Skip to content


Jeewanlal (1929) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 4 of 1977
Judge
Reported in[1983]139ITR865(Cal)
ActsIncome Tax Act, 1961 - Section 256(2); ;Indian Income Tax Act, 1922 - Sections 4(3), 10(2) and 66(1); ;Finance Act, 1966 - Section 2(5); ;Income-tax (Determination of Export Profits) Rules, 1966 - Rule 2(2)
AppellantJeewanlal (1929) Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateD. Pal and ;P.K. Pal, Advs.
Respondent AdvocateB.L. Pal and ;Suhas Sen, Advs.
Excerpt:
- sabyasachi mukharji, j. 1. in this reference under section 256(2) of the i.t. act, 1961, the following questions have been referred to this court,' 1. whether, on the facts and in the circumstances of the case and on a proper interpretation of the relevant provisions of the special export promotion scheme, the receipts of rs. 32,91,180 and rs. 21,26,232 in the assessment years 1965-66 and 1966-67, respectively, arising out of the transfer of the import entitlements are capital receipts, and not revenue profits assessable to tax ?2. whether the finding of the tribunal that the assessee entered the business of manufactures and exports of aluminium goods with the clear intention of taking advantage of such special export promotion scheme is based on any material or evidence and is perverse.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(2) of the I.T. Act, 1961, the following questions have been referred to this court,

' 1. Whether, on the facts and in the circumstances of the case and on a proper interpretation of the relevant provisions of the Special Export Promotion Scheme, the receipts of Rs. 32,91,180 and Rs. 21,26,232 in the assessment years 1965-66 and 1966-67, respectively, arising out of the transfer of the import entitlements are capital receipts, and not revenue profits assessable to tax ?

2. Whether the finding of the Tribunal that the assessee entered the business of manufactures and exports of aluminium goods with the clear intention of taking advantage of such Special Export Promotion Scheme is based on any material or evidence and is perverse ?

3. Whether the finding of the Tribunal that the profits and gains from the sale proceeds of import entitlements were foreseen by the assessee at the time of making exports and, therefore, were earned by the assessee in the ordinary course of its business is based upon any material or evidence and is perverse '

2. The assessment years involved are 1965-66 and 1966-67 for which the relevanx accounting years are the calendar years 1964 and 1965, respectively. The assessee is a limited company which is engaged in the business of aluminium goods which are exported by the assessee.

3. During the course of its business of export of aluminium goods and by virtue of the Special Export Promotion Scheme for engineering goods made out by the Govt. of India, Ministry of Commerce & Industry, Department of International Trade, the assessee was entitled to get import entitlements. In view of the fact that a good deal of arguments were advanced on the nature of the right under the import entitlements it would be necessary to refer to some of the provisions of the Scheme under which the assessee wasso entitled. As we have mentioned before the said Scheme is an Export Promotion Scheme for engineering goods and it applied to the exports of Indian goods other than ' rolled steel ' which had not undergone any substantial processing effected by exporters registered with Engineering Export Promotion Council, Calcutta. The Scheme came into force from April 1, 1973, and would be applicable to export of goods covered by the Scheme with effect from or after Apri 1,1963. The Scheme was contemplated to continue and remain in force on a permanent basis until further orders. Exports effected before April 1,1963, will be governed by the provisions in force prior thereto. All the previous schemes in this regard were thereby superseded as regards exports of such goods effected from April 1, 1963, onwards. However, the concerns validly registered under the previous scheme as on March 31, 1963, might be deemed to have been registered under the revised scheme with effect from April 1, 1963.

4. The Scheme provided for the registration of the exporters, re-registration and other ancillary matters. It is not necessary for us to refer the scheme in detail. Clause 5 thereof deals with the benefits available under the scheme. It would be necessary for us to refer to some of the provisions of the said clause which are as follows:

' Benefits available under the Scheme.

