meaning given to the word 'derive' in Websters New 20th Century Dictionary, 2nd Edn., is : 'to draw from, as in regular course or channel; to receive or get (from a source); as the heir derives an estate from his ancestor; we derive instructions from books'.

It was argued that having regard to the dictionary meaning of the word 'derive', all the benefits adverted to above which the assessee-company acquired as a result of the export of goods would go into the computation of the profits and gains 'derived from export of goods'. In CIT v. Kamakhya Narayan Singh [1948] 16 ITR 325, the question which arose before the Privy Council was whether interest on arrears of rent payable in respect of the land used for agricultural purposes was agricultural income within the definition of that phrase contained in s. 2(1) of the Indian I.T. Act, 1922 and, was, therefore, exempt from income-tax. The Privy Council held that this was neither rent nor revenue derived from land. Dealing with the above question, the Privy Council observed (p. 328) :

'Equally clearly the interest on rent is revenue, but in their Lordships opinion it is not revenue derived from land. It is no doubt true that without the obligation to pay rent - and rent is obviously derived from land - there could be no arrears of rent and without arrears of rent there could be no interest. But the affirmative proposition that interest is derived from land does not emerge from this series of facts. All that emerges is that as regards the interest, land rent and non-payment of rent stand together as cause sine quibus non. The source from which the interest is derived has not thereby been ascertained.

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 on 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.

There is no commercial connection between the interest and the rented land and an effective source - not land - has become apparent.

These considerations supply a negative answer to the question posed, subject to an entirely different point taken by the respondents.'

It would appear that the Privy Council gave a restricted meaning to the word 'derive'. In its view, if an enquiry was to be made into the genealogy of the item under consideration, enquiry was required to be stopped as soon as the effective source is discovered. Applying the test laid down by the Privy Council, the question to which we have to address ourselves is as to what is the source of the benefits referred to above derived by the assessee-company as a result of the export of goods. If the source is the export of goods, the assessee-company must succeed.

In Cochin Company v. CIT : [1978]114ITR822(Ker) , the Kerala High Court dealt with the words 'derive profits and gains from export of goods' used in s. 2(5)(a)(i) of the Finance Act, 1966. The provision which was considered by the Kerala High Court was identical with the provision which is under consideration in the instant case. In the case before the Kerala High Court, the assessee had made certain profits by the sale of import entitlements, and one of the questions which arose before the Kerala High Court was whether such profits could be regarded and considered to be profit derived from export of any goods or merchandise out of India within the meaning of s. 2(5)(a)(i) of the Finance Act, 1966. The same argument which is advanced before us was advanced on behalf of the assessee before the Kerala High Court, namely, that the assessee had become eligible for import entitlement only on account of its having exported goods out of India. If that was so, according to the assessee, the income derived by it by conversion of the import entitlements into money by a process of sale should be regarded as profits and gains derived from the said activity, viz., the export of goods. The Kerala High Court rejected this contention,, observing (p. 830) :

'Profit or 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 or 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 income or profit in an indirect or remote manner.'

The Kerala High Court referred to the decision of the Privy Council in CIT v. Kamakhya Narayan Singh [1948] 16 ITR 325, and the decision of the Supreme Court in Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) .

