Commissioner of Income Tax vs Chettinad Corporation Pvt. Ltd.

Venkataswami, J.—As directed by this court in Tax Case Petitions Nos. 403 and 404 of 1978 by order dated October 15, 1979, a

common question of law in respect of the assessment years 1967-68 and 1968-69 has been referred to this court for its decision. The common

question of law reads as follows :

Whether, on the facts and in the circumstances of the case, the assessee-company satisfied all the requirements of Notification No. 2007 (see

[1967] 65 (St.) 8, dated June 6, 1967, and was, therefore, eligible to be exempted u/s 104(3) of the Income-Act, 1961, from the liability to

additional tax leviable under that section ?

For the assessment year 1967-68, the assessee, a company, a company having income in India as well as in Ceylon, while filing a return of income,

claimed benefit of a notification, namely, Notification No. 2007 (see [1967] 65 ITR 8), dated June 6, 1967, issued u/s 104(3) of the Income Tax

Act. This claim was rejected by the Income Tax Officer holding that the gross receipts from the constructional operations in Ceylon were only Rs.

15,27,754 whereas the gross receipts from other businesses are Rs. 1,29,55,660, and as the gross receipts from constructional operations are

very much less than 50 per cent of the total sale proceeds or gross receipts of the assessee. Consequently, the Income Tax Officer passed the

order u/s 104 of the Act levying additional tax, as no dividend had been declared, on the rent distributable surplus which he had worked out in the

order. On appeal of the Appellate Assistant Commissioner, the appellate authority found that the total gross receipts from all activities in Ceylon

amounted to Rs. 1,44,19,593.79 and Rs. 59,79,115.77 in India, and in all, Rs. 2,03,98,709.56. According to the appellate authority, the gross

receipts from constructional operations and services rendered outside India, i.e., Ceylon, amounted to Rs. 1,37,84,444.65, and that exceeded

more than 50 per cent contemplated under the second proviso to Notification No. 2007 (see [1967] 65 ITR 8), and, therefore, the assessee is

entitled to the benefit of the notification issued u/s 104(3) of the Act.

The Revenue, aggrieved by the order of the Appellate Assistant Commissioner, preferred an appeal to the Tribunal. The Tribunal held as follows :

The plain reading of the notification, in our view, makes it applicable to companies of any of the three varieties as referred to in the arguments of

learned counsel of the assessee. Thus, since the present assessee carries on business involving the performance of constructional operations, the

requirements of proviso (1) are fully satisfied. Admittedly, the assessee does not do any exports and, in our view, buying and selling goods in

Ceylon does not amount to rendering of any services outside India. Therefore, the other two types of receipts contemplated by proviso (2) (i.e.,

other than constructional receipts) are not there in the assessee''s case. The question of making any aggregation, therefore, does not arise. In the

assessee''s case, 100 per cent of the receipts from constructional operations relate to the operations outside India. The requirements of the

notification are satisfied. The assessee is exempt from the applicability of the provision of section 104. We agree with the conclusion of the

Appellate Assistant Commissioner in this regard, though for different reasons. In the view that we have taken, we do not go into the other reasons

which weighed with the Appellate Assistant Commissioner, namely, that the assessee would not be liable to pay additional tax if the provisions of

section 109(i)(e) are appeal of the Department is dismissed.

Now, the contention for the Revenue is that the reasoning of the Tribunal that 100 per cent of the receipts from constructional operations relate to

the operations outside India and, therefore, the requirements of the notification are satisfied, is based on a wrong understanding of the notification,

in particular, the second proviso the notification.

Mr. P. P. S. Janarthana Raja, learned counsel appearing for the assessee, though he attempted to sustain the order of the Tribunal, could not

pursue the same in view of the plain language of the second proviso to Notification No. 2007 (see [1967] 65 ITR 8.

In order to appreciate the rival submissions, it is necessary to set out the Notification No. 2007 (see [1967] 65 ITR 8, dated June 6, 1967), and it

reads as follows :

In exercise of the powers conferred by sub-section (3) of section 104 of the Income Tax Act, 1961 (43 of 1961), the Central Government being

of opinion that it is necessary and expedient in the public interest so to do, hereby exempts every Indian company (not being an investment

company as defending clause (ii) of section 109 of that Act) from the operation of the said section 104 in respect of the previous year relevant to

the assessment year commencing on the 1st day of April, 1967, and any subsequent assessment year :

Provided that -

(i) The company is engaged in any business of exporting goods or merchandise out of India or in any business which involves the performance of

any constructional operations or rendering of any service outside India; and

(ii) in respect of the said previous year, the amount of the sale proceeds derived by the company from the export of goods or merchandise out of

India or gross receipts derived by it from the constructional operations or services rendered outside India, as the case may be, is fifty per cent or

more of the aggregate amount of the sale proceeds or, as the case may be, the gross receipts of the relevant previous year credited to the profit

and loss account of the company.

The relevant clause for our purpose it, the second proviso. A plain reading of the second proviso shows that the gross receipts derived by the

company from the constructional operations or services rendered outside India, as the case may be, must be 50 per cent or more of the aggregate

amount of the sale proceeds, or as the case may be, the gross receipts of the relevant previous year credited to the profit and loss account of the

company. The reasoning given by the Tribunal that the receipts from the constructional operations relating to the operations outsides India being

100 per cent, the second proviso is satisfied is understandable. The receipts must be compared for the purpose of percentage with the gross

receipts and not receipts from a particular head. On this view, we have no hesitation to hold that the Tribunal erred in understanding the

notification, in particular, the second proviso. The order of the Tribunal cannot be sustained for the assessment year 1967-68.

For the assessment year 1968-69, the Tribunal held as follows :

Coming to the assessment year 1968-69, the facts are the same as far as the nature of the business activities, etc., are concerned. The only point

is that the figures differ. The arguments of the assessee and the Department are the same before us. As we do not have the agreed figures before us

of the receipts from constructional activities in Ceylon, the assessee has given a figure of Rs. 75,18,020 in Indian rupees and the Department refers

to a figure of Rs. 17.88 lakhs; we would set aside the order of the Appellate Assistant Commissioner and restore the appeal to his file. The

Appellate Assistant Commissioner would determine the correct figure of constructional receipts in Ceylon and thereafter apply the ratio of our

finding for the assessment year 1967-68 and decide the appeal afresh. Subject to this observation, the appeal for this year is treated as follows.

As we have held that the Tribunal erred in understanding the notification and as we have also held that the assessee had not satisfied the conditions

prescribed in the notification, the assessment for 1968-69 also will have to be in the light of the interpretation given by us on the scope of the

notification.

However, Mr. P. P. S. Janarthana Raja, learned counsel appearing for the assessee, submitted that the Appellate Assistant Commissioner allowed

the claim of the assessee not only on the basis of the notification, but also on yet another ground based on the provisions of section 109(i)(e) of the

Act. However, the Tribunal did not go into the second ground based on section 109(i)(e) of the Act, on the basis of which the Appellate Assistant

Commission allowed the claim of the assessee. Therefore, when the matters go back on the basis of this reference order, the assessee must be

permitted to raise the second ground before the appropriate authority for claiming the relief.

Accordingly, while answering the question in the negative and against the assessee, we hold that the claim of the assessee on the basis of the

provisions of section 109(i)(e) of the Act will have to be gone into by the appropriate authority when the matters go back for fresh assessment.

The question is answered as above and the references are disposed of accordingly with costs. Counsel fee Rs. 1,000, One set.