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1997 Supreme(SC) 1166
SUPREME COURT OF INDIA
S. Saghir Ahmad, Suhas .C. Sen
HINDUSTAN LEVER LIMITED, APPELLANT
Versus
COMMISSIONER OF INCOME TAX, RESPONDENT.
Civil Appeals Nos. 1911-11-A of 1981 with Nos. 1912, 1913-13-A, of 1981 and 738 of 1982,
decided on September 2, 1997.
Headnote:
Income Tax Act,1961 - Section 28,28(iii-a), (iii-b) and (iii-c) to Section 43-C - Finance Act,1962 - Section 2(5)(i) - Imported palm oil was consumed internally by assessee for manufacturing other products - Particulars of products manufactured by assessee utilising palm oil have not been given in order of Tribunal - Contention of assessee is that oil which was purchased by assessee from foreign countries on strength of import entitlement was at a rate much lower than rate obtaining in Indian market for similar products - Since assessee paid a lower price for imported palm oil assessee made a larger profit than what it would have made had it purchased palm oil locally at a higher rate – Assessee therefore would be entitled to benefit of Section 2(5)(i) of Finance Act in respect of amount of profit it made in excess of what it would have otherwise made if it had to buy palm oil locally - Entire profit derived from sale of goods made by assessee arises out of sale of goods in India - No part of assessees income has not been derived from any export of its products - Section 2(5)(i) of Finance Act is attracted only when assessees total income includes any profit or gains derived from export of any goods or merchandise out of India - Assessee has simply consumed some imported palm oil in manufacturing products which were ultimately sold in local market - On behalf of assessee it has been pointed out that had assessee sold import entitlement its income would have been profit from export - That may or may not be position in law - Court do not have to decide this point in instant case - Here assessee has not sold anything which he has imported - He has imported palm oil which he has utilised in manufacturing other products - It may be that at a particular point of time palm oil was selling in a foreign country at a rate much lower than rate obtaining in local market - Held, Court fail to see how any of these three sub-sections come to aid of the assessee in any manner - Sub-section (iii-a) speaks of profits on sale of a licence granted under Imports Order (iii-b) speaks of cash assistance received or receivable by any person against exports and speaks of duty of customs which is not case here - These profits and gains arose out of export sales and specially in view of rules framed under Act assessee was entitled to get relief - Court can refer to decision of Privy Council in case of CIT - In that case it was pointed out that word derived is not a term of art - Its use in definition demanded an inquiry into genealogy of product - But Privy Council cautioned that inquiry should stop as soon as effective source is discovered - Question in that case was whether interest in respect of arrears of rent payable for land which was used for agricultural purposes would also be agricultural - Claim on behalf of assessee was that since rent was payable for agricultural land interest on delayed payment of such rent was also of agricultural character and was not taxable - It was explained by Privy Council at - Those who put it in this way say that such interest when received has its origin in tenancy because if there had been no tenancy there would have been no arrears of rent and if there had been no arrears of rent there would have been no statutory interest - Following this sequence of causes they say that it is obvious that interest in circumstances such as these must be classified as revenue derived from land - Interest on rent is revenue but in their Lordships opinion it is not revenue derived from land - It is no doubt true that without obligation to pay rent - Rent is obviously derived from land - There could be no arrears of rent and without arrears of rent there would be no interest - But affirmative proposition that interest is derived from land does not emerge from series of facts - All that emerges is that as regards interest land rent and nonpayment of rent stand together as causae sine quibus non - Source from which interest is derived has not thereby been ascertained - Word derived is not a term of art - Its use in definition indeed demands an enquiry into genealogy of product - But enquiry should stop as soon as effective source is discovered - In genealogical tree of interest land indeed appears in second degree but immediate and effective source is rent which has suffered accident of non-payment - Appeals Dismissed
ORDER
1. The assessment years involved in these matters are 1962-63 and 1963-64. The assessee is a manufacturing company. In the relevant years of account, it made large profits. The assessee had also exported groundnut oil which resulted in an apparent loss of Rs. 3.44 lakhs. However, for the exports made at a loss, the assessee was rewarded with import entitlements. It utilised the import entitlements in purchasing palm oil from foreign countries. The imported palm oil was consumed internally by the assessee for manufacturing other products. The particulars of the products manufactured by the assessee utilising palm oil have not been given in the order of the Tribunal. The contention of the assessee is that the oil which was purchased by the assessee from foreign countries on the strength of the import entitlement was at a rate much lower than the rate obtaining in the Indian market for similar products. Since the assessee paid a lower price for the imported palm oil the assessee made a larger profit than what it would have made had it purchased palm oil locally at a higher rate. The assessee, therefore, would be entitled to benefit of Section 2(5)(i) of Finance (No. 2) Act, 1962, in respect of the amount of profit it made in excess of what it would have otherwise made if it had to buy palm oil locally.
"2. (5)(i) An assessee being an Indian company or any other company which has made the prescribed arrangements for the declaration and payment of dividends within India or an assessee other than a company, whose total income includes any profits and gains derived from the export of any goods or merchandise out of India, shall be entitled to a deduction, from the amount of income tax and super tax with which he is chargeable for the assessment year commencing on the 1st day of April, 1962, of an amount equal to the income tax and super tax calculated respectively at one-tenth of the average rate of income tax and of the average rate of super tax on the amount of such profits and gains included in the total income."
2. The entire profit derived from the sale of goods made by the assessee arises out of sale of goods in India. No part of the assessees income has not (sie) been derived from any export of its products. Section 2(5)(i) of Finance (No. 2) Act is attracted only when the assessees total income includes any profit or gains derived from export of any goods or merchandise out of India. The assessee has simply consumed some imported palm oil in manufacturing the products which were ultimately sold in the local market. On behalf of the assessee, it has been pointed out that had the assessee sold the import entitlement its income would have been profit from export. That may or may not be the position in law. We do not have to decide this point in the instant case. Here, the assessee has not sold anything which he has imported. He has imported palm oil which he has utilised in manufacturing other products. It may be that at a particular point of time, palm oil was selling in a foreign country at a rate much lower than the rate obtaining in the local market. But purchasing something at a rate cheaper than the local market rate does not result in any profit. Profit arises from sale of goods. The question in this case is whether the assessees total income includes "any profits and gains derived from export of any goods or merchandise out of India". The total income has to be computed in accordance with the provisions of the Income Tax Act. The assessees business income has to be computed in accordance with the provisions of Section 28 to Section 43-C of the Income Tax Act. It cannot be said that the total income of the assessee as computed by the Income Tax Officer comprised of any item which was profits and gains derived from export. The assessees 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 impor