A directly contrary view has been taken by the Madras High Court in CIT. Wheel and Rim Co. of India Ltd. : [1977]107ITR168(Mad) . The assessee before the Madras High Court was a company carrying on business in the manufacture and sale of cycle rims. Some of the goods manufactured by it were exported abroad and the court was considering two schemes which the government had introduced by promoting exports. Under the first one, the assessee became entitled to a sum of Rs. 1,60,717 from the Engineering Export Promotion Council, which amount, according to the court, was paid to the assessee by way of compensating the loss it suffered by exporting goods abroad. The sum was included in the receipts which were taken into account for arriving at the income of the assessee for the year. Under another scheme, the assessee had become entitled to import licence which it sold and made a profit of Rs. 4,83,856 from such sale. In the course of the assessment year 1966-67, the assessee claimed a rebate on the value of the exported goods and on the two receipts referred to above based on the provisions of s. 2(5)(a) of the Finance Act, 1966. As already pointed out above, these provisions are in pari materia with the provisions which we are called upon to consider in these reference. The Madras High Court was of the view that by virtue of r. 2(2) of the Income-tax (Determination of Export Profits) Rules, 1966, framed in pursuance of s. 2(5)(d) of the Finance Act, 1966, the profits and gains derived from the export of any goods or merchandise were required to be ascertained in accordance with the provisions of the I.T. Act. In the view of the Madras High Court, if the profits and gains were so ascertained, the two amounts referred to above will necessarily constitute business receipts referable to or derived from the export of goods and hence the assessee was entitled to a rebate, under s. 2(5)(a) of the Finance Act, 1966, of the aforesaid two amounts. The Madras High Court did not proceed to consider whether the two amounts in question could be said to be 'profits and gains derived from export of goods or merchandise out of India.' The reasoning in upholding the claim of the assessee was that the two amount constituted business receipts referable to or derived from the export of cycle rims.

An identical question had come up for consideration before the Bombay High Court in Hindustan Lever Ltd. v. CIT : [1980]121ITR951(Bom) , wherein the decisions of the Privy Council, Kerala High Court and Madras High Court referred to above have been considered. In that case, the assessee-company effected export of various products made by it during the previous year relevant to the assessment years 1962-63 and 1963-64. It claimed a deduction out of income-tax and super-tax payable by it, of the profits and gains claimed to have been derived by it from these exports under s. 2(5)(i) of the Finance (No. 2) Act of 1962. The assessee-company claimed that no separate accounts of the export sales had been maintained by it and accordingly under r. 2(3) of the Income-tax (Determination of Export Profits) Rules, 1962, the profits from export sales was to be taken as a proportionate fraction of the profits and gains of the whole business of which such exports formed a part. On the quantum of profits in respect of which a deduction had been claimed, it was urged by the company that, in consideration of the company having exported its products, the Government had issued import entitlements on the strength of import licences to the company. It was pointed out that on the strength of these licences, s the company had imported large quantities of palm oil and other products at a rate cheaper than the rates prevailing in the home market. It was submitted that the savings so effected by it should be deemed to form a part of the profit derived by it from the export of goods. The Bombay High Court did not express any definite opinion on the question whether export subsidy or cash allowance given to the assessee who effects export sales could or could not be taken by him to compute the profits derived by him from the export business. It was, however, observed (at p. 962 of 121 ITR) :

'For such subsidy or allowance it should be held that there was a direct connection with the exports effected and perhaps the case of the assessee that the amount of the subsidy or allowance be taken into consideration in ascertaining profits from the exports may be required to be accepted.'

Dealing with the assessee-companys argument that the savings effected by it on account of import of palm oil and other products at a rate cheaper than the rate prevailing in the home market would form a part of the profits and gains derived from the export of goods, s the Bombay High Court observed (p. 962) :

'It may be pointed out that even on the proceeds realised from sale of import entitlements, the Madras High Court has held in favour of the assessee on the plea that the amount received by the assessee would have to be disclosed in its business income as income referable to its export business. It is perhaps on that limited footing that the Madras High Court upheld the assessees contention as regards the inclusion of this amount for the purpose of obtaining the benefit of a comparable provision in the Finance Act, 1966. By no stretch of imagination can a similar argument be made available to the savings effected by the assessee in the case before us which, it was submitted, was its notional profit. However, we do not propose to rest our decision on this limited point, viz., that whatever be the position for items similar to items (1) and (2), i.e., for cash subsidies and sale proceeds of import entitlements, the notional savings resulting from the third type of case cannot be regarded as profits derived from export. In our view, the point would be required to be decided and concluded against the assessee by reason of the fact that the word derived, as far as income-tax law is concerned, has been given a narrow meaning - a strict meaning - by the courts and has been understood in the restricted sense of a direct derivation and not understood in the broad sense as equivalent to derived directly or indirectly. In other words, we have only to consider the proximate source and not the source to which it may ultimately be referable. This is the view of the Privy Council in CIT v. Kamakhya Narayan Singh [1948] 16 ITR 325, which was approved by the Supreme Court in Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) , and followed by the Kerala High Court in Cochin Company v. CIT : [1978]114ITR822(Ker) . In our view, the word derived to be found in s. 2(5)(i) of the Finance (No. 2) Act, 1962, will have to be given a meaning consistent with what was decided in these cases and the words derived from exports cannot be accepted as equivalent to referable to exports.'

