Commissioner of Income Tax vs Eastern Chemicals and Minerals Pvt. Ltd.

Somasundaram, J.—At the instance of the Revenue, u/s 256(1) of the Income Tax Act, 1961, hereinafter called (""the Act""), the following

common questions of law have been referred to this court for its opinion :

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that, having regard to the notification u/s

104(3) of the Income Tax Act, 1961 in S. O. No. 3210 See [1969] 74 ITR 6, dated August 8, 1969, issued by the Government, the assessee

was not liable to pay additional tax u/s 104 of the Income Tax Act, 1961, for any of the assessment years from 1972-73 to 1974-75 ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the amounts realised by the assessee

from the transfer of its import licenses constituted sale proceeds derived by it from its export within the meaning of the Notification S.O. No. 3210

See [1969] 74 ITR 6, dated August 8, 1969, and, therefore, the assessee would be entitled to enjoy the exemption from the operation of the

provisions of section 104 of the Income Tax Act, 1961 ?

The assessee is a private limited company exporting lignite chrome ores and other minerals. These three tax cases relate to the three assessment

years 1972-73, 1973-74 and 1974-75. The Income Tax Officer found that, for the assessment years 1972-73 and 1974-75, adequate profits

were available and there had been no distribution of dividend by the assessee-company which is a company in which the public are not

substantially interested. In those circumstances, the Income Tax Officer initiated proceedings u/s 104 of the Act and, with the previous approval of

the Inspecting Assistant Commissioner of Income Tax, passed orders u/s 104(1) of the Act calling upon the appellant to pay additional Income

Tax of Rs. 1,09,019 and Rs. 82,836 for the assessment years 1972-73 and 1974-75, respectively. In the course of the proceedings u/s 104 of the

Act, the assessee contended that, as the assessee-company is engaged in the export of goods outside India in the course of its business activities, it

was entitled to the exemption available under Notification S.O. No. 3210 dated August 8,1969, (see [1969] 74 ITR 6) issued by the Central

Government by virtue of the power vested in it u/s 104(3) of the Act. The Income Tax Officer, in the orders levying additional Income Tax u/s

104(1) of the Act, held that the assessee company is not entitled to the exemption under Notification S.O. No. 3210 dated August 8, 1969 (see

[1969] 74 ITR 6) issued by the Central Government by virtue of the power vested in it u/s 104(3) of the Act. The Income Tax Officer, in the

orders levying additional Income Tax u/s 104(1) of the Act, held that the assessee-company is not entitled to the exemption under Notification

S.O. No. 3210 dated August 8, 1969 (see [1969] 74 ITR 6) since the assessee did not export goods outside India during the accounting years

relevant to the assessment years 1972-73 and 1974-75. The Income Tax Officer further held that the profits which the assessee claimed as having

been realised out of exports were in fact derived by the sale of import entitlement licenses. The Income Tax Officer took the view that the profits

derived by the sale of import licences constituted profits arising out of trading activities in import licenses and should not be equated with profits

derived from exports exempted by the notification referred to above. The Income Tax Officer passed a similar order for the assessment year

1973-74 holding that the assessee is liable to pay additional Income Tax on the distributable income of Rs. 59,667. As against the orders passed

by the Income Tax Officer for the assessment years 1972-73 and 1974-75, the assessee filed appeals before the Appellate Assistant

Commissioner who heard the appeals for 1972-73 and 1974-75. It was contended on behalf of the assessee that the Government Notification

No. S.O. 3210 dated August 8, 1969 (see [1969] 74 ITR 6), issued u/s 104(3) of the Act did not refer to any particular assessment year or

previous year and that the notification only required that the activity of export should be in the course of the business which requirement was

satisfied in the assessee''s case as also the other requirements of the notification. It was further contended before the Appellate Assistant

Commissioner on behalf of the assessee that, as per the relevant clause of the Barter Approval Scheme under which the import licences were

granted by the Government, the import licences will be issued in the names of actual users nominated by the assessee. The assessee became

entitled to import licences by export performance and, when the Government, in terms of the Barter Scheme, issued import licences in the names

of the actual users nominated by the assessee, there was no question of trading in import licences by the assessee. The Appellant Assistant