5. 1. The benefits which may be granted to a registered exporter under the Scheme will consist of:

(a) Import entitlements : Against exports of the products mentioned in annexure V, a registered exporter will be entitled to import entitlements as indicated in the same annexure.

(b) Allocation and supply of indigenous raw materials, etc., in accordance with annexure VI.

5. 2. In the case of any export product falling within the scope of the Scheme which is not specifically mentioned in annexure V the extent of import entitlement will 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.

5. 3. 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 date of application for registration will be considered for the import and other benefits under the Scheme. '

5. Clause 6 deals with the application for import entitlement. It is also not necessary for our present purposes but it deals in detail with the same.Clause 7 deals with the use of import entitlements. It is relevant to refer to the provisions of the said clause which are as follows :

'7. 1. The import entitlement may be used for the import of the materials as mentioned in annexure VII and subject to the conditions, if any, mentioned therein import entitlement for machinery or machine parts, etc., may be accumulated for a maximum period of two years and up to a maximum value of Rs. 10 lakhs. The procedure to be followed for the import of machinery, etc., is given in annexure VIII. If any raw materials, components or consumable stores not mentioned in annexure VII are sought to be imported by an exporter, the matter may be referred by the Council to the Department of Technical Development for a decision. For this purpose, the Council should furnish a report whether such materials, etc., are actually required in the manufacture of the export products covered by the Scheme. Similarly, any request made by an exporter for the import of machinery or machine parts, etc., in excess of the prescribed entitlement should be forwarded by the Council with its recommendations, to the Department of Technical Development for a decision.

7. 2. Articles imported against such import entitlement may be:

(a) used in the exporter's own factory or factories ; or

(b) sold to any other manufacturer/manufacturers who manufacture products covered by the scheme and who directly export a part of their products or who sell a part of their products for export.

7. 3. In cases where 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 and import licence will be issued in the name of such manufacturer/manufacturers provided such manufacturer/manufacturers satisfy the conditions as mentioned in para. 7.2(b). 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 satisfy the conditions mentioned in para. 7.2(b). There will be no objection to the letter of authority being amended in the name of any other manufacturer/manufacturers who satisfy the conditions mentioned above before the original authorisation is actually utilised.

7.4. Details of the sales of the imported materials to any person in accordance with para. 7.2(b) or 7.3 above should be reported by the exporter within a fortnight to the Export Promotion Council. '

6. Clause 9 deals with advance licensing. It is not necessary for our present purposes. The other clauses also need not detain us. We also need not deal with annex. VIII which has been set out in the paper book. There is no dispute that the goods which the petitioner dealt with are covered by the said items.

7. The said import entitlements received by the assessee during the relevant year were sold to other members who were covered under the said Export Promotion Scheme and the assessee realised sums of Rs. 32,91,180 and Rs. 21,26,232 in the respective two years. According to the assessee, the said sale proceeds were in the nature of non-recurring casual receipts and also were of capital nature and, therefore, the said sums were not liable to tax. The ITO, however, was unable to accept this view. The ITO was of the view that the import entitlements were made available to the assessee on the basis of the exports made by it and such entitlements were sold by the assessee to others who were also members of the said Export Promotion Council. The ITO, therefore, was of the view that such entitlements were sold by the assessee by way of business expediency and, therefore, the said entitlements were circulating capital or trading assets of the assessee and the surplus resulting from their sale was income of revenue nature liable to tax. He, therefore, brought the said sale proceeds to tax, because, in his opinion, the sales were effected in the ordinary course of the assessee's business and after allowing deductions of Rs. 7,65,087 and Rs. 9,17,928 in the respective two years under consideration, the ITO brought to tax the net amounts of Rs. 25,26,093 and Rs. 12,08,304 in the assessment years 1965-66 and 1966-67.

