Receipts from sale of import entitlements treated as business income under s.5; not capital, s.80HH deduction denied.

HC held that receipts from sale of import entitlements constituted business income under s.5 and must be included in total income. The court ruled such receipts are not capital proceeds and do not qualify for deduction under s.80HH because the profits were not derived directly from the industrial undertaking; a mere commercial connection is insufficient. Consequently, the taxpayer's claim for relief under s.80HH was disallowed and the question was decided against the assessee.

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Issues Involved:
1. Whether the receipts from the sale of import entitlements could be included in the income of the assessee for the purpose of computing the relief u/s 80HH of the Income-tax Act, 1961.

Summary:

Issue 1: Inclusion of Receipts from Sale of Import Entitlements for Relief u/s 80HH

The assessee-firm, engaged in the processing and export of prawns and other sea-foods, earned import entitlements under the Export Promotion Scheme by the Central Government. These entitlements were sold, and the proceeds were included in the total income for the assessment years 1975-76 and 1976-77. The Income Tax Officer (ITO) allowed relief u/s 80HH of the Act for the entire receipts, including the sale proceeds of the import entitlements.

The Commissioner, exercising his power u/s 263 of the Act, opined that the assessee was not entitled to relief u/s 80HH for the receipts from the sale of import entitlements. He set aside the assessment and directed the ITO to re-do the assessment excluding the proceeds from the sale of import entitlements.

The assessee appealed to the Appellate Tribunal, arguing that the import entitlements were secured in the course of business in the industrial undertaking, and thus, the profits derived should fall under the relief u/s 80HH. The Tribunal, following the Supreme Court decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, rejected this contention and dismissed the appeals.

The High Court examined the scope and meaning of the expression "derived from" used in s. 80HH. The term "derived" has a restricted meaning, as interpreted by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 and the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. The court emphasized that the profits must be directly derived from the industrial undertaking itself, not merely connected to it.

The court noted that the import entitlements were awarded under a government scheme to encourage exports, not directly connected to the industrial undertaking of the assessee. The source of the profits from the sale of import entitlements was the government scheme, not the industrial undertaking.

The court referred to similar views held by the Kerala High Court in Cochin Company v. CIT [1978] 114 ITR 822, the Bombay High Court in Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951, and the Madhya Pradesh High Court in Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. CIT [1983] 143 ITR 590. The court disagreed with the Madras High Court's decision in CIT v. Wheel and Rim Company of India Ltd. [1977] 107 ITR 168, which had a broader interpretation of "derived from."

The High Court concluded that the assessee is not entitled to relief u/s 80HH for the profits and gains derived from the sale of import entitlements. The question was answered in the affirmative and against the assessee, with no order as to costs.

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