Commissioner accepted the assessee''s contention that the Barter Scheme of the Central Government was an integrated scheme covering the

export performance including the exports as such and the issue of import licences and held that the profits arising out of sale of import licences

were attributable to the exports and they have to be classified as earnings arising out of exports. The Appellate Assistant Commissioner further

held that, while the actual export may be made in a particular year, the proceeds could be derived in a subsequent year and the notification in

question does not require that the exports and the receipts of the sale proceeds on behalf of the exporting company should be in the same year.

The Appellate Assistant Commissioner further found that the second proviso to the notification requiring that the sale proceeds from export should

exceed 50% of gross receipts was satisfied in the assessee''s case and, accordingly, held that the assessee which had made profits out of exports

was entitled to the benefit of Notification S.O. No. 3210 dated August 8, 1969 ( see [1969] 74 ITR 6), and, hence, the assessee was entitled to

exemption u/s 104(3) of the Act for both the assessment years 1972-73 and 1974-75. The Commissioner of Income Tax (Appeals) who

subsequently heard the assessee''s appeal for the assessment year 1973-74 also took a similar view and held that the assessee''s case was covered

by the provisions of the Notification S.O. No. 3210 dated August 8, 1969 (see [1969] 74 ITR 6), and that he was entitled to exemption u/s

104(3) of the Act for the assessment year 1973-74.

Thereafter, the Revenue filed three appeals as against the three orders referred to above before the Tribunal in I.T.A. Nos. 1299 and

1300/MDS of 1977-78 and 1889/MDS of 1978-79. The Tribunal, by its common order dated April 7, 1979, found that the language used in the

second proviso to the notification, viz.,""sale proceeds derived from the exports"" is intended to give a wide sweep to the scope of the expression

sale proceeds"" as including even the realisation from the sale of the import licences. The Tribunal relied on the decision in Commissioner of

Income Tax Vs. Wheel and Rim Company of India Ltd., , for coming to the conclusion that the expression""sale proceeds derived from the

exports"" will include the realisation from the sale of the import licences. Ultimately, the Tribunal found that the import licences realisation by the

assessee will constitute sale proceeds derived by it from its export within the meaning of the Notification S.O. No. 3210 dated August 8, 1969

(see [1969] 74 ITR 6) and, consequently, the Tribunal confirmed the orders of the Appellate Assistant Commissioner/Commissioner of Income

Tax (Appeals) for all the assessment years holding that the assessee is entitled to the exemption claimed u/s 104(3) of the Act and dismissed the

appeals filed by the Revenue.

Aggrieved by the common order of the Tribunal, the Commissioner of Income Tax obtained a reference u/s 256(1) of the Act to this court for

its opinion on the common questions of law referred to above.

For the purpose of understanding the point involved in these cases, it is necessary to refer to the relevant provisions of the Act. Section 104(1)

of the Act provides for the levy of additional Income Tax on companies under certain circumstances. Section 104(3) of the Act runs as follows :

If the Central Government is of opinion that it is necessary or expedient in the public interest so to do, it may, by notification in the Official Gazette

and subject to such conditions as may be specified therein, exempt any class of companies to which the provisions of this section apply from the

operation of this section.

Notification No. S.O. 3210 dated August 8, 1969 (see [1969] 74 ITR 6), issued by the Government u/s 104(3) of the Act 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), and in partial modification of

the Ministry of Finance (Department of Revenue and Insurance), Notification No. S.O. 2007, dated June 6, 1967, the Central Government, being

of the 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 defined in 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 April 1, 1970, and any subsequent year :

Provided that such Indian company, in the course of its business, -

(a) exports any goods or merchandise out of India; or

(b) performs any constructional operations or renders any service outside India; or