8. The assessee went up in appeal before the AAC and various arguments were advanced on behalf of the assessee. The AAC, however, agreed with the order by which the ITO confirmed the said assessment order. In view of the questions raised and in view of some of the arguments pressed it would be necessary to refer to certain portions of the order of the Tribunal. Dealing with the decision of the Patna High Court in the case of Bisheswar Singh : [1955]27ITR376(Patna) to which our attention was also drawn, and on which reliance was placed on behalf of the Revenue, the Tribunal, so far as the facts of this case are concerned, observed, inter alia, as follows:

' Thus, at the time of ma/king export of goods the assessee was fully aware of the import entitlements to which it was entitled on the basis of exports and it also knew that such entitlements could either be sold in the market because they were valuable goods or on the basis of the said entitlements the assessee could import any of the goods specified in the scheme and make profit by selling such goods. Thus, there was a definite intention on the part of the assessee at the time of making exports to receive the import entitlements and to make profits from the said entitlements either by exploiting the said import entitlements by importing goods or by straightway selling the import entitlements. '

9. Thereafter, the Tribunal observed as follows :

' The facts as enumerated in the foregoing paragraphs prove it beyond doubt that holding of import entitlements by the assessee was incidentalto the carrying on of its business of manufacture and export of aluminium goods under the export promotion scheme of the Government of India. It was, therefore, not necessary that the assessee should have carried on a separate business of dealing in import entitlements. As the import entitlements came into existence because of the exports made by the assessee the profits resulting from the sale of the import entitlements were closely and intimately connected with the assessee's business of manufacture and export of aluminium goods. Moreover, the mode in which the assessee acquired the import entitlements without paying a price for it shows that the transaction of acquiring import entitlements amounted to an exchange. By exporting goods the assessee got import entitlements which amounted to a barter or which may be termed as receiving the sale price for the goods exported partly in cash and partly in kind. The said barter or exchange was voluntarily done by the assessee by registering itself under the Export Promotion Scheme of the Government of India. Such exchange or barter, therefore, constitutes an adventure which resulted in realising the sale proceeds of the goods exported. The transaction of sale of import entitlements has taken place in connection with the business carried on by the assessee of manufacture and export of aluminium goods in the usual course and, therefore, it is assessable income, and not a capital receipt. This view finds support from the judgment of the Hon'ble Calcutta High Court in the case of United Bank of India Ltd. : [1963]50ITR258(Cal) . The Hon'ble Supreme Court of India in the case of Sardar Indra Singh & Sons Ltd. : [1953]24ITR415(SC) , had also occasion to consider this proposition. It was held by the Hon'ble Supreme Court of India that the question in such cases was whether the sales which produced a surplus were so connected with the carrying on of the assessee's business that it could fairly be said that the surplus was the profits and gains of such business. It was not necessary that the surplus should have resulted from such course of dealing in securities as by itself would amount to the carrying on of a business of buying and selling securities. It would be enough if such sales were effected in the usual course of carrying on business or if the realisation of securities was a normal step in carrying on the assessee's business. '

10. Out of the aforesaid order of the Tribunal refusing to refer the question of law, the assessee came up before this court. Under the order of this court under Section 256(2) of the I.T. Act, 1961, as directed by this court the questions indicated before have been referred to us.

11. In our opinion, before we deal with the several decisions, the questions proposed before us should be looked at from the substance of the matter whether in fact the amounts in questions were received by the assessee in the course of its dealings of the export and that would necessarily depend upon the nature of the right that the assessee acquired under theentitlement scheme which we have set out hereinbefore and the manner as to how it dealt with those rights. Naturally, in a case of this nature several decisions were referred. In this case, various arguments were raised and each case depends on its own facts, and a close similarity between one case and another is not enough because, even a single significant detail may alter the entire aspect. As we have been warned by Cardozo that in deciding such cases we should avoid the temptation of matching the colour of one against the colour of another. (See The Nature oj Judicial Process by Cardozo, p. 20). To decide, therefore, on which side of the line a case falls its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the income and not the nature of the right and also relation inter se, and that is the key to resolve the issue in the light of the general principles which are to be followed in such cases.

