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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
Mohammad Sharif and S.A. Hakeem, JJ.
Sterling Foods —Appellant
Vs.
Commissioner of Income Tax, Karnataka —Respondent
Income Tax Reference Case Nos. 9 and 10 of 1982
Decided on : 01-06-1984
I.T. Act, 1961 - Import Entitlements - s. 80HH - 80HH(1)
Fact of the Case:
The assessee firm was engaged in processing and export of prawns and other sea-foods. The assessee earned import entitlements and sold them to others, resulting in profits. The question was whether the receipts from the sale of import entitlements could be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income Tax Act, 1961.
Finding of the Court:
The court held that the profits and gains derived from the sale of import entitlements were not entitled to relief under s. 80HH as they were not directly derived from the industrial undertaking of the assessee.
Issues: 1. Whether the receipts from the sale of import entitlements could be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income Tax Act, 1961?
Ratio Decidendi: The profits and gains must have been derived from the industrial undertaking itself, and not merely have a commercial connection with it. The source of the profits must be the industrial undertaking, and not a scheme or activity indirectly related to the undertaking.
Final Decision: The court answered the question in the affirmative and against the assessee, holding that the assessee was not entitled to relief under s. 80HH in respect of the profits and gains derived from the sale of import entitlements.
Jagannatha Shetty, J.—The common question referred in these two references under s. 256(1) of the I.T. Act, 1961 (shortly called "the Act"), runs as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80HH of the Income Tax Act, 1961 ?"
2. The facts giving rise to the question are as follows :
3. During the assessment years 1975-76 and 1976-77 the assesses-firm was engaged in the processing and export of prawns and other sea-foods. The assessee also earned some import entitlements granted by the Central Government under the Export Promotion Scheme. It is said that the person who has secured the import entitlements could either use the same or sell it to others. The assessee sold such import entitlements and earned some profits. The total income of the assessee for the years in question included the years in question included the sale proceeds of such import entitlements. The ITO allowed relief under s. 80HH of the Act in respect of the entire receipts inclusive of the sales proceeds of the import entitlements.
4. The Commissioner in exercise of his power under. 263 of the Act was of the opinion that the assessee was not entitled to the relief under s. 80HH in respect of the receipts from the sale of the import entitlements. He, accordingly, set aside the assessment and directed the ITO to re-do the accordingly, set aside the assessment and directed the ITO to re-do the assessment after excluding the proceeds of the sale of import entitlements.
5. The assessee preferred appeals before the Appellate Tribunal with the contention that the import entitlements were secured in the course of the business in the industrial undertaking and the profits derived therefrom must, therefore, fall for relief under s. 80HH of the Act. The Tribunal did not accept that contention. While following the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, AIR 1978 SC 1099, the Tribunal rejected the contention urged and consequently dismissed the appeals.
6. Section 80HH of the Act, under which the relief is claimed by the assessee, reads :
"80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas. - (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof.
(2) This section applies to any industrial undertaking which fulfills all the following conditions, namely :
(i) it has begun or begins to manufacture or produce articles after December 31, 1970, in any backward area;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area :
Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section."
7. The entitlement of an assessee for relief under s. 80HH is in respect of the profit derived from his undertaking located in specified backward areas. There is no dispute that the assessee's undertaking has been located in the backward areas. The answer to the question before use, "derived from" used in s. 80HH.
8. The word "derived" has received judicial interpretation apart from its narrow meaning in the di
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