(c) provides or makes available to any enterprise or institution, association, or other body established outside India, any technical know-how being

any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or

scientific knowledge, experience or skill,

and the sale proceeds of the exports referred to in item (a) or, as the case may be, the income accruing to the company from the activities of its

business referred to in item (b) or item (c) is received in or brought into India by the company or on its behalf in accordance with the Foreign

Exchange Regulation Act, 1947 (7 of 1947), and any rules and orders made thereunder :

Provided further that the sale proceeds derived by the company from the exports, if any, referred to in item (a) and the gross receipts derived by it

from the activities of its business referred to in item (b) or item (c) or both, during the previous year, amount, in the aggregate, to 50 per cent. or

more of the aggregate amount of the sale proceeds and all other gross receipts of the business during the previous year credited to the profit and

loss account of the company.

According to Notification No. S.O. 3210 dated August 8, 1969 see [1969] 74 ITR 6), an assessee, in order to get the benefit of exemption

from levy u/s 104(3) of the Act, should satisfy the following three conditions :-

(i) It should export goods or merchandise out of India;

(ii) The sale proceeds of export of such goods or merchandise should be received in or brought into India by the company or on its behalf in

accordance with the Foreign Exchange Regulation Act of 1947;

(iii) The sale proceeds derived by the company from the export of goods or merchandise referred to earlier should be equal to or more than 50 per

cent. of the aggregate amount of the sale proceeds and all other gross receipts of the business during the previous year credited to the profit and

loss account of the company.

Now, we have to examine whether the assessee has satisfied the three conditions prescribed by Notification No. S.O. 3210 dated August 8,

1969 (see [1969] 74 ITR 6). With regard to the first condition prescribed by the notification, it is admitted that, for the assessment years 1972-73

and 1974-75, the assessee had not exported any goods; but, for the assessment year 1973-74, the assessee had exported goods worth Rs.

31,000. With regard to condition No. 3 prescribed by the notification and referred to above, it is common ground that, if the realisation from the

transfer of the assessee''s import licences are considered as sale proceeds derived from exports, they would constitute more than 50 per cent. Of

the aggregate amount of the sale proceeds and all other gross receipts of the business during the previous year credited to the profits and loss

account of the assessee-company. Therefore, the main question we have to examine is, whether the assessee has satisfied the second condition

prescribed in the Notification No. S.O. 3210, dated August 8, 1969 (see [1969] 74 ITR 6), viz., whether the realisation from the transfer of the

assessee''s import licences can be considered as sale proceeds derived from exports and received in or brought into India by the assessee or on its

behalf in accordance with the Foreign Exchange Regulation Act of 1947. Learned counsel for the assessee submitted that, in respect of all the

three assessment years, the amounts realised by the assessee from the transfer of its import licences must be considered as sale proceeds derived

by the assessee from its exports and, if so considered, they would constitute more than 50 per cent. of the aggregate amount of the sale proceeds

and all other gross receipts of the business during the previous year credited to the profit and loss account of the assessee-company. In support of

his contention learned counsel for the assessee relied on the decision in Commissioner of Income Tax Vs. Wheel and Rim Company of India Ltd.,

. We are unable to accept the above contention of learned counsel for the assessee. In the decision in Commissioner of Income Tax Vs. Wheel

and Rim Company of India Ltd., , this court considered the question whether the sale proceeds of import entitlements can be considered as profits

and gains derived by the assessee by export of goods. In that case, the assessee-company carrying on business in the manufacture and sale of

cycle rims 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 rat her than selling the goods in this country itself, and this sum was included in the receipts which were taken into account

for arriving at its business income. By reason of another scheme, the assessee in that case was granted, on the basis of its export performance,

import licence for dates and by the sale of the import licence, the assessee made a profit of Rs. 4,83,856. In its assessment for the year 1966-67,

the assessee claimed a rebate on the value of the exported goods on the two receipts referred to above on the basis of the provisions of section

2(5)(a) of the Finance Act, 1966. The Income Tax Officer 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 the order of the Income Tax Officer was confirmed by the Appellate Assistant Commissioner. 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 the rebate. On a reference u/s 256(1) of the Act, this court held that, by virtue of rule 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) of the Finance Act have to be ascertained in accordance with the Income Tax Act, 1961

and, if so ascertained, the two amounts referred to will necessarily constitute business receipts referable to, or derived from the export of cycle

rims and hence the assessee was entitled to the rebate u/s 2(5)(a) of the Finance Act, 1966, on the two amounts. The above decision is clearly

distinguishable on facts and the principle laid down in that decision will not apply to the facts of the present case. In the decision of Commissioner

of Income Tax Vs. Wheel and Rim Company of India Ltd., , this court was not concerned with the interpretation of the Notification No. S.O.

