High Court: Import profit not part of export profit under Finance Act. Section 2(5) allows benefits on individual export sales. (5)

Hindustan Lever Limited Versus Commissioner Of Income-Tax, Bombay City I

Hindustan Lever Limited Versus Commissioner Of Income-Tax, Bombay City I - [1980] 121 ITR 951, 12 CTR 55, 3 TAXMANN 390 Issues Involved:
1. Whether the profit earned or savings effected by the assessee in importing articles on the strength of import licences granted for exporting goods formed a part of its profits on export within the meaning of section 2(5)(i) of the Finance (No. 2) Act, 1962.
2. Whether the benefit of the provisions of section 2(5) of the Finance (No. 2) Act, 1962, on export profits can be allowed on export sales individually on which profit has been earned, or only if all export sales during the previous year have resulted in an overall profit.

Detailed Analysis:

Issue 1:
Question: Whether the profit earned or savings effected by the assessee in importing articles on the strength of import licences granted for exporting goods formed a part of its profits on export within the meaning of section 2(5)(i) of the Finance (No. 2) Act, 1962.

Findings:
- The assessee-company, M/s. Hindustan Lever Ltd., claimed deductions under section 2(5)(i) of the Finance (No. 2) Act, 1962, based on profits derived from exports.
- The company argued that savings from importing palm oil at cheaper rates due to export entitlements should be considered part of the profit from exports.
- The ITO rejected this claim, and the matter was appealed to the AAC, who accepted the company's contention.
- The Income Tax Appellate Tribunal (ITAT) disagreed, stating that the savings from import entitlements could not be treated as profit derived from exports. The Tribunal emphasized that the word 'derived' should be understood in its direct sense, not indirectly.
- The Tribunal relied on the Kerala High Court's decision in CIT v. Saraf Trading Corporation, which held that 'derived' implies a direct connection between the profit and the export activity.
- The High Court agreed with the Tribunal, emphasizing that the word 'derived' in income-tax law has a narrow meaning, requiring a direct derivation from the export activity.

Conclusion:
The High Court held that the profit earned or savings effected by the assessee in importing articles on the strength of import licences granted for exporting goods did not form a part of its profits on export within the meaning of section 2(5)(i) of the Finance (No. 2) Act, 1962. The word 'derived' implies a direct connection and not an indirect or remote connection.

Issue 2:
Question: Whether the benefit of the provisions of section 2(5) of the Finance (No. 2) Act, 1962, on export profits can be allowed on export sales individually on which profit has been earned, or only if all export sales during the previous year have resulted in an overall profit.

Findings:
- The Tribunal held that the benefit of section 2(5)(i) could be extended to individual export sales that resulted in profit, regardless of whether the total export business resulted in an overall profit.
- The Tribunal emphasized the language of the provision, which refers to profits derived from the export of 'any goods or merchandise,' not the export business as a whole.
- The High Court agreed with the Tribunal, stating that the statutory provision is clear and unambiguous. The benefit can be claimed on individual export sales that resulted in profit, even if the total export business resulted in a loss.

Conclusion:
The High Court held that the benefit of the provisions of section 2(5) of the Finance (No. 2) Act, 1962, on export profits can be allowed on export sales individually on which profit has been earned, subject to other conditions being satisfied, even if all the export sales did not result in an overall profit.

Final Judgment:
- Question No. 1: Answered in the negative and against the assessee.
- Question No. 2: The benefit of the provisions of section 2(5) of the Finance (No. 2) Act, 1962, on export profits can be allowed, subject to other conditions being satisfied, on export sales individually on which profit has been earned, although all the export sales did not result in an overall profit.

Order: Each party to bear its own costs of the reference.