Commissioner of Income Tax vs Maddi Venkataratnam and Co. (P.) Ltd.

Anjaneyulu, J.—The Income Tax Appellate Tribunal, Hyderabad, made this reference u/s 256(1) of the Income Tax act, 1961, at the instance of the Commissioner of Income Tax. The reference relates to the Income Tax assessment year 1974-75. The following question of law is referred for the consideration of this court :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the sum of Rs. 11,98,787, received by the assessee on the sale of import entitlements represented only a capital receipt ?"

The assessee is a company. For the Income Tax assessment year 1974-75, its previous year ended on October 31, 1973. The assessee carries on the business in processing and sale of Virginia tobacco and also in ginning cotton and sale of lint and seeds. It also deeds in pesticides. The assessee-company also exports tobacco to outside countries on a large scale. In its assessment for the year 1973-74, the Income Tax Officer included a sum of Rs. 11,98,787 under the head "Business". The sum represented import entitlements sold by the company along with others. It may be mentioned that in respect of certain joint exports made by the assessee-company and other associates, the company was entitled to certain import entitlements. The assessee was entitled to import raw materials for which the import entitlements were issued. It, however, chose to sell the import entitlements for cash. On the sale of the import entitlements, the abovementioned sum of Rs. 11,98,787 was realised. The assessee raised two contentions for the Income Tax assessment year 1973-74. Firstly, it was urged that out of the sum of Rs. 11,98,787 the assessee''s share was only Rs. 5,15,140 and that the balance amount related to its other associates. The second contention was that, in any event, the amount was not liable to be taxed for the assessment year 1973-74, but is so liable for the assessment year 1974-75.

The Income Tax Appellate Tribunal on appeal for the assessment year 1973-74, accepted the assessee''s contention that only a sum of Rs. 5,15,140 was liable to be assessed in its hands. The Tribunal also accepted the contention that the amount is liable to be taxed for the assessment year 1974-75. The Revenue unsuccessfully carried the matter in reference, vide R.C. No. 124 of 1978. The assessment proceedings for the assessment year 1973-74 had thus become final.

In the return filed for the Income Tax assessment year 1974-75, the assessee included the sum of Rs. 5,15,140 as representing income from business. As matters regarding the assessment of the income did not become final for the assessment year 1973-74, the Income Tax Officer included the entire sum of Rs. 11,98,787 in the assessment for the assessment year 1974-75. It is said that the amount was provisionally included. The assessee carried the matter in appeal to the Commissioner of Income Tax (Appeals) questioning the inclusion of the sum in excess of Rs. 5,15,140. The Commissioner accepted the assessee''s contention and deleted the income of Rs. 6,82,966 from the assessment observing that in view in the Tribunal''s order for the immediately preceding year, the amount in not liable to be taxed in the assessee''s hands.

The Revenue as well as the assessee filed appeals to the Tribunal. The Revenue''s contention was that the assessee was liable to be taxed on the amount of Rs. 6,82,966 also. The assessee, on the other hand, raised a new plea before the Tribunal, viz., that the sum of Rs. 5,15,140 represented receipt of capital and cannot be held to be "revenue" in character. It was claimed that by mistake the sum of Rs. 5,15,140 was offered for assessment as business income whereas the true character of the receipt is on capital account. The assessee, therefore, urged that the sum of Rs. 5,15,140 cannot be taxed in its hands.

The Tribunal rejected the Revenue''s contention that the sum of Rs. 6,82,966 was liable to be assessed in the assessee''s hands. It reiterated its earlier decision in connection with the assessment year 1973-74 which had become final, viz., that the sum is not liable to be assessed in the hands of the assessee. At the same time, the Tribunal permitted the assessee to raise the new place concerning the sum of Rs. 5,15,140. After consideration, the Tribunal came to the conclusion that the sum in question represented realisation of capital by sale of import entitlements and the capital gain derived is not liable to be taxed, as there was no cost of acquisition to the import entitlements sold. Accordingly, the assessee''s contention that no part of the sum of Rs. 5,15,140 was liable to be assessed for the assessment year 1974-75 was accepted by the Tribunal. Aggrieved by the order of the Tribunal, the Commissioner of Income Tax sought a reference u/s 256(1) of the Income Tax Act, 1961, and the question of law as stated in para 1 (at p. 62) is referred by the Tribunal for the consideration of this court.

