1997 (9) TMI 7 - SC - Income Tax

Export-linked import entitlements and palm-oil manufacturing profits: domestic sales held too remote for s. 2(5)(i) export benefit

The dominant issue was whether profits earned by an assessee from sale of goods manufactured using imported palm oil could be treated as 'profits and ... Entitlement to benefit of section 2(5)(i) of the Finance (No. 2) Act, 1962, - profit made in excess of what it would have otherwise made if it had to buy palm oil locally - HELD THAT:- The assessee's business income has to be computed in accordance with the provisions of section 28 to section 43C of the Income-tax Act. It cannot be said that the total income of the assessee as computed by the Income-tax Officer comprised any item which was profits and gains derived from export. The assessee's contention is that profits and gains made by sale of goods by the assessee were manufactured out of some imported raw material. It is incomprehensible how by mere utilisation of imported goods the assessee can be said to have derived profits and gains from the export of any goods or merchandise out of India. The assessee utilised all the import entitlements for import of palm oil which was consumed by the assessee in manufacturing of its own products. The products were sold for profit. The profit in this case arose out of sale of goods. That is the proximate cause of making of the profit. In the instant case, the immediate source of the profit is sale of goods. The export of other goods is not even the second degree but it has to be traced to an even more remote degree. The import was of palm oil. The import was possible because of earlier export of goods at a loss. In the chain of sequence the earlier export would be four degrees away - hence assessee is not entitled to allowance of deduction in respect of profits derived by it on specified export sales Appeals are, therefore, dismissed. Issues:1. Interpretation of section 2(5)(i) of the Finance (No. 2) Act, 1962.2. Determining if the assessee's total income includes profits and gains derived from export of goods.3. Application of section 28 to section 43C of the Income-tax Act in computing the assessee's total income.4. Comparison with relevant legal precedents regarding profits derived from export sales.5. Analysis of the genealogy of profit derived from the sale of goods.Detailed Analysis:1. The judgment involves the interpretation of section 2(5)(i) of the Finance (No. 2) Act, 1962, which allows deductions for profits and gains derived from the export of goods. The assessee claimed benefits under this section due to importing palm oil at a lower rate using export rewards, resulting in higher profits. However, the court examined whether this scenario qualified as profits derived from export, emphasizing that profit arises from the sale of goods, not from purchasing raw materials at a lower rate.2. The court analyzed whether the assessee's total income included profits and gains derived from export of goods, as required by the Finance Act for claiming deductions. It was noted that the assessee's income was solely from the sale of goods in India, with no part derived from exports. The court emphasized that the total income must be computed according to the Income-tax Act provisions, and the assessee's profits did not stem from export activities but from domestic sales of manufactured products.3. The judgment delved into the application of sections 28 to 43C of the Income-tax Act in computing the assessee's total income. It highlighted that the profits made by the assessee were from the sale of goods manufactured using imported raw materials, particularly palm oil. The court emphasized that the profit arose directly from the sale of goods in the local market, not from export activities or the importation of raw materials.4. Legal precedents were cited to compare the current case with past decisions regarding profits derived from export sales. The court discussed contrasting views from the Madras and Kerala High Courts on cases involving import entitlements and cash subsidies obtained through exports. It was concluded that the current case, involving the utilization of import entitlements for manufacturing products sold domestically, differed from cases involving the direct sale of import entitlements.5. The judgment analyzed the genealogy of profit derived from the sale of goods, drawing parallels to legal precedents such as the Privy Council decision in CIT v. Raja Bahadur Kamakhaya Narayan Singh. The court emphasized that the immediate source of profit was the sale of goods in India, not the export activities or the importation of palm oil. It rejected the argument that profits were derived from export-related activities, emphasizing the direct link between the sale of goods and the generated profit.In conclusion, the Supreme Court dismissed the appeals, affirming that the assessee's profits from the sale of goods in India did not qualify as profits derived from export sales. The judgment provided a detailed analysis of the legal provisions, precedents, and the genealogy of profit to support its decision.