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PETITIONER: COMMISSIONER OF INCOME TAX, KARNATAKA

       Vs.

RESPONDENT: STERLING FOODS, MANGALORE

DATE OF JUDGMENT:       15/04/1999

BENCH: S.P.Bharucha, R.C.Lahoti,

JUDGMENT:

BHARUCHA.J.

       The Judgment and order under appeal  (190  ITR  274) was  pronounced  by  a  Division Bench of the Karnataka High Court on a reference made by the assessee, and  the  Revenue is in  appeal.    The  High  Court answered in favour of the assessee the following question:                 "Whether,    on    the    fact    and         circumstances  of  the case, the Tribunal was         justified in law in holding that the  receipt         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?"

       The identical question had arisen in respect of  the same  assessee  for  an  earlier year and the High Court had then answered the question against  the  assessee  (150  ITR 293).   The  assessee  had  not  carried  the matter further Ordinarily,  therefore,  the  Division  Bench  hearing   the assessee’s  appeal  for the later assessment year would have been bound by the earlier decision.  However, it  chose  not to do so relying upon the fact that Section 28 of the Income Tax  Act,  1961  had  been  amended  in the meanwhile by the Finance Act, 1990  with  effect  from  1st  April,  1962  by insertion  of  clause  (iiia)  and clause (iiib) with effect form April 1, 1967, which read as follows:

       (iiia)  profits  on sale of a licence         granted under the  Imports  (Control)  Order,         1955,  made  under  the  Imports  and Exports         (Control) Act, 1947 (18 off 1947).

               (iiib)  cash assistance (by  whatever         name  called)  received  or receivable by any         person against exports under  any  scheme  of         the Govt. of India.

       As we shall point out, these amended provisions have no relevance to the point at issue and the High Court was in error  in  relying  thereon  and  not  following the earlier judgment.

       The facts are :

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               The  assessee  firm  is  engaged   in         processing  prawns  and other sea food, which         it  exports  during  the   Assessment   Years         1975-76 and  1976-77.    It  also earned some         import entitlements granted  by  the  Central         Govt.  under an Export Promotion Scheme.  The         assessee  was  entitled  to  use  the  import         settlements  itself  or  sell  the  same   to         others.  It sold the import entitlements that         it had  earned  to  others.  Its total income         for  the  aforementioned   assessment   years         included  the  sale  proceeds for such import         entitlements  and  it  claimed  relief  under         Section  80HH  of  the Act in respect also of         the sale proceeds of the import entitlements.

       Section 80HH, so far as it is relevant,  read         at all relevant times thus:

               "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, he allowed, in computing the         total  income  of  the  assessee, a deduction         from such profits and against  of  an  amount         equal to twenty per cent thereof."

       To  analyses  the provision so far as it is relevant here, if the gross total income of an assessee includes  any profits  and  gains  derived from an industrial undertaking, the assessee is entitled to be allowed, in  the  computation of  his total income, a deduction from the profits and gains derived from the industrial undertaking of an  amount  equal to 20% thereof.

       The  question,  therefore,  was  whether  the income derived  by  the  assessee  by  the  sale  of   the   import entitlements was profit and gain derived from its industrial undertaking of  processing  sea food.  The Division Bench of the High Court came to the conclusion that the income  which the assessee had made by selling the import entitlements was not  a  profit  and  gain  which  it  had  derived  from its industrial undertaking.  For that purpose,  it  relied  upon the  decision  of  this  Court  in  Cambay  Electric  Supply Industrial Co.  Ltd.  vs.  CIT (113 ITR 84).  It  was  there held  that  the  expression  "attributable  to" was wider in import than the expression "derived from".   The  expression of  wider  import, namely, attributable to was used when the legislature intended to cover receipts  from  sources  other than the actual conduct of the business.  The Division Bench of  the  High  Court  observed that to obtain the benefit of Section 80HH the assessee had to establish that the  profits and  gains  were derived from its industrial undertaking and it was just not sufficient that a commercial connection  was established  between  the  profits earned and the industrial undertaking.  The industrial undertaking itself  had  to  be the source  of  the  profit.  The business of the industrial undertaking had  directly  to  yield  that  profit.      The

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industrial  undertaking  had the direct source of the profit and not a means to earn any other  profit.    Reference  was also  made  to the meaning of word "source", and it was held that the import entitlements that the  assessee  had  earned were awarded  by  the  Central  Govt.    under the Scheme to encourage exports.  The source referable to the profits  and gains  arising  out  of  the  sale  proceeds  of  the import entitlement was, therefore, the Scheme of the Central  Govt. and not the industrial undertaking of the assessee.