We are in full agreement with the view taken by the Bombay High Court and to some extent with the view taken by the Kerala High Court. Profits and gains can be said to have been 'derived' from an activity carried on by a person only if the said activity is an immediate and effective source of the said profit or gain. There must be a direct nexus between the activity and the earning of the profits and gains. In other words, what we have to consider is the proximate sosurce and not the sosurce to which the profit or gain may in a remote indirect way be referable. The view to this effect of the Privy Council in CIT. Kamakhya Narayan Singh [1948] 16 ITR 325 was approved by the Supreme Court in Mrs. Bacha F. Guzdar v. CIT : [1955]27ITR1(SC) and followed by the Kerala High Court in Cochin Company v. CIT : [1978]114ITR822(Ker) and by the Bombay High Court in Hindustan Lever Ltd. v. CIT : [1980]121ITR951(Bom) . In our opinion, the word 'derive' to be found in s. 2(5)(a)(i) of the relevant Finance Act will have to be given a meaning consistent with what was decided in the above decisions. The words 'derived from exports' cannot be accepted as equivalent to 'referable to exports' or even indirectly or remotely connected with the exports by a nebulous link.

So far as cash subsidy or allowance by government is concerned, it posses no difficulty. In our opinion, such subsidy or allowance should be held to be directly connected with export of goods. It was on account of export of goods made by the assessee-company that a cash subsidy or allowance was given. There is, therefore, a direct nexus between the export of goods and earning of income in the shape of cash subsidy or allowance. The proximate sosurce of cash subsidy or allowance is export of goods. In our opinion, therefore, cash subsidy or allowance has to be taken into consideration in ascertaining profits from exports made by the assessee-company. However, the income derived by sales of transferable import entitlements or import licences and savings effected as a result of import of materials and commodities at a price lower than the ruling home market price under the import entitlements or licences which are not transferable stands on a different footing. In the present case, we are not concerned with the income derived from sale of import entitlements or import licences which are transferable because Mr. Shah appearing for the assessee-company submitted that we are only concerned with the cash subsidy or allowance and savings effected by import of raw materials so far as the assessment years under consideration are concerned. We, therefore, do not propose to express any final opinion on the question whether income derived from sale of transferable import entitlements and import licences could be included in the profits and gains derived from the export of goods. But prima facie, we are of the opinion that this income cannot be said to have a direct nexus with the export of goods. The proximate source of income is import entitlements and licences, which are transferred. It may be that such import entitlements and import licences were given on account of the exports made by the assessee but that by itself does not establish a direct link between the income derived by the sale of such export entitlements and export licences with the export of goods. The income may ultimately be referable to the export of goods; but, as pointed out above, there is no direct nexus between the two.

Same is the position in the case of savings effected on account of import of raw materials at a price lower than the ruling home market price under the import entitlements and import licences which are not transferable. Notional savings resulting from the third type of case cannot be regarded as profit derived from export. As discussed above, the word 'derive' as far as income-tax law is concerned, has been given a narrow meaning - a restricted meaning - by the courts and has been understood in the restricted sense of a direct derivation and not understood in the broad sense as equivalent to derived directly or indirectly. The proximate source of the saving is not the export of goods but the import entitlements and import licences which are not transferable. Therefore, following the decisions of the Privy Council, the Supreme Court, Kerala High Court, and Bombay High Court, in our opinion, the assessee-company is not entitled to include the savings made by it, on account of import of raw materials as stated above, in the profits and gains derived from the export of goods.

In the result, the questions referred to us in each of the references is answered in the affirmative and against the assessee-company. There would be no order as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //