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TMI Blog1983 (1) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... e questions in this reference relate to calculation of tax deduction allowance under s. 2(5) of the Finance (No. 2) Act, 1962. The ITO in calculating the value of the turnover of exports for computation of qualifying income under r. 2(3) of the Income-tax (Determination of Export Profits) Rules, 1962, took into account only the value of goods exported as per invoice amounting to Rs. 8,25,668. The assessee-company submitted before the ITO that three further items should be taken into account in calculating the value of the turnover of exports. These items are: (i) Rs. 1,41,402, being drawback of customs duty, (ii) Rs. 86,526, being refund of excise duty, and (iii) Rs. 28,81,308, being value of import entitlements. The ITO refused to take int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k of customs duty, refund of excise duty and premium gain on value of yarn entitlements to which the applicant-company is entitled are added to the invoice, price's of the, exported goods, the assessee would be getting double advantages as these indirect benefits have already formed part of the total profits of the applicant-company and erred in concluding that the applicant-company wanted them to be included again in the turnover of such export ? Section 2(5)(i) of the Finance (No. 2) Act, 1962, reads as follows 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part and included in the total income (as reduced by the aggregate of the amount of any portion thereof on which income-tax or super-tax is not payable and the amount in respect of which a deduction of income-tax or super-tax has been granted under any provision of the Act), the fraction being proportional to the value of the turnover of such exports in relation to the total turnover of the business of which such exports form a part ........" The entitlement of an assessee-company for a deduction from the amount of income-tax and super-tax under s. 2(5) of the Finance (No. 2) Act is 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 rate of super-tax on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received and receivable as a result of the company's trading, whether normal or abnormal. On this view, various lump sums received by the company in discharge of war-time contracts from Government departments representing payment by them for articles taken over and for hardship suffered by the company as a result of the termination of the contracts were held to be part of the turnover of the company's annual business. It is not in dispute before us that the amounts received by the assessee-company as drawback of the customs duty and as refund of excise duty have been included in the computation of profits and gains of business of the assessee. It is also not in dispute that these items were received by the company only because of the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have otherwise incurred in export business and the value of import entitlements must, therefore, be added in the calculation of the value of the turnover of exports. Now import entitlements are of two varieties, transferable and non-transferable. In the case of transferable import licences, the goods imported can be sold in the market by the importer In the case of non-transferable import-licences, the goods have to be utilised by the importer himself., But, on principle, there is hardly any difference. The profits and gains resulting in both the cases would be included in the total income. The question before us is whether the source of such income can be said to be the export business. In other words, whether the income resulting from im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it was because of the export business that the assessee got import licences, yet the connection of the income resulting from import entitlements to the export business is indirect and the direct source of this income is the import business. The amount of Rs.28,81,308, being profits arising from import entitlements cannot, therefore, be included in the value of the turnover of exports under r. 2(3). It is true that neither r. 2(1) nor r. 2(3) uses the word " derived ", but the rule has to be construed, as earlier stated, in the light of the object of s. 2(5)(i). A rule made under s. 2(5)(ii) for a computation of the qualifying income cannot enlarge the tax deduction allowance by widening the scope of the profits and gains of export busines ..... X X X X Extracts X X X X X X X X Extracts X X X X
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