1998 (10) TMI 12 - HC - Income Tax

Cash assistance, duty drawback, and import entitlements excluded from profits 'derived from' undertaking u/ss 80HH and 80J

HC held that cash assistance, duty drawback and import entitlements received from the Government, though attributable to the assessee's business ... New Industrial Undertaking In Backward Area - Special Deduction - Condition Precedent - Whether the Appellate Tribunal is right in law in holding that cash assistance and duty drawback received from the Government by the assessee are includible in the profits derived from the industrial undertaking and eligible for relief under sections 80HH and 80J of the Income-tax Act, 1961 ? - HELD THAT:- While the cash assistance, duty drawback and import entitlements are undoubtedly attributable to the business carried on by the assessee and the assessee would not have been in a position to receive any of these benefits, had the assessee not been carrying on business, it cannot be said, however, that such income is 'derived' from the business. The decision of the Karnataka High Court relied on by learned counsel for the assessee in the case of Sterling Foods v. CIT [1990 (11) TMI 65 - KARNATAKA HIGH COURT] did not examine the distinction between the terms 'derived from' and 'attributable to'. It only proceeded on the basis, that such income being part of the business income, it must follow that the income is derived from the industrial undertaking. Though it is desirable that the provisions of the statute which impose burdens and those conferring benefits use uniform expressions so that receipts and expenditure are treated in an uniform manner and this controversy as to whether such profits and gains of a business included in the total income should nevertheless be excluded while determining the extent of exemption from tax is avoided, the statute in its present form uses different expressions in different provisions and the court has no option but to give effect to the legislative intention as ascertained from the statutory language. Had it been the intention of Parliament, that all business income qualified for the benefit under sections 80J and 80HH of the Act, the statutory language would have been different. The fact that an expression which had the narrower meaning has been used, warrants the inference that the Legislature intended to limit the extent of profit and gain that should be properly considered as being relevant for the purpose of those provisions. Another Bench of this court more recently in the case of CIT v. Pandian Chemicals Ltd.[1997 (4) TMI 38 - MADRAS HIGH COURT] elaborately considered the decisions of this and other High Courts as also the Supreme Court bearing on the interpretation of the words 'derived from' used in section 80HH of the Act, and held that there must be a direct nexus between the profit or gain and the business, and the fact that the business is the means for securing the receipts was by itself insufficient. We therefore, answer the question referred to us in favour of the Revenue and against the assessee. Issues Involved:1. Whether cash assistance and duty drawback received from the Government by the assessee are includible in the profits derived from the industrial undertaking and eligible for relief under sections 80HH and 80J of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Inclusion of Cash Assistance and Duty Drawback in Profits Derived from Industrial Undertaking:The core issue revolves around whether the cash assistance and duty drawback received by the assessee from the Government qualify as profits derived from the industrial undertaking, thereby making them eligible for relief under sections 80HH and 80J of the Income-tax Act, 1961.Arguments by the Revenue:The Revenue contended that sections 80HH and 80J can only be invoked in respect of the profits and gains 'derived from' an industrial undertaking. It argued that the cash assistance, duty drawback, and import licence nomination entitlements were not 'derived' from the industrial undertaking but from the activity of export. The immediate source of these receipts was the export activity, not the industrial undertaking itself. The Revenue relied on several precedents, including the judgment in Fenner (India) Ltd. v. CIT [1999] 239 ITR 480, where it was held that cash assistance for export is not derived from the industrial undertaking.Arguments by the Assessee:The assessee argued that the cash assistance, duty drawback, and import entitlement form part of the business income and should be regarded as income derived from the business. The counsel for the assessee pointed out that such income is taxed as 'business income' and not under 'Income from other sources,' indicating a nexus between the income and the business carried on by the assessee. The counsel also referred to the amendments to section 28 of the Income-tax Act by the Finance Act, 1990, which included profits from the sale of import licences and cash assistance as part of the business income.Court's Analysis:The court noted that all the decisions rendered by this court on the points argued by the assessee were against the assessee. The court emphasized that the relevant statutory provisions and decisions of the Supreme Court and Privy Council had been considered in earlier cases. The court reiterated that the benefit of section 80HH could be claimed only when there was a direct nexus between the profit or gain and the industrial undertaking. It held that the amounts paid to the assessee by the Government as part of the scheme to encourage export were not derived from the industrial undertaking but from the scheme of the Government. The court distinguished between the terms 'derived from' and 'attributable to,' noting that the former is narrower and requires a direct nexus.Conclusion:The court concluded that the amounts received by the assessee from the Government consequent to the exports effected by it are not amounts which form part of the profits and gains 'derived' from the industrial undertaking. The court emphasized that the statutory language in sections 80J and 80HH uses the term 'derived from,' indicating a narrower scope intended by the Legislature.Final Judgment:The court answered the question in favor of the Revenue and against the assessee, holding that cash assistance and duty drawback received from the Government are not includible in the profits derived from the industrial undertaking for the purpose of relief under sections 80HH and 80J of the Income-tax Act, 1961.Post-Judgment:After pronouncing the judgment, the court declined the assessee's request for a certificate for leave to appeal to the Supreme Court, stating that the judgment followed the law laid down by this court in light of the decisions of the apex court.