12. In this connection, we may deal with the decision of the Supreme Court in the case of K.T.M.T.M. Abdul Kayoom v. CIT : [1962]44ITR689(SC) , where the court was concerned with the expenditure. The assessee-firm which carried on business in the purchase and sale of conch (chank) shells took on lease from the Government ' the exclusive rights, liberty and authority to fish for and take and carry away all chank shells ' in the sea of the coastline of a certain area specified in the lease, for a period of three years from July 1, 1944, to June 30, 1947, on a consideration of an yearly rent of Rs. 6,111. The assessee claimed that, in computing its annual income from the sale of chanks it was entitled to deduct the yearly rent of Rs. 6, 111 paid to the Government as business expenditure under Section 10(2)(xv) of the I.T. Act, but the Department held that it was capital expenditure. A Full Bench of the High Court of Madras held that the expenditure was not of a capital nature and the assessee was entitled to deduct the amount claimed as business expenditure. On appeal to the Supreme Court, it was held by majority judges (S.K. Das J. dissenting), that the amount of Rs. 6,111 paid by the assessee was an amount paid to obtain an enduring asset in the shape of an exclusive right to fish ; the payment was not related to the chanks, which it might or might not bring to the surface; it was not an amount spent in acquiring its stock-in-trade but for acquiring an asset from which it may collect its stock-in-trade. It was, therefore, an expenditure of a capital nature, and though it was incurred for the purposes of the assessee's business, it was not allowable under Section 10 (2)(xv) of the Indian I.T. Act, 1922.

13. Learned advocate for the assessee emphasised that the very right which the Supreme Court considered to be the right of the assessee, therefore, ceased on the transactions. It was emphasised that it was the nature of the right and the relation inter se which were vital. Therefore, thenature of the right acquired and the user of the same and the relation inter se should be examined. Learned advocate for the assessee was emphasising this aspect to stress the point that what was obtained was not goods themselves but the right to import. Therefore, that was a right in the nature of capital asset and as the assessee was not a dealer in import entitlements the realisations made in dealings with the same must be treated as revenue receipts. The assessee could not be said to be dealing in import entitlements and as such if it got something in lieu of an enduring right, that is to say, right to import, such receipt in exchange of that right, should be considered to be a capital receipt it was submitted on behalf of the assessee. This Bench had to consider the aspect though in different context in the case of Kesoram Industries and Cotton Mills Ltd. v. CIT : [1978]115ITR143(Cal) . There, the assessee was a manufacturer of textile goods. In order to acquire foreign exchange the Govt. of India started an Export Promotion Scheme. Under the scheme an exporter of cotton cloth or yarn was eligible for grant of subsidy to the extent specified. The amount received by the assessee under this Scheme amounted to Rs. 5,85,701. The assessee contended that this amount was capital receipt. The Appellate Tribunal held that the sum of Rs. 5,85,701 was'assessable. Therefore, it was held that the sum of Rs. 5,85,701 was received by the assessee in the course of carrying on its business. Here there was no question of any subsidy or grant. The fact that the amount might be used as capital in the hands of the assessee was irrelevant according to the decision. Hence, it was held to be taxable income.