       The  question  arose,  as  aforestated again for the Assessment Year 1979-80 and the Division Bench of  the  High Court  then  basing  itself  on  the amendment to Section 28 referred to above, decided otherwise. The  relevant  portion of the judgment and order under appeal reads thus :

               "We have already extracted  what  was         decided by  this  court.    It cannot be said         that that decision is incorrect.    What  has         happened  is  that that decision as a binding         precedent is of little value in the light  of         amendments     made     to     section     28         retrospectively.  If it is not binding on us,         then at the time we are called upon to answer         a  question  for  the  subsequent  assessment         year,  we  must look at the law as it was, at         the relevant time that is  relevant  for  the         assessment year 1979-80.  Both the amendments         have   been   effected   from   1962-63   and         therefore, in 1979-80,  the  income  received         from the  Govt.    of India by sale of import         licences and incentives for export was income         within the meaning of Section  28  assessable         to  tax  as  income from profits and gains of         business or profession.  It is in that  light         that we have to answer the question."

It appears to us that the later Division Bench did not fully appreciate  what had been held by the earlier Division Bench and to what had so held  the  provision  of  Section  28  as amended made  no  difference.    Therefore, in our view, the judgment under appeal would have to be set aside in as  much as it did not follow an earlier binding judgment of the High Court itself.

       But  learned counsel for the assessee submitted that he was entitled to urge  since  this  matter  related  to  a different  assessment  year, that the earlier Division Bench judgment of the High Court was erroneous.  Since we  are  of the  view that the earlier judgment was not erroneous, it is not necessary to decide whether the assessee could so urge.

       In learned counsel’s  submission,  the  profits  and gains   were   derived   from   the   assessee’s  industrial undertaking and were, therefore, entitled to  the  deduction prescribed by  Section  80HH.    Learned  counsel  cited the judgment  of  the  Madras  High  Court  in  Commissioner  of Income-Tax, Madras-I  vs.    Wheel  and Rjn Company of India Ltd.  (107 ITR 168) which, no  doubt,  is  squarely  on  the point and  holds  in  favour of the assessee.  To quote what would be fully explanatory, "In the fast 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

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profits and gains derived from the export of cycle rims even on the basis of any theory of proximity."

       Our attention was also invited to  the  judgment  of this Court in National Organic Chemical Industries Ltd.  vs. Collector of  Central  Excise,  Bombay  (106  STC 467).  The relevant portion of the judgment is contained in  paragraphs 10,11,& 12 and they read thus:

       "10. The dictionaries state that  the         word "derive" is usually followed by the word         "from",  and  it  means : get to trace from a         source; arise from, originate  in;  show  the         original or formation of.

               11.   The  use  of the words "derived         from" in  item  11-AA(2)  suggests  that  the         original  source  of  the  product  has to be         found.  Thus, as a matter of  plain  English,         when it is said that one word is derived from         another,  often  in another language, what is         meant is that the  source  of  that  word  is         another word,  often in another language.  As         an  illustration,  the  word  "democracy"  is         derived  from  the  Greek  word  "demos", the         people and most dictionaries will  so  state.         That  is  the  ordinary  meaning of the words         "derived from" and  there  is  no  reason  to         depart from that ordinary meaning here.

               12.   Crude  petroleum  is refined to         produce raw naphtha.  Raw naphtha is  further         refined,  or  cracked  to  produce  the  said         products.  This  is  not  controverted.    It         seems  to  us  to make no difference that the         appellants buy the raw naphtha  from  others.         The  question  is  to be judged regardless of         this  and  the  question   is   whether   the         intervention of the raw naphtha would justify         the  finding  that  the said products are not         derived from  refining  of  crude  petroleum.         The  refining  of  crude  petroleum  produces         various products at different  states.    Raw         naphtha is  one  such  stage.    The  further         refining, or cracking of raw naphtha  results         in the said products.  The said products must         therefore,  be held to have been derived from         crude petroleum."

We  do  not think that the source of the import entitlements can  be  said  to  be  the  industrial  undertaking  of  the assessee.  The source of the import entitlements can, in the circumstances, only be  said  to  be  the  Export  Promotion Scheme   of   the   Central   Govt.  whereunder  the  export entitlements  become  available.  There  must  be  for   the application  of  the  words  "derived  from", a direct nexus between  the  profits   and   gains   and   the   industrial undertaking. In the instant case the nexus is not direct but only   incidental.   The   industrial   undertaking  exports processed sea food. By reason of  such  export,  the  Export Promotion   Scheme  applies.  Thereunder,  the  assessee  is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot,  in  our  view  be  held  to constitute  a  profit  and  gain derived from the assessees’

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industrial undertaking.

       In the result, the appeals are allowed. The judgment under appeal is set aside. The question is answered  in  the affirmative  and  in  favour  of the Revenue. No order as to costs.