3210, dated August 8, 1969 (see [1969] 74 ITR (St.) 6), but had considered only the combined effect of section 2(5)(a)(i) and 2(5)(d) of the

Finance Act, 1966, and the rule 2(2) of the Income Tax (Determination of Export Profits) Rules, 1966. The assessee would get the benefit of

Notification No. S.O. 3210 dated August 8, 1969 (see [1969] 74 ITR 6), only if it exported goods out of India and received the sale proceeds of

the exports in India and the receipts from the transfer of import licences by the assessee to actual users in India cannot be treated as sale proceeds

derived from the export within the meaning of the said notification. Admittedly, the sale proceeds of export of goods are not received in or brought

into India by the assessee or on its behalf in accordance with the Foreign Exchange Regulation Act, 1947. It is further admitted that the import

licences were sold by the assessee in India and the sale proceeds of the import licences were also realised in India. It may be that import licences

were granted to the assessee in consideration of the exports made by the assessee-company in the previous years. But, the fact remains that

realisations from the sale of import licences do not represent the sale proceeds of the goods sold outside India. The profit realised on sale of import

licences in India cannot be considered as part of the export sale proceeds. Further, the facility offered by the Government in the form of incentive

to import has not been utilised by the assessee but has been transferred for a consideration in accordance with the procedure laid down for such

incentive. Such sale of licence can be considered only as trading in import licences. The fact that such import licences are acquired on export of

goods will not convert the trading receipts in licences into sale proceeds from exports. Notification No. S.O. 3210, dated August 8, 1969 (see

[1969] 74 ITR 6), is an exemption notification and it gives a concession to the assessee provided the assessee satisfied the conditions prescribed in

the notification. The exemption notification must be construed strictly and the assessee cannot claim the benefit of the notification unless it satisfies

all the conditions prescribed therein. Admittedly, in the present case, the sale proceeds realised by the assessee by selling the import licences have

been received in India and they have not been brought into India in accordance with the Foreign Exchange Regulation Act, 1947. Therefore, it has

to be held that the realisation from transfer of the assessee''s import licence cannot be considered as sale proceeds derived from exports and

received in or brought into India by the assessee or on its behalf in accordance with the Foreign Exchange Regulation Act, 1947, and that the

assessee is not entitled to claim the benefit of Notification No. S.O. 3210, dated August 8, 1969 (see [1969] 74 ITR 6). The language of

Notification No. S.O. 3210 dated August 8, 1969 (see [1969] 74 ITR 6, does not support the conclusion of the Tribunal that import licences

realisation by the assessee will constitute sale proceeds derived by it from its export within the meaning of the notification particularly when the sale

proceeds are not brought into India in accordance with the Foreign Exchange Regulation Act, 1947, and, therefore, the conclusion of the Tribunal

is clearly erroneous. Therefore, the Tribunal is not right in holding that the amounts realised by the assessee from the transfer of its import licences

constituted sale proceeds derived by it from its export within the meaning of the Notification No. S.O. 3210, dated August 8, 1969 (see [1969]

74 ITR 6); that the assessee would be entitled to enjoy the exemption from the operation of the provisions of section 104 of the Act and that the

assessee was not liable to pay additional tax u/s 104 of the Act for any of the assessment years from 1972-73 to 1974-75.

In the result, we answer both the questions referred to us in the negative and in favour of the Revenue. The Revenue is entitled to costs.

Counsel''s fee Rs. 500 (one set).