14. Learned advocate for the assessee sought to urge, that there, we were dealing with actual cash receipt and, therefore, this decision was no authority for the receipt of money in exchange for a sale or transfer of import entitlements for an assessee not dealing with in import entitlements. It is true that the case before us previously was one dealing with cash receipt; but, it is the nature of the right that should be decisive in conjunction with other factors. The nature of the amount received or the exchange value of the same though relevant is not at all decisive. We emphasised that if in the course of carrying on the business an amount, which was received, might be turned into capital, would be irrelevant. We are, therefore, of the view that the ratio of the said decision would also be applicable to the facts of this case. In the very same volume, there is another decision of the Madras High Court which had to examine some aspects involved, to which our attention was drawn, i. e,, the Full Bench decision of the Madras High Court, in the case of Addl. CIT v. K. S. Sheik Mokideen : [1978]115ITR243(Mad) . There, the assessee had made remittances under the National Defence Remittance Scheme and such remittance earned import entitlements which were sold by the assessee resulting in a profit which wasassessed to capital gains tax by the officer. The Tribunal, however, held that there was no capital gains liable to be taxed. On a reference, the Madras High Court held that the Tribunal was right in holding that there would be no liability to capital gains tax on the sale of import entitlement certificates as, in order that there might be capital gains, there must be a cost of acquisition in terms of money which was absent in the case of import entitlements or of goodwill. We are, however, not concerned really with this controversy, viz., whether an asset which had not cost the assessee anything could create, on transfer, either capital or revenue receipt. Therefore, it is not necessary for us to consider this decision in detail.

15. While on this aspect, learned advocate for the assessee stressed a point, viz., if the import entitlements were a right arising to the assessee in the course of his dealing in export, then that right or the monetary value of the right would be taxable in the year when the assessee became entitled to such entitlements and not when such transfer was effected and a cash amount was received in exchange. 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.

16. Then our attention was drawn to the decision of this court in the case of CIT v. H. Dear & Co. Ltd. : [1964]52ITR65(Cal) . There, the question involved before this court was whether an expenditure was in the nature of a capital expenditure or a revenue expenditure. The court reiterated that each case had to be decided upon its own facts. No exhaustive or universal tests or rule could be laid down. Sinha J., as the learned Chief Justice then was, observed at p. 77 of the report that if a trader or a businessman bought a quantity of goods which formed his stock-in-trade, and this he might do in an infinite number of ways, then it was a part of his revenue expenditure. In other words, he was buying stock-in-trade in order to carry on his business and, looking at it from a commercial point of view, the expenditure incurred was one solely for the purpose of his business and could not be for any other purpose. A distinction is, however, to be made if instead of buying his stock-in-trade, he acquired a right whereby he would be in a position to acquire his stock-in-trade, then it would be a capital expenditure. Learned advocate for the assessee stresses this aspect that by exporting the goods the assessee acquired a right not of the imported materials, but it was a right to acquire imported materials. It was aright in the nature of an enduring right, in the sense the word is understood in judging capital assets. Therefore, in parting with such a right the assessee was parting with a capital asset. 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.

17. Our attention was also drawn to the decision of the Supreme Court in the case of Pingle Industries Ltd. v. CIT : [1960]40ITR67(SC) . There, the Supreme Court was dealing, in our opinion, with entirely a different set of facts. There, the assessee which carried on, inter alia, the business of selling Shahabad flag stones, obtained from a jagirdar under a contract the right to extract stones from quarries situated in six named villages for a period of twelve years on the annual payment of Rs. 28,000. To safeguard the payment a sum of Rs. 96,000 was paid in advance as security of which Rs. 8,000 was to be adjusted annually against Rs. 28,000 and the balance of Rs. 20,000 was payable in monthly instalments of Rs. 1,666-10-8. The assessee had only the right to excavate stones and undertook not to manufacture cement and the jagirdar undertook not to allow any other person to excavate stones in those areas. There was also another similar lease taken from the government for a period of five years under which the appellant had to pay Rs. 9,000 per year in monthly instalments of Rs. 750. The question was whether the amounts paid by the assessee to the jagirdar and the Government each year were revenue expenditure allowable under Section 10(2)(xv) of the Indian I.T. Act, 1922. It was held by the majority of the learned judges of the Supreme Court that the assessee had acquired by his long term lease the right to win stones, and the leases conveyed to him a part of the land. The stones, in situ, were not his stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment, though periodic in fact, was neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions. The facts, as we have said, were entirely different. It would depend on the nature of the right acquired and the nature of the dealing.

