Eastern
Chemical and Minerals Vs. Commissioner of Income Tax [1999] INSC 56 (9 March 1999)
R.C.Lahoti,
S.P.Bharucha, S.S.M.Quadri Bharucha. J.
Under
appeal is the decision of a Division Pench of the High Court at Madras. The Division Bench answered in the
negative and in favour of the Revenue the following question:
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 under
Section 104(3) of the Income Tax Act. 1961 in S.O. No.3210. dated 8.8.1969
issued by the Government the assessee was not liable to pay additional tax
under section 104 of the Income Tax Act.
1961
for any of the assessment vears 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 licences constituted sales proceeds derived by it
from its export within the meaning of the Notification S.O.
No-3210,
dated 8.8.1969 and therefore the assessee would be entitled to enjoy the
exemption from the operation of the provision of Section 104 of the Income Tax
Act. 1961?" As indicated in the questions, we are concerned with the
Assessment Years 1972- 73 to 1974-75.
To
appreciate what is involved, it is necessary to set out, at the outset, the
provisions of Section 104 of the Income Tax Act, 1961; so far as they are
relevant:
"104.
Income-tax on undistributed income of certain companies - (1) Subject to the
provisions of this section and of sections 105, 106, 107 and 107A, where the
Income-Tax Officer is satisfied that in respect of any previous year the
profits and gains distributed as dividends by any company within the twelve
months immediately following the expiry of that previous year are less than the
statutory percentage of the distributable income of the company of that
previous year, the Income Tax Officer shall make an order in writing that the
company shall, apart from the sum determined as payable by it on the basis of
the assessment under Section 143 or Section 144, be liable to pay income-tax at
tlie rate of - (a) fifty percent, in the case of an investment company;
(b)
thirty' seven per cent, in the case of a trading company, and (c) twenty five
per cent, in the case of any other company.
on the
distributable income as reduced by the amount of dividends actually
distributed, if any.
(2)..................
(3) 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 tilis section apply from the operation of
this section." A notification dated 8^ August, 1969 (No.S.0.3210) was
issued in exercise of the powers conferred by Section 104(3). It read thus :
"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 Ministly
of Finance (Department of Revenue and Insurance) Notification No. S.0.2007
dated the 6^ June. 1967, 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 defined in clause (ii) of
section 109 of the Act) from the operation of the said section 104. in respect
of the previous year relevant to the assessment year commencing on the I '' day
of April, 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 (c) is received in or
brought into India by the company or on its behalf 'a accordance with the
Foreign Exchange Regulation Act, 1947 (7 of 1947), and any rules and orders
made thereunder :
Provided
farther 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.
dunng
the previous year, amount. in the aggregate, to 50 per cent or more of the
aggregate amount of die sale proceeds and all other gross ieceipis of the brnines?
during the previous year credited to the profit and loss account of th^
company." The assessee had. by a letter dated 26^ March. 1969, written by
the Government of India, Ministry of Commerce, been granted permission to
export for the purpose of a barter deal. ferro-silicon manufactured by the Mysore
Iron and Steel Works, Bhadravati, upto a value ofRs.52 lacs (f.o.b.). Against
this value the assessee was permitted to import pesticides as therein
enumerated of a total value that did not exceed Rs.22 lacs. The assessee was
informed that the import licences that would be issued in this regard could be
endorsed in favour of actual users on the list of the Director General
Technical Development.
The assessee
claimed that it was entitled to the exemption from the levy of additional
income-tax under Section 104(1) read with the said notification. For this
purpose, it relied upon the income derived from the exports that it had made as
also upon the consideration that it had realised for the assignment of the
import licences obtained pursuant to such exports. The Income Tax Officer
rejected the assessee's contention. The Commissioner of Income Tax (Appeals)
accepted it, as also did the Income Tax Appellate Tribunal. The Tribunal noted
that it was common ground that if the realisation from the transfer of the assessee's
import licences were considered as sale proceeds derived from exports, they
would constitute more than 50% of the aggregate amount of the gross receipts
credited, to the profit and loss account for all the assessment years. It was
the contention of the Revenue that the import licence realisation could not be
treated as such sale proceeds. The Tribunal relied upon a judgment of the
Madras High Court in Commissioner of Income Tax Madras-1 vs. Wheel and Rim
Company of India Limited (107 ITR 168) and held that, having regard to the
integrated nature of the scheme, the import licence realisation by the assessee
would constitute sale proceeds derived by it from exports within the meaning of
the said notification.
.rising
out of the judgment and order of the Tribunal, the questions quoted above were
referred to the High Court. The High Court found, lightly, that the judgment in
the earlier case referred to above was distinguishable on facts. It analysed
the said notification and held that an assessee would get its benefit only
after it exported goods out of India and
received the sale proceeds of the exports in India. The receipts from the transfer of import licences by the assessee
to actual users in India did not fall within the meaning of
the said notification. Admittedly, the import licences had been sold by the assessee
in India and the sale proceeds thereof had
been realised in India. The profit realised on such sales
could not be considered as a part of export sale proceeds.
Accordingly,
the High Court reversed the Tribunal's conslusion.
What
is involved in this appeal is the construction of the said notification and,
particularly, the provisos thereof. The notification exempts every Indian
company from the operation of Section 104 in respect of the previous year
relevant to the assessment year commencing on I** April. 1970 and in subsequent
years, and we now quote only what are the relevant words thereof:
"Provided that such Indian corr.pany in the course of its business exports
any goods or merchandise out of India and the sale proceeds of the exports is
received in or brought into India by the comp«iny cr on ite 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 during the previous year amount, in the
aggregate, to 50% 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." For the purposes of determining
whether the sale proceeds derived by an assessee from exports amount to 50% or
more of its aggregate gross income what is to be taken into account are
"'the sale proceeds of the exports"; that is to say, the export
"of any goods or merchandise out of India". Secondly, the sale
proceeds of the exports have to be received in or brought into India in accordance with FERA. What is
contemplated is the export of goods or merchandise out of India, such export to be paid for in India or abroad. If paid for abroad, such
amount has to be brought into India in
accordance with the provisions of FERA. Clearly, the consideration received by
an assessee for assignment of import licences received pursuant to the exports
cannot be taken into account for the purpose of determining whether the sale
proceeds derived by the assessee from exports amount to 50°o or more of its aggregate
gross income.
No
doubt, the barter deal entitles the assessee to import licences. The assessee
is further entitled to assign these import licences to actual users, but the
consideration that it receives in regard to such assignment falls outside the
scope of the two requirements of the said notification.
It may
be that. as argued by learned counsel for the assessee. the import licences arc
intended to compensate the assesses for any loss that it has incurred by reason
of export at competitive international rates. Nonetheless, for the purposes of
the said notification, the consideration received by the assessee upon
assignment of such import licences does not fall within the requirements of the
said notification as analysed above and cannot be taken into account in
determining whether 50% or more of the assessee's income is derived from the
sale proceeds of exports.
We
affirm the judgment of the High Court and dismiss the appeal with costs.
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