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PETITIONER: EASTERN CHEMICAL AND MINERALS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT:       09/03/1999

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

JUDGMENT:

     Bharucha.  J.

     Under  appeal  is the decision of a Division Pench  of the  High  Court at Madras.  The Division Bench answered  in the  negative  and  in favour of the Revenue  the  following question:

     1.   "Whether on the facts and in the circumstances of the  case, the Appellate Tribunal was right in holding  that having  regard  to the Notification under Section 104(3)  of the  Income Tax Act.  1961 in S.O.  No.3210.  dated 8.8.1969 issued  by the Government the assessee was not liable to pay additional  tax  under  section 104 of the Income  Tax  Act. 1961  for  any  of  the assessment vears from  1972-  73  to 1974-75?

     2.   Whether on the facts and in the circumstances  of the case.  the Appellate Tribunal was right in holding, that the  amounts  realised by the assessee from the transfer  of its import licences constituted sales proceeds derived by it from  its export within the meaning of the Notification S.O. No-3210,  dated 8.8.1969 and therefore the assessee would be entitled  to  enjoy the exemption from the operation of  the provision of Section 104 of the Income Tax Act.  1961?"

     As  indicated in the questions, we are concerned  with the Assessment Years 1972- 73 to 1974-75.

     To appreciate what is involved, it is necessary to set out,  at  the outset, the provisions of Section 104  of  the Income Tax Act, 1961;  so far as they are relevant:

     "104.   Income-tax on undistributed income of  certain companies  -  (1) Subject to the provisions of this  section and of sections 105, 106, 107 and 107A, where the Income-Tax Officer  is  satisfied that in respect of any previous  year the  profits  and  gains  distributed as  dividends  by  any company  within the twelve months immediately following  the expiry  of  that previous year are less than  the  statutory percentage  of  the distributable income of the  company  of that  previous  year, the Income Tax Officer shall  make  an order  in writing that the company shall, apart from the sum determined  as payable by it on the basis of the  assessment under  Section  143  or  Section   144,  be  liable  to  pay income-tax at tlie rate of -

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     (a)  fifty  percent,  in  the case  of  an  investment company;

     (b)  thirty’ seven per cent, in the case of a  trading company, and

     (c)  twenty  five per cent, in the case of  any  other company.

     on  the distributable income as reduced by the  amount of dividends actually distributed, if any.

     (2)..................

     (3) If the Central Government is of opinion that it is necessary  or expedient in the public interest so to do,  it may,  by notification in the Official Gazette and subject to such  conditions  as  may be specified therein,  exempt  any class  of companies to which the provisions of tilis section apply from the operation of this section."

     A notification dated 8^ August, 1969 (No.S.0.3210) was issued  in  exercise  of  the powers  conferred  by  Section 104(3).  It read thus :

     "In  exercise  of the powers conferred by  sub-section (3)  of  section  104 of the Income-Tax Act.   1961  (43  of 1961),  and  in  partial  modification of  the  Ministly  of Finance  (Department of Revenue and Insurance)  Notification No.   S.0.2007  dated  the  6^   June.   1967,  the  Central Government,  being  of  opinion  that it  is  necessary  and expedient  in the public interest so to do.  hereby  exempts every  Indian  Company (not being an investment  company  as defined  in clause (ii) of section 109 of the Act) from  the operation  of  the  said  section 104.  in  respect  of  the previous  year relevant to the assessment year commencing on the I ’’ day of April, 1970, and any subsequent year :

     Provided  that  such Indian company, in the course  of its business.  -

     (a) exports any goods or merchandise out of India;  or

     (b)  performs any constructional operations or renders any service outside India;  or

     (c)  provides or makes available to any enterprise  or institution,  association, or other body established outside India,  any technical know-how being any patent,  invention, model design, secret formula or process, or similar property right,  or information concerning industrial, commercial  or scientific knowledge, experience or skill,

     and  the  sale proceeds of the exports referred to  in item  (a) or, as the case may be, the income accruing to the company  from the activities of its business referred to  in item  (b) or (c) is received in or brought into India by the company  or  on  its behalf ’a accordance with  the  Foreign Exchange Regulation Act, 1947 (7 of 1947), and any rules and orders made thereunder :

     Provided farther that the sale proceeds derived by the company  from the exports, if any.  referred to in item  (a) and  the gross receipts derived by it from the activities of its  business  referred to in item (b) or item (c) or  both.

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dunng  the  previous year, amount.  in the aggregate, to  50 per  cent  or  more  of the aggregate  amount  of  die  sale proceeds  and  all  other  gross ieceipis  of  the  brnines? during  the  previous year credited to the profit  and  loss account of th^ company."