18. In the context of capital gains, this court had to consider this aspect in the case of K.N. Daftary v. CIT : [1977]106ITR998(Cal) . As that case was dealing with a controversy whether capital gains arises in the transfer of an asset which did not cost the assessee anything, that controversy is not before us and we need not express any opinion on this aspect in this case.

19. In the case of CIT v. T. Kuppuswami Pillai & Co. : [1977]106ITR954(Mad) , the Madras High Court was dealing with a case where, by virtue of the National Defence Remittance Scheme under which the import licences were being granted against bank's certificates evidencing certain categories of foreign exchange remittances received during a particular period through banking channels by persons who were Indian nationals, the assessee was given an import licence for his having effected foreign exchange remittance. By transferring the same to a third party, the assessee got a sum of Rs. 67,125 and this was assessed by the officer as capital gains. The Tribunal, however, held that no capital gain was involved in the transfer of the licence, as it did not cost anything to the assessee in terms of money in its creation or acquisition, as the import entitlement was acquired by the assessee on the basis of foreign exchange remittance. On a reference, the High Court held that, generally, only if an asset had cost something in terms of money for its acquisition, the provisions relating to capital gains tax would apply and this principle was not restricted only to cases of transfer of capital assets like goodwill, copyright, trademark, etc., which were created by personal efforts, and, as in the instant case, the acquisition of the import licence did not involve any cost to the assessee, no question of any liability to capital gains would arise on its transfer. As mentioned hereinbefore, we are, however, not concerned with this controversy, and, therefore, it is not necessary for us to deal with this case in greater detail.

20. In the case of CIT v. Wheel & Rim Co. of India Ltd. : [1977]107ITR168(Mad) , the Madras High Court, though in a slightly different context, was concerned with the precise problem with which we are concerned. The assessee-company there was carrying on business in the manufacture and sale of cycle rims, and the assessee-company became entitled to a sum of Rs. 1,60,717 from the Engineering Export Promotion Council for compensating the loss, it suffered by exporting goods abroad rather than selling the goods in this country itself, and this sum was included in the receipts which were taken, in to account for arriving at its business income. By reason of another scheme, the assessee was granted, on the basis of its export performance, import licence for dates and by sale of the import licence the assessee had made a profit of Rs. 4,83,856. In its assessment for 1966-67, the assessee had claimed rebate on the value of the exported goods and on the two receipts referred to above on the basis of the provi-sions of Section 2(5)(d) of the Finance Act, 1966. The ITO held that the cash subsidy of Rs. 1,60,717 and the profits from the sale of import entitlements amounting to Rs. 4,83,856 did not constitute profits and gains derived by the assessee by export of goods for the purpose of claiming rebate under the said section and this was confirmed by the AAC. The Appellate Tribunal, however, held that the two items of receipts having been treated by the taxing authorities as business receipts from export of goods, they were entitled to a rebate. On a reference, the High Court held that by virtue of r. 2(2) of the Income-tax (Determination of Export Profits) Rules, 1966, framed in pursuance of Section 2(5)(d) of the Finance Act, 1966, the profits and gains derived from the export of any goods or merchandise referred to in Section 2(5)(a)(i) had to be ascertained in accordance with the I.T. Act, 1961, and if so ascertained, the two amounts referred to would necessarily constitute business receipts which are referable to, or are derived from, the export of cycle rims. Now, the important aspect of this case is that it is necessary to find out by judging the true nature of a subsequent transaction whether the amount in question was derived in the course of carrying on the business of export. That is to say, whether the right to get import entitlement and the amount received by sale of such entitlement really derived from the carrying on of the business of the assessee of export. We are of the opinion that looked at from that point of view it was so derived.