We may first clear the ground regarding the Revenue''s claim for assessment of the sum of Rs. 6,82,966 which was the subject-matter of consideration for the assessment year 1973-74. We have already mentioned that the Tribunal held that the aforementioned sum pertains to the associates of the assessee and that the sum is assessable in their hands. Once the Tribunal''s decision in this regard became final, it is not open to the Revenue to reagitate the same question. Even otherwise, the Tribunal found that the exports of tobacco were made by three groups of persons, including the assessee, and that the assessee''s share therein was only 43%. In its order disposing of the appeal for the assessment year 1973-74, the Tribunal dealt with this matter at considerable length and upon the evidence available, came to the conclusion that only 43% of the income is liable to be assessed in the hands of the assessee. The Tribunal''s finding is one of fact, based on evidence and it is not possible for this court to interefere with the finding in a reference u/s 256(1) of the Act. We, therefore, uphold the Tribunal''s view that the sum of Rs. 6,82,966 is not liable to be taxed in the assessee''s hands for the assessment year 1974-75.

This takes us to the consideration of the plea urged by the assessee and accepted by the Tribunal that the sum of Rs. 5,15,140 is not liable to be taxed for the assessment year 1974-75 on the ground that it was realisation of capital. The Tribunal relied on cases where the view taken was that the capital gain derived on the sale of assets is not liable to be taxed if the cost of acquisition of that asset is not ascertainable. The Tribunal referred to the Full Bench decision of the Madras High Court in The Additional Commissioner of Income Tax, Madras Vs. K.S. Sheik Mohideen, , and also other cases bearing on the same point and observed that the facts in the assessee''s case are on all fours. In that view, the Tribunal held that the sum of Rs. 5,15,140 realised is not liable to be taxed in its hands.

We are afraid the Tribunal fell into an error in thinking that the above principle is applicable in the assessee''s case. It must be remembered that the assessee is a trader. In relation to its business transactions involving export of tobacco to outside countries, the assessee became entitled to import entitlements. There is thus an intimate and direct connection between the business carried on by the assessee and the import entitlements received. It is not a case where import entitlements were received by a non-trader, as in the Madras Full Bench case The Additional Commissioner of Income Tax, Madras Vs. K.S. Sheik Mohideen, . In that case, under the National Defence Remittance Scheme, persons remitting foreign exchange to this country became entitled to import entitlements. The import entitlements received in cases relating to that Scheme have nothing to do with the business carried on by a person. The entitlements were received by traders as well as non-traders and as the import entitlements received under that Scheme had no connection whatsoever with the business carried on by a person, they were treated as assets and the capital gain derived on the sale of import entitlements was held to be not liable to tax. That line of reasoning cannot be applied to the assessee''s case, as the receipt of import entitlements is directly relatable to the business carried on by the assessee. The sum realised by sale of import entitlements is liable to be assessed in the hands of the assessee as income under the head "Business". It was rightly so offered by the assessee itself in its return for the assessment year 1974-75 and no contention that it is not liable to be taxed as such was urged before the Commissioner (Appeals). It was only before the Tribunal that the assessee made a somersault and raised a new plea that it is not liable to be taxed, relying on the Full Bench decision of the Madras High Court.

We may refer to the decision of the Calcutta High Court in Jeewanlal (1929) Ltd. Vs. Commissioner of Income Tax, , of the Bombay High Court in Metal Rolling Works Pvt. Ltd. Vs. Commissioner of Income Tax, , and of the Kerala High Court in O.K. Industries and Others Vs. Commissioner of Income Tax and Another, . All the aforesaid decisions support the view we have taken that the cash realised by a businessman on the sale of import entitlements constituted income from business and not realisation of capital resulting in capital gain.

In the result, we answer the question referred to us in the negative, that is to say, in favour of the Revenue and against the assessee subject to the modification that the sum assessable shall be Rs. 5,15,140 and not Rs. 11,98,787 as specified in the question. No costs.