Commissioner Of Income Tax, Madras I v. Wheel And Rim Company Of India Limited

Ismail J.

The Income tax Appellate Tribunal, Madras Bench, under section 256(1) of the Income tax Act, 1961, has referred the following question of law for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee was entitled to rebate under the provisions of clause 2(5)(a) of the Finance Act, 1966, on the cash subsidy of Rs. 1, 60, 717 received from the Engineering and Export Promotion Council and on the sum of Rs. 4, 83, 856 representing the income derived from sale of import entitlements "

The short facts which gave rise to the above reference are these :

The assessee is a company carrying on business in the manufacture and sale of cycle rims. Consequently, the assessee is engaged in the production of engineering goods and some of the goods are exported abroad. The Government had introduced more than one scheme to encourage such exports. Under one of the schemes, the assessee became entitled to a sum of Rs. 1, 60, 717 from the Engineering Export Promotion Council, and obviously this amount was paid to the assessee by way of compensating the loss it suffered by exporting goods abroad rather than selling the goods in this country itself. This sum has been included in the receipts which are taken into account for arriving at the business income. From the very nature of the case, the cash subsidy referred to above related to the quantity of goods exported by the assessee.

Under another scheme, the assessee became entitled to import licence. In this particular case, the assessee was granted import licence, on the basis of his export performance, for dates. The assessee sold the import licence and made a profit of Rs. 4, 83, 856. In the course of the assessment year 1966-67, the assessee claimed rebate on the value of exported goods and on the two receipts referred to above based on the provisions of section 2(5)(a) of the Finance Act, 1966. According to the assessee, the net profit on exports had amounted to Rs. 90, 986 arrived at as follows and rebate was admissible thereon while computing the tax on the total income :

Gross export turnover : 6, 51, 112.61

Less :

Freight charges on export : 1, 52, 154.09

Commission on exports : 7, 424.36

1, 59, 578.45

4, 91, 534.16

Less :

Cost of sales (Exports): 9, 98, 216.91

Proportionate administration overheads : 75, 356.63

10, 73, 573.54

Loss

5, 82, 039.38

Add :

Subsidy received from export pool :Rs. 72, 937.50

Less : Contribution to the pool Rs. 44, 484.60

28, 452.90

Cash subsidy from Engineering Export Promotion Council : 1, 60, 716.79

Revenue from import entitlements : 4, 83, 856.04

6, 73, 025.73

Profit on exports 90, 986.35

The Income tax Officer held that the cash subsidy of Rs. 1, 60, 717 and profits from sale of import entitlements amounting to Rs. 4, 83, 856 did not constitute the profits and gains derived by the assessee by export of goods within the meaning of clause 2(5)(a) of the Finance Act, 1966

For the purpose of understanding the point involved it is necessary to refer to the statutory provisions in this behalf. The Finance Act of 1966 by section 2(5)(a)(i) provided as follows :

"2. (5)(a) In respect of any assessment for the assessment year commencing on the 1st day of April, 1966, in the case of an assessee being a domestic company or an assessee other than a company

(i) where his total income includes any profits and gains derived from the export of any goods or merchandise out of India, he shall be entitled to a deduction, from the amount of income tax with which he is chargeable, of an amount equal to the income tax calculated at one tenth of the average rebate of income tax on the amount of such profits and gains included in his total income. "

Section 2(5)(d) stated :

" The amount of any profits and gains derived from the export of any goods or merchandise out of India in respect of which deduction of income tax is admissible under sub clause (i) of clause (a) shall be computed in accordance with the rules made by the Board in this behalf." *

Pursuant to this power conferred on the Board, the Central Board of Direct Taxes has made rules called the Income tax (Determination of Export Profits) Rules, 1966. Rule 2(2) of these Rules with which alone we are concerned runs as follows :

"Where in the opinion of the Income tax Officer it is possible to ascertain the profits and gains on such exports, the qualifying income shall be taken to be the amount by which the profits and gains so ascertained in accordance with the provisions of the Income tax Act, 1961 (43 of 1961) (hereinafter referred to as the Act), and included in the total income exceed the aggregate of the amount of any portion thereof on which income tax is not payable and the amount in respect of which a deduction of income tax has been granted under any of the provisions of the Act." *

The question that arises for consideration is the combined effect of these provisions. In the first place, it is worthwhile pointing out that by virtue of section 2(5)(d) of the Finance Act, 1966, the profits and gains derived from the export mentioned in section 2(5)(a)(i) have necessarily to be computed in accordance with the rules made by the Board in this behalf and there is no other method of computing that income. Rule 2(2) of the Income tax (Determination of Export Profits) Rules, 1966, made by the Board expressly states that the qualifying income shall be taken to be the amount by which the profits and gains so ascertained in accordance with the provisions of the Income tax Act, 1961. Consequently, the profits and gains derived from export of any goods or merchandise referred to in section 2(5)(a)(i) and 2(5)(d) have to be ascertained in accordance with the provisions of the Income tax Act, 1961. If it is so ascertained, the two amounts referred to above will necessarily constitute business receipts referable to the export of cycle rims. In the present case, the subsidy received from the Engineering Export Promotion Council is directly relatable to the loss which the assessee sustained by exporting the cycle rims. The import entitlement is again directly referable to the export performance, i.e., the quantum of export made by the assessee and, therefore, the profits and the receipts of the import entitlement will also be receipts referable to the exports. Once it is found that the profits and gains derived from the export have to be ascertained in accordance with the provisions of the Income tax Act, 1961, and according to those provisions these two receipts have to be treated as business receipts relatable and referable to the export mentioned above, there is no escape from the conclusion that these two receipts will have to be taken into account in computing the profits of the assessee derived from the export of cycle rims.

Mr. J. Jayaraman, learned counsel for the department, sought to contend that the words profits and gains derived from the export of any goods or merchandise occurring in section 2(5)(a)(i) and 2(5)(d) clearly restrict the scope of the profits and gains by showing that the export of any goods or merchandise must be the proximate cause of the profits or gains. In our opinion, this argument is without substance. In the first place, as we pointed out already, the receipt by way of subsidy and the receipt by way of the profits due to the sale of import entitlement are directly referable to the export of the cycle rims made by the assessee and consequently they can be said to be profits and gains derived from the export of cycle rims even on the basis of any theory of proximity. Secondly, by virtue of the fact that the amount of profits and gains derived from the export have to be ascertained only in accordance with the provisions of the Income tax Act, 1961, and not independent of it, in view of the provisions contained in section 2(5)(d) of the Finance Act, 1966, and rule 2(2) made by the Central Board of Direct Taxes pursuant to section 2(5)(d), these two receipts have to be treated as profits referable to or derived from the said export. Under these circumstances, we answer the question referred to us in the affirmative and in favour of the assessee. The assessee is entitled to its costs. Counsels fee is fixed at Rs. 500.