High Court rules on development rebate for fishing trawler; profits from import entitlements not export profits

Cochin Company Versus Commissioner Of Income-Tax, Kerala

Cochin Company Versus Commissioner Of Income-Tax, Kerala - [1978] 114 ITR 822, 1975 CTR 104 Issues Involved:
1. Applicability of Circular No. 27 (LIX-2) of 1955 and Circular F. No. 10/49-65-IT(AI) dated October 14, 1965, for development rebate.
2. Whether profits from the sale of import entitlements qualify as profits derived from the export of goods under section 2(5)(a)(i) of the Finance Act, 1966.
3. Whether the assessee qualifies as an 'industrial company' under section 2(7)(d) of the Finance Act, 1966.

Issue-wise Detailed Analysis:

1. Applicability of Circular No. 27 (LIX-2) of 1955 and Circular F. No. 10/49-65-IT(AI) dated October 14, 1965, for development rebate:
The Tribunal held that the assessee could not avail of the benefit of Circular No. 27 (LIX-2) of 1955 and Circular F. No. 10/49-65-IT(AI) dated October 14, 1965, for claiming development rebate on a second-hand fishing trawler purchased in December 1963. The Tribunal found that the circular dated July 6, 1955, provided for development rebate only in respect of second-hand ships purchased by Indian shipping concerns, and this position was not modified by the subsequent circular of October 14, 1965. The High Court upheld this finding, noting that the assessee, not being a shipping concern, could not claim the rebate based on these circulars. The Court emphasized that the circulars could not override the specific provisions of the Act, which did not allow for such a rebate in this case.

2. Whether profits from the sale of import entitlements qualify as profits derived from the export of goods under section 2(5)(a)(i) of the Finance Act, 1966:
The Tribunal agreed with the Income-tax Officer and the Appellate Assistant Commissioner that profits from the sale of import entitlements could not be considered as profits derived from the export of goods. The High Court supported this view, stating that there must be a direct nexus between the activity and the profit. The Court referenced the principle that profit can be said to have been 'derived' from an activity only if the activity is the immediate and effective source of the profit. Since the sale of import entitlements was not a direct result of the export activity, the profits from such sales did not qualify for the rebate under section 2(5)(a)(i) of the Finance Act, 1966.

3. Whether the assessee qualifies as an 'industrial company' under section 2(7)(d) of the Finance Act, 1966:
The Tribunal held that the assessee did not qualify as an 'industrial company' because it did not satisfy the requirement that at least 51% of its total income was derived from the processing of goods. The High Court disagreed with this interpretation, stating that the definition of 'industrial company' includes companies exclusively engaged in the specified business activities. The Court clarified that the Explanation to section 2(7)(d) was intended to apply only to companies engaged in multiple business activities. Since the assessee was solely engaged in the processing and export of fish, it met the definition of an 'industrial company' and was entitled to the concessional tax rate of 55% as provided in Item I(A)(2) of Paragraph F of Schedule I of the Finance Act, 1966.

Conclusion:
The High Court answered the first and second questions in the affirmative, against the assessee, and the third question in the negative, in favor of the assessee. The parties were directed to bear their respective costs. A copy of the judgment was ordered to be forwarded to the Appellate Tribunal as required by section 260(1) of the Act.