     The assessee had.  by a letter dated 26^ March.  1969, written  by  the Government of India, Ministry of  Commerce, been  granted  permission  to export for the  purpose  of  a barter  deal.  ferro-silicon manufactured by the Mysore Iron and  Steel  Works,  Bhadravati, upto a  value  ofRs.52  lacs (f.o.b.).   Against this value the assessee was permitted to import  pesticides  as therein enumerated of a  total  value that  did not exceed Rs.22 lacs.  The assessee was  informed that the import licences that would be issued in this regard could  be endorsed in favour of actual users on the list  of the Director General Technical Development.

     The  assessee  claimed  that it was  entitled  to  the exemption  from  the  levy of  additional  income-tax  under Section  104(1)  read with the said notification.  For  this purpose,  it relied upon the income derived from the exports that  it had made as also upon the consideration that it had realised  for the assignment of the import licences obtained pursuant  to such exports.  The Income Tax Officer  rejected the  assessee’s contention.  The Commissioner of Income  Tax (Appeals)  accepted it, as also did the Income Tax Appellate Tribunal.  The Tribunal noted that it was common ground that if  the  realisation  from the transfer  of  the  assessee’s import  licences  were considered as sale  proceeds  derived from  exports,  they would constitute more than 50%  of  the aggregate  amount  of  the gross receipts credited,  to  the profit  and  loss account for all the assessment years.   It was  the  contention of the Revenue that the import  licence realisation could not be treated as such sale proceeds.  The Tribunal  relied upon a judgment of lhe Madras High Court in Commissioner  of  Income  Tax Madras-1 vs.   Wheel  and  Rim Company of India Limited (107 ITR 168) and held that, having regard to the integrated nature of the scheme, the

     import  licence  realisation  by  the  assessee  would constitute  sale proceeds derived by it from exports  within the meaning of the said notification.

     .rising  out  of  the  judgment   and  order  of  the Tribunal,  the  questions quoted above were referred to  the High  Court.   The  High  Court  found,  lightly,  that  the judgment  in  the  earlier  case   referred  to  above   was distinguishable on facts.  It analysed the said notification and  held that an assessee would get its benefit only  after it  exported  goods  out  of India  and  received  the  sale proceeds  of  the exports in India.  The receipts  from  the transfer  of import licences by the assessee to actual users in  India  did  not  fall within the  meaning  of  the  said notification.  Admittedly, the import licences had been sold by  the assessee in India and the sale proceeds thereof  had been  realised in India.  The profit realised on such  sales could  not be considered as a part of export sale  proceeds. Accordingly,   the  High  Court   reversed  the   Tribunal’s conslusion.

     What is involved in this appeal is the construction of the  said  notification  and,   particularly,  the  provisos thereof.  The notification exempts every Indian company from the operation of Section 104 in respect of the previous year

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relevant  to  the assessment year commencing on  I**  April. 1970 and in subsequent years, and we now quote only what are the  relevant  words  thereof:  "Provided that  such  Indian corr.pany in the course of its business exports any goods or merchandise  out  of  India  and the sale  proceeds  of  the exports is received in or brought into India by the comp«iny cr  on  ite behalf in accordance with the  Foreign  Exchange Regulation  Act.  1947 (7 of 1947) and any rules and  orders made  thereunder;   provided further that the sale  proceeds derived by the company from

     the  exports  during the previous year amount, in  the aggregate,  to  50% or more of the aggregate amount  of  the sale  proceeds and all other gross receipts of the  business during  the  previous year credited to the profit  and  loss account of the company."

     For  the  purposes  of determining  whether  the  sale proceeds  derived by an assessee from exports amount to  50% or  more  of its aggregate gross income what is to be  taken into  account are "’the sale proceeds of the exports";  that is  to  say, the export "of any goods or merchandise out  of India".   Secondly, the sale proceeds of the exports have to be  received  in  or brought into India in  accordance  with FERA.   What  is  contemplated  is the export  of  goods  or merchandise  out  of  India, such export to be paid  for  in India  or abroad.  If paid for abroad, such amount has to be brought  into  India  in accordance with the  provisions  of FERA.   Clearly,  the consideration received by an  assessee for  assignment of import licences received pursuant to  the exports  cannot  be  taken into account for the  purpose  of determining  whether  the  sale   proceeds  derived  by  the assessee  from  exports  amount  to  50°o  or  more  of         its aggregate gross income.

     No  doubt,  the barter deal entitles the  assessee  to import licences.  The assessee is further entitled to assign these import licences to actual users, but the consideration that  it receives in regard to such assignment falls outside the  scope of the two requirements of the said notification. It  may  be  that.   as argued by learned  counsel  for  the assessee.   the  import licences arc intended to  compensate the  assesses for any loss that it has incurred by reason of export at competitive international rates.  Nonetheless, for the  purposes  of the said notification,  the  consideration received by the assessee upon assignment of such

     import  licences does not fall within the requirements of  the  said notification as analysed above and  cannot  be taken into account in determining whether 50% or more of the assessee’s  income  is  derived from the  sale  proceeds  of exports.

     We  affirm the judgment of the High Court and  dismiss the appeal with costs.