21. The case upon which the Tribunal had relied mainly is the decision of the Patna High Court in the case of Bisheshwar Singh v. CIT : [1955]27ITR376(Patna) . There Clause (vii) of Section 4(3) of the Indian I.T.1 Act, 1922, which provided, that ' any receipt not being a receipt arising from business which is of a casual and non-recurring nature shall not be included in the total income of the person receiving them ', implied that any casual receipt from trade or from an adventure in the nature of trade should be regarded as income and assessable to tax. The assessee was appointed as a grain stockist on March 1, 1947. He carried on the grain business till December, 1947. The account books maintained for the business was for the period from March to December, 1947. The assessee had obtained on March 12, 1947, two permits for molasses for 1,400 and 4,000 maunds. The officer estimated the profits of the assessee from the sale of these permits and included the amount in his income in the assessment year 1947-48 on the ground that he had sold the permits on or before March 31, 1947. On appeal, the Tribunal reduced the estimated amount but found that the person to whom the assessee transferred the permits took delivery of the molasses and sold these in the market, and taking into account the quantity of molasses covered by the two permits, the Tribunal held that the transaction constituted an activity in the nature of trade and the income was, therefore, liable to be taxed. The assessee contended that the accounts pro-duced by him were for the period from March to December, 1947, the amount could not be assessed for the assessment year 1947-48, and also that the profit from the sale of the molasses permits was of a casual and non-recurring nature and was. therefore, exempt under Section 4{3)(vii) of the Indian I.T. Act, 1922. It was held that the mere production of accounts for the period from March to December, 1947, did not amount to the exercise of an option on the assessee's part, a controversy with which we are not concerned. The Patna High Court, further held that there was a definite intention on the part of the assessee to re-sell the permits and make a profit from the transaction; and that the assessee had obtained profits from an adventure in the nature of trade and, therefore, the income was assessable. Now, in this instant reference before us, learned advocate for the assessee took strong exception to this finding of the Tribunal, which we have set out hereinbefore, where the Tribunal had observed that there was a definite intention on the part of the assessee at the time of making the export, to receive the import entitlements and to make a profit from the said import entitlements. According to learned advocate for the assessee, there was no basis for this finding and the finding was perverse in law. It was stressed that the assessee was a company which was carrying on export business long before this scheme came into effect. Therefore, the assessee's participation in the export of or the carrying on of the export and the subsequent right to participate in this scheme entitling him to the import entitlements could not have been attributed to a definite scheme or intention of selling the import entitlements. It is true, that the assessee was carrying oh the business of export. It is perhaps also correct to state that there is no factual evidence to state that the assessee had exported the goods at least initially with the intention of re-selling the rights acquired by such export of the goods, specially when the assessee was not a dealer in those rights. But having regard to the nature of the rights granted by the scheme and having taken part in the scheme after knowledge of those rights, if a fact-finding body on the probability of the situation comes to a conclusion that there was an intention, it could perhaps not be said to be perverse. But, we need not really, however, deal with this aspect of the matter. Because, this question is not really important in deciding, whether, it was an adventure in the nature of a trade. The question before us, in our opinion, can be looked at, apart from being an adventure in the nature of a trade, as being a right and whether it was really a right flowing from the business of the assessee. If looked at from this point of view, then perhaps it is necessary to embark upon whether this finding of the Tribunal was perverse. Such right was derived directly from the carrying on of the business and the nature of the dealing of such right was such that even though the assessee was not adealer in import entitlement as such, it (the transaction) can be categorised as resulting in an income received by the assessee from carrying on the business.

22. The Allahabad High Court, in the case of Ex-Soldiers Motor Transport Co. v. CIT : [1963]47ITR913(All) , was dealing with a case, where the assessee was carrying on the business of plying motor buses and held permits from the transport authority to ply buses in certain routes. The assessee transferred the permits to ply buses in some of the routes to a third party, with the permission of the authority and received a sum of Rs. 10,000 as consideration for such transfer. It was held that the sum of Rs. 10,000 thus received by the assessee was not a receipt of a capital nature but a revenue receipt and was liable to be assessed to income-tax. There was really no sale of any capital asset in the case. The assessee had merely changed the mode of earning profits by using the permits. It is true, as learned advocate for the assessee emphasised, that a sale of the import entitlements is something different from permitting a permit-holder to use the permit for a limited period. But the real importance of the ratio of this decision is not whether there is an actual transfer of the right or possession, but really whether the right the assessee had acquired flowed from the carrying on of the business and whether the right so exercised was a different method of dealing with such rights or not.

