1995 (3) TMI 134 - AT - Income Tax

Export License Sale Proceeds Deemed Capital Receipt Not Taxable

The Tribunal held that the sale proceeds of the export license were deemed a capital receipt and not taxable as business income. As there was no cost of ... Capital receipt - business income - profit-making apparatus - stock-in-trade - Exports (Control) Order, 1977 - licence as condition precedent - transferability restrictions on licences - capital gains - cost of acquisitionCapital receipt - business income - profit-making apparatus - stock-in-trade - Exports (Control) Order, 1977 - licence as condition precedent - transferability restrictions on licences - Whether the sale proceeds of the export licence are taxable as business income or constitute a capital receipt. - HELD THAT: - The Tribunal held that the assessee was not engaged in trading of export licences and therefore the licence could not be stock-in-trade. Under the Exports (Control) Order, 1977 a licence was a condition precedent for exporting garments; without the licence the assessee could not carry on its export business. Consequently the licence represented a valuable right and formed part of the profit-making apparatus or the very framework of the business. Transfer restrictions and the governmental scheme for allocation and limited transferability of licences further demonstrate an intention to discourage trading in licences. Where an asset representing the profit-making apparatus or source of income is sold, the receipt is capital in nature. Applying these principles to the facts, the Tribunal concluded that the amount realised on sale of the export licence could not be brought to tax as business income and deleted the addition made by the revenue. [Paras 7, 8, 11, 12]Amount realised from sale of the export licence is a capital receipt and not taxable as business income; the addition is deleted.Capital gains - cost of acquisition - capital receipt - Whether the capital receipt arising from the sale of the export licence is chargeable to capital gains tax. - HELD THAT: - The Tribunal examined the materials relating to the grant of the licence and found that the assessee had only paid non-refundable service charges and nominal council charges; there was no evidence of any cost of acquisition of the licence itself. Relying on the principle that where there is no cost of acquisition a capital receipt cannot be brought to tax as capital gains, the Tribunal held that the sale proceeds did not give rise to a chargeable capital gain. [Paras 13]No liability to capital gains tax arises because there is no cost of acquisition for the export licence.Final Conclusion: The Tribunal held that the sum realised on sale of the export licence is a capital receipt (not business income) and, having found no cost of acquisition, is not chargeable to capital gains tax; the addition of the amount in assessment year 1989-90 is deleted. Issues Involved:1. Taxability of sale proceeds of export quota as business income.2. Applicability of section 28(iiia) of the Income-tax Act.3. Determination of whether the sale proceeds constitute capital receipt.4. Liability for capital gains tax on the sale proceeds.Issue-Wise Detailed Analysis:1. Taxability of Sale Proceeds of Export Quota as Business Income:During the assessment proceedings, the Assessing Officer observed that the assessee, a private limited company engaged in the export of garments, did not export any garments during the year. The receipts consisted of duty drawback and sale of R.E.P. licence from earlier exports. The officer found that the assessee did not include Rs. 7,25,854 received from the sale of the export quota in the taxable income, arguing it was a capital receipt related to the capital structure of the business. The Assessing Officer disagreed, stating that the export entitlement was received in the regular course of business, thus constituting trading receipts and taxable income. This view was upheld by the CIT(A).2. Applicability of Section 28(iiia) of the Income-tax Act:The assessee argued that section 28(iiia) was inapplicable as it pertains to profits on the sale of licences under the Imports (Control) Order, 1955, while the case involved an export licence under the Exports (Control) Order, 1977. The assessee contended that the sale proceeds of the export licence were a capital receipt, as the licence was integral to the business structure. Various authorities were cited to support this, including cases where the sale of licences was considered a capital receipt.3. Determination of Whether the Sale Proceeds Constitute Capital Receipt:Upon reviewing the facts, authorities, and contentions, it was concluded that the assessee's business did not involve dealing in export licences, thus the export licence was not stock-in-trade. The Exports (Control) Order, 1977, required a licence for exporting garments, making the licence a capital asset. The Madras High Court in Seshasayee Bros. Ltd. and the Bombay High Court in CIT v. Automobile Products of India Ltd. supported the view that the sale of such licences constitutes a capital receipt. The Supreme Court in Kettlewell Bullen & Co. Ltd. and CIT v. Maheshwari Devi Jute Mills Ltd. further clarified that compensation for loss of a source of income is a capital receipt, not taxable income.4. Liability for Capital Gains Tax on the Sale Proceeds:The question of capital gains tax liability arose as a consequence of the receipt being a capital receipt. The assessee argued there was no cost of acquisition for the export licence, referencing CIT v. B. C Srinivasa Setty and Ganapathi Raju Jogi. It was found that the assessee paid non-refundable service charges and council charges to the Apparel Export Promotion Council, but these were not costs of acquisition for the licence itself. Therefore, following the Supreme Court's judgment, it was concluded that there was no liability for capital gains tax due to the absence of a cost of acquisition.Conclusion:The Tribunal held that the sale proceeds of the export licence were a capital receipt and not taxable as business income. Consequently, there was no liability for capital gains tax due to the absence of a cost of acquisition. The addition of Rs. 7,25,854 to the taxable income was deleted.