Commissioner of Income Tax vs Swadeshi Mills Co. Ltd.

Dr. B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, the following question of law has been referred to this court for opinion at the instance of the Revenue :

"Whether, on the facts and in the circumstances of the case, the assessee was entitled to export profits rebate, as provided for in section 2(5)(i) of the Finance Act, 1963, read with the rule 2(3) of the Income Tax (Determination of Export Profits) Rules, 1963 ?"

The material facts relevant for the determination of the controversy involved in the above question are as follow :

The assessee is a textile mill. This reference pertains to the assessment year 1963-64, the relevant previous year being the year ended on March 31, 1963. The assessee claimed a rebate in respect of export of cloth which was admissible on the export profits u/s 2(5)(i) of the Finance Act, 1963 (13 of 1963). This claim of the assessee was rejected by the Income Tax Officer, as according to him, the exports made by the assessee had not resulted in a profit. The Income Tax Officer referred to the directors'' report where it was observed that the reduction in the profits was mainly due to adverse trading conditions for a part of the year, higher price of cotton and unremunerative compulsory export sales. In view of the above observations, the Income Tax Officer held that the assessee''s claim for rebate on the exports made by it could not be accepted. The assessee appealed to the Appellate Assistant Commissioner of Income- tax. The Appellate Assistant Commissioner held that the assessee had received lucrative export incentives for exporting goods, which involved a bit of underselling. The Appellate Assistant Commissioner further held that the Income Tax Officer had essentially to go by rule 2(3) of the Income Tax (Determination of Exports Profits) Rules, 1963, for the purpose of determining export profits. The Appellate Assistant Commissioner also observed that the Income Tax Officer was not justified in reading out of context some observations in the directors'' report of the assessee-company and rejecting the claim of the assessee on that basis. The Appellate Assistant Commissioner, therefore, directed the Income Tax Officer to determine the export profits in the manner laid down in rule 2(3) of the Income Tax (Determination of Export Profits) Rules, 1963, keeping in mind the relevant provisions of the Finance Act, 1963, for the purpose of computing the export profits rebate. Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue went in appeal to the Income Tax Appellate Tribunal. The Tribunal affirmed the order of the Appellate Assistant Commissioner and dismissed the appeal of the Revenue. While doing so, the Tribunal observed that the assessee was entitled to export profit rebate as provided in section 2(5)(i) of the Finance Act, 1963, on export profits determined in the manner laid down in rule 2(3) of the Income Tax (Determination of Export Profits) Rules, 1963. Hence, this reference to us at the instance of the Revenue u/s 256(1) of the Act for opinion on the question of law set out above.

Section 2(5) of the Finance Act, 1963, so far as is relevant, read :

"2(5). In respect of any assessment for the assessment year commencing on the 1st day of April, 1963, -

(i) an assessee being an Indian 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 and super tax with which he is chargeable of an amount equal to the Income Tax and super tax calculated, respectively, at one-tenth of the average rate of income- tax and of the average rate of super tax on the amount of such profits and gains included in the total income;....

(vi) the amount of any profits and gains derived from the export of any goods or merchandise out of India in respect of which deduction of Income Tax and super tax is admissible under clause (i) shall be computed in accordance with the rules made by the Central Board of Revenue in this behalf."

From a plain reading of the above provision, it is clear that an assessee whose total income includes any profits and gains derived from export of any goods out of India, is entitled to the deduction specified therein. Clause (vi) specifically provides that the amounts of profits and gains derived from the export of any goods out of India in respect of which deduction of Income Tax and super tax is admissible under clause (i) shall be computed in accordance with the rules made by the Central Board of Revenue in this behalf. In exercise of the above powers, the Central Board of Revenue framed the Income Tax (Determination of Export Profits) Rules, 1963, vide Notification No. S.O. 1981 (see [1963] 49 ITR 86), dated July 9, 1963, which provides the method of computation of the qualifying income for the purpose of clause (vi) of sub-section (5) of section 2 of the Finance Act, 1963. Rule 2 of the above rules reads :

"2. Computation of qualifying income.-(1) Where an assessee referred to in clause (i) of sub-section (5) of section 2 of the Finance Act, 1963 (XIII of 1963), exports any goods or merchandise out of India, the amount of the profits and gains derived from such exports with reference to which deduction of tax is admissible under that sub- section (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 amount of the qualifying income shall be taken as the excess of the amount of the profits and gains so ascertained in accordance with the provisions of the Income Tax Act, 1961 (XLIII of 1961) (hereinafter referred to as ''the Act''), and included in the total income over 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.

(3) Where in the opinion of the Income Tax Officer, the profits and gains on such exports cannot be ascertained, the amount of the qualifying income shall be taken as a fraction of 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 and 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 fraction being proportional to the value of the turnover of such exports in relation to the total turnover of the business of which such exports form a part.

(4) Where in the opinion of the Income Tax Officer the computation of such profits and gains in the manner indicated in sub-rule (3) presents exceptional difficulties, the amount of the qualifying income shall be taken as the excess of such profits and gains ascertained by the Income Tax Officer on any other reasonable basis on the data available and included in the total income over 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."

A conjoint reading of section 2(5)(i) of the Finance Act, 1963, and rule 2 of the Income Tax (Determination of Export Profits) Rules, 1963, makes it abundantly clear that the amount of profits and gains derived from exports with reference to which deduction of tax is admissible under clause (i) of sub-section (5) of section 2 of the Finance Act, 1963 (referred to as the "qualifying income"), has to be computed in accordance with the provisions contains contained therein. In that view of the matter, the Income Tax Officer was not justified in not computing the profits and gains derived from the exports in the manner set out in rule 2(3) of the Income Tax (Determination of Export Profits) Rules for the purpose of computing the deduction allowable to the assessee u/s 2(5)(i) of the Finance Act, 1963, and in rejecting the claim on the basis of some observations in the directors'' report taken out of context, in total disregard to the scheme of the relevant provision and the rule specifically framed for that purpose. In our opinion, the said observations have no bearing on the computation of profits and gains derived by the assessee from the exports for the purpose of allowability of deduction of tax admissible u/s 2(5)(i) of the Finance Act, 1963. The Income Tax Officer was, therefore, bound to compute the amount of profits and gains derived from such exports strictly in accordance with the provisions of sub-rule (2) or sub-rule (3) or sub-rule (4) or rule 2 of the Income Tax (Determination of Export Profits) Rules, 1963. In that view of the matter, the Appellate Assistant Commissioner was fully justified in directing the Income Tax Officer to compute the export profits in accordance with the above rule and in no other manner and the Tribunal was correct in confirming the same.

In the premises, we answer the question referred to us in the affirmative and in favour of the assessee.

No order as to costs.