23. It is necessary also to refer, in this connection, to the decision of the Allahabad High Court in the case of CIT v. Swadeshi Cotton Mills Co. Ltd. : [1980]121ITR747(All) . There, the Allahabad High Court reiterated its previous views and followed the ratio of the decision of this court, as we have mentioned hereinbefore, in the case of Kesoram Industries and Cotton Mills Ltd. : [1978]115ITR143(Cal) .

24. Our attention was also drawn to a decision in the case of Addl. CIT v. Ganapatki Raju fegi, Sanyasi Raju : [1979]119ITR715(AP) . There, the court was dealing with route permits to ply buses granted by the road transport authority. We are really not concerned with the question here whether such a transfer would email the question of capital gains or not.

25. In the case of CEPT v. Shri Lakshmi Silk Mills Ltd. : [1951]20ITR451(SC) , the Supreme Court reiterated that if a commercial asset was not capable of being used as such, then its being let out toothers did not result in an income which was the income of the business ; but it could not be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. He was entitled to exploit it to his best advan-tage and he may do so either by using it himself personally or by letting out to somebody else.

26. Learned advocate for the assessee was emphasising that there was no question of temporarily allowing a use of the entitlement but there was a transfer of title in the instant case before us. That is true. But in the view we have taken that is not the decisive matter.

27. In the case of Sardar Indra Singh & Sons Ltd. v. CIT : [1953]24ITR415(SC) , the assessee was incorporated with the objects, inter alia, of carrying on the business of bankers, financiers, managing agents and secretaries. The assessee was empowered to purchase or otherwise acquire and to sell stocks, shares, business concerns and undertakings and to invest and deal with the moneys of the company not immediately required for its business upon such securities and in such manner as might from time to time be determined. The question arose whether the profit realised by the assessee from the sale of certain shares was assessable to income-tax. The Appellate Tribunal was of the view that the profit was taxable as profits of the business carried on by the assessee but did not decide the question whether the profits were taxable as profits and gains of the assessee from the business of dealing in shares. On a reference under Section 66(1) of the 1922 Act, the High Court held that there was ample material upon which the Appellate Tribunal could arrive at the conclusion which it did. It was held that the question in such cases was 'whether the sales, which produced the surplus, were so connected with the carrying on of the assessee's business that it could fairly be said that the surplus was the profits and gains of such business. It was not necessary that the surplus should have resulted from such a course of dealing in securities, as, by itself it would amount to the carrying on of a business of buying and selling securities. It would be enough if such sales were effected in the usual course of carrying on the business or if the realisation of securities was a normal step in carrying on the business. Now, in the facts of the instant case, having regard to the scheme that we have set out before and having regard to the terms of the scheme, that is to say, 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 said council registered as such and subject to the fulfilment of certain conditions, it is really in the course of dealing with a transaction of export that such a profit arose and, therefore, judged from that, in our opinion, the fact that the assessee was not a dealer as such in import entitlements was not decisive. In this view of the matter, it is not necessary to consider whether the assessee had a definite intention to enter into the transaction with an intention to re-sell in order to make the dealing an adventure in the nature of trade.

28. We would, therefore, answer the first question in the negative and in favour of the Revenue. We would say that for the second question there are materials to make such a finding but it is not necessary, in the light of the view that we have taken, to answer this question. In the view we have taken on the first question, it is also not necessary to answer the third question. In the facts and circumstances of the case, parties will pay and bear their own cost.

Sudhindra Mohan Guha, J.

29. I agree.


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