TMI Blog1994 (10) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... was derived from the assessee's manufacturing activity for the purpose of deduction of relief under section 80J of the Income-tax Act, 1961, in our opinion, has to be answered against the assessee. Before, however, we advert to the statement of the case and give reasons for the above opinion, we propose to set out the specific provisions of law in this behalf. The Indian Income-tax Act, 1922, had and in the same way, the Income-tax Act, 1961, has envisaged that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year or previous years, as the case may be, of every person ; provided that where by virtue of any provision of the Act tax is to be charged in respect of the income of a period other than the previous year, tax shall be charged accordingly and also contemplated in various sections how income has to be assessed and realised from the assessee. With respect to such, however, of the tax-payers who deserve exemption or relief by way of tax deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an industrial undertaking or a ship or the business of a hotel, deductions can be allowed and says where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or a business of a hotel, there shall, in accordance with and subject to the provisions of the section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year. The petitioner herein claimed deduction to the extent envisaged under section 80J of the Act at the rate of six per cent. per annum on the capital in respect of the amount in a sum of Rs. 5,70,704 as income derived from his business. The income, it is not in dispute, was derived from the sale of the import licences obtained as an incentive on the export of shrimps. We are tempted to refer to the statement of the case by the Tribunal, for knowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Merchant exporters and manufacturer-exporters may be allowed, on request, to transfer import replenishment licences issued to them under the Import Policy for Registered Exporters, in favour of the State Trading Corporation or the Minerals and Metals Trading Corporation, or an eligible export house. The requests for transfer should be supported by a written consent of the proposed transferee." The Income-tax Officer who was the first to consider the claim of deduction held that the profit from the sale of the import licences could not be said to be derived from the industrial activity of processing of prawns and sale under section 80J(1) of the Act. In the appeal, the Appellate Assistant Commissioner held that so long as it was not shown that the income was directly the profits derived from the industrial activities the relief was not available and thus affirmed the order of the Income-tax Officer. The assessee preferred an appeal before the Tribunal and the Tribunal in its attempt to give a meaning to the word "derived from the business" within the meaning of section 80J embarked upon a study of the meaning of the expression "derived from" should receive and concluded in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under : 'Derived.--The word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. (See Indian Income-tax Act, 1922, s. 2(1)(a) : CIT v. Kunwar Trivikram Narain Singh AIR 1965 SC 1836 at page 1838 ; [1965] 57 ITR 29). The expression "any income derived from property held under trust", means the property must be the effective source from which the income arises. It is not sufficient that the property should be indirectly responsible for the income. The income must directly and substantially arise from the property held under trust. (See Indian Income-tax Act, 1922, A section 4(3) : J. K Trust v. CIT/CEPT [1953] 23 ITR 143 (Bom)). The Departmental representative submitted that the terms 'derived from' in section 80J(1) implied that the assessee's direct sale of goods should be the immediate and direct source for the purpose of section 80J, the sale of import licences being a different activity. The Departmental B representative thus supported the Income-tax Officer's order. The Tribunal found from the facts stated above that an exporter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goods under the Special Exports Promotion Scheme to the extent of the value mentioned therein, it would not have obtained the entitlements. It is thus clear that the entitlements sprang up or came into being because of the business which the assessee was doing. The dictionary meaning of the word "arise" given in the Chambers' Twentieth Century Dictionary as originate, to come into being, leaves no room for doubt that income from import entitlements had actually arisen from the assessee's business.' The dictionary meaning of 'derived from' extracted above, viz., to have one's origin from, is almost identical with the dictionary meaning of 'arise' referred to in the above observation of the High Court. We are hence of the view that applying the ratio of the above High Court decision, the sale proceeds of import entitlements in the assessee's case also should be taken as 'derived from' or arising from the assessee's business which is an industrial undertaking for processing seafoods. We may also refer to the Supreme Court decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. Here the Supreme Court, while holding that the expression 'attributable to' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 and several other authorities. We pick up, however, the judgment of the Privy Council in the case of CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 in which case the assessee claimed exemption of the interest on earlier sufferance payable in respect of the land used for agricultural purposes under the provisions of the Indian Income-tax Act, 1922. The Privy Council noted that there was diversity of judicial opinion as to the correct answer to the question whether such interest, rent or revenue was derived from land. In its words : "There is diversity of judicial opinion ,as to the correct answer to this question. The High Court of Calcutta (cf. In re Manager, Radhika Mohan Roy Wards Estate, In re [1940] 8 ITR 460) and the High Court of Madras in Al. Mr. V P. Pethaperumal Chettiar v. CIT [1943] 11 ITR 532 have answered this question in the negative. The High Court of Allahabad in Mst. Sarju Bai v. CIT [1947] 15 ITR 137 and the High Court of Patna in Maharajadhira a Kurnari Srimathi Lakshmi Daiji v. CIT [1944] 12 ITR 309 have answered it in the affirmative. The differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haya Narayan Singh [1948] 16 ITR 325, however, said, "the interest clearly is not rent" and "equally clearly the interest on rent is revenue", but in their Lordships' opinion it is not revenue derived from land. Speaking as to the word "derived", their Lordships said : " The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition. There is no commercial connection between the interest and the rented land and the. effective source--not land--has become apparent." In Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the Supreme Court considered a claim to special deduction under section 80E of the 1961 Act as it stood prior to the amendment by the Finance (No. 2) Act of 1967 arising as a result of the sale of old machinery and building. The Supreme Court took notice of the words in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT [1935] 3 ITR 237 and (2) CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 and concluded in these words : "In Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 (PC), the facts were that the assessee had conveyed the greater portion of his estate. The consideration for the transfer was, inter alia, an annual payment of Rs. 2,40,000 to the assessee for life. The Privy Council held that this 'annual payment was not agricultural income as it was not rent or revenue derived from land, but money payable under a contract imposing a personal liability on the covenantor the discharge of which was secured by a charge on land'. The Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 construed the word 'derived' as follows : 'The word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncil and the judgments of this court cited above that if it is held in this case that the source of the allowance or pension is the arrangement arrived at in 1837, then the income cannot be held to be derived from land within the meaning of the definition in section 2(1)(a) of the Act. It seems to us that in this case, the source of income is clearly the arrangement arrived at in 1837, and, therefore, it is not agricultural income as defined in the Act. " It has to be held in view of the above that the expression "derived from the business" in section 80J should receive a restricted meaning and if it is an income directly relatable to the business activities of the assessee, it will be deemed to be derived from the business of the assessee. A Bench of the Kerala High Court in the case of Cochin Co. v. CIT [1978] 114 ITR 822 considered a case of the sale of import entitlements like the case of the assessee and proceeded "as we have to take notice of the judgment of the Privy Council in the case of CIT v. Roja Bahadur Kanakhaya Narayan Singh [1948] 16 ITR 325 and Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC)" and said : "Profit or gain can be said to have been 'derived' from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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