TMI Blog1981 (5) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... nts pertaining to the export business, is unable to establish that the export business resulted in any profit whatsoever. The Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal ") has negatived the claim of the assessee-company on the ground that the condition precedent for the grant of deduction (earning of profit in export business) is not satisfied. In the course of assessment for the assessment year 1964-65 the assessee-company contended that its total direct and indirect export sales came to Rs. 1,85,69,325. Out of these sales, sales worth Rs. 25,82,240 were direct export sales. It is not in dispute that sales other than such direct export sales do not qualify for rebate under s. 2(5)(a)(i) of the Finance Act, 1964. In other words, the claim which was made by the assessee-company before the ITO was that it was entitled to such rebate in regard to direct export sales of Rs. 25,82,240. In the assessment year 1965-66, the total export sales, including the direct and indirect, came to Rs. 2,03,14,853. Out of these sales direct export sales were to the tune of Rs. 49,21,323. The assessee-company claimed rebate in regard to these direct sales of Rs. 49,21,323, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITO had made a technical approach in disallowing the assessee-company's claim for rebate. In his view the ITO ought to have worked out the profits and gains derived from direct export sales under sub-r. (3) of r. 2 of the Income-tax (Determination of Export Profits) Rules, 1964 (hereinafter referred to as " the Rules "). According to the AAC, the assessee-company was entitled to a rebate of an amount of Rs. 76,508 on the basis that the total turnover of the assessee-company was Rs. 15,66,27,255 and its direct export sales were to the tune of Rs. 25,92,240. He, therefore, directed the ITO to allow a rebate to the assessee-company on the amount of Rs. 76,508. So far as the assessment year 1965-66 is concerned, the AAC who heard the assessee-company's appeal for the assessment year 1965-66, by his order dated March 5, 1972, took a similar view. He held that the ITO should have worked out the profits and gains on the export sales under sub-r. (3) of r. 2 of the Income-tax (Determination of Export Profits) Rules, 1965 (which is in pari materia with sub-r. (3) of r. 2 of the Rules, which provides for a computation of the qualifying income for rebate, where, in the opinion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for cash and to that extent the assessee had made profit. It is difficult to believe that a concern like the assessee should carry on its business without knowing the cost of articles manufactured by it. If the cost is not disclosed to us the assessee may have its own reasons for doing so. I am inclined to accept the contentions of the departmental representative that it is for the assessee to establish that it had earned profits or gains from its export business which would entitle it to claim allowance or reduction under s. 2(5)(i) of the Finance Act, 1963. This the assessee has signally failed to do and as such it is not entitled to any rebate or reduction under s. 2(5)(i) of the Finance Act, 1963. " The assessee-company had urged before the Tribunal that as the profits and gains on export sales made by it were not ascertainable, such profits and gains should have been computed under sub-r. (3) of r. 2 of the said Rules of 1963. It was urged that otherwise the provisions contained in the said sub-r. (3) of r. 2 would be redundant. Dealing with this argument, the learned Accountant Member observed: " I am not impressed with this argument. Rules have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances of the case, the Tribunal was justified in rejecting the assessee's claim for deduction under section 2(5)(a)(i) of the Finance Act, 1965, on account of export of cloth out of India during the accounting year ending on 31st March, 1965 ? " The answer to the questions referred to us mainly turns on the interpretation of the provisions contained in s. 2(5)(a)(i) of the Finance Act, 1964, and s. 2(5)(a)(i) of the Finance Act, 1965. These provisions contained in Finance Act, 1964, and Finance Act, 1965 are in identical terms except for the year mentioned in cl. (a) of s. 2(5). In the provision contained in the Finance Act, 1964, the year mentioned is 1964, while in the Finance Act, 1965 the year mentioned is 1965. Instead of reproducing the provisions of both the Acts, for the sake of convenience, we reproduce hereinbelow the provisions contained in s. 2(5)(a)(i) of the Finance Act, 1965 : " 2. (5)(a) In respect of any assessment for the assessment year commencing on the 1st day of April, 1965 (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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport of goods, it must fail. The Tribunal has recorded a finding of fact that the assessee-company has not established that it had derived profits and gains from the direct export sales and in view of this finding, which is not alleged or proved to be unreasonable, the assessee-company's claim for rebate under s. 2(5)(a)(i) of the relevant Finance Acts, in each of the assessment years under consideration, must be rejected. It is, however, urged by Mr. B. R. Shah, learned counsel for the assessee-company, that the assessee-company's claim should not be rejected merely on the ground that it had not maintained separate accounts in respect of the export trade and consequently failed to prove by positive evidence that it bad derived profits and gains from direct export sales. Mr. Shah submitted that in each of the assessment years under consideration, the assessee had made an overall profit though it could not be shown whether profit was derived from export business and if so to what extent. According to Mr. Shah, it was a case where profits and gains on export sales cannot be ascertained. Mr. Shah submitted that the revenue authorities should have worked out such profits and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the export business, it would not be entitled to any rebate under s. 2(5)(a)(i) of the relevant Finance Acts. If what Mr. Shah says is the correct position, even in case where the assessee-company has suffered loss in the export business, it would be entitled to rebate if it has made an overall profit in its business including the export business, which would be inconsistent with the precondition (earning of profits) embedded in the said Provision. In our opinion, this is a wrong reading of s. 2(5)(a)(i). There is hardly any scope for two interpretations of the provisions of s. 2(5)(a)(i). On a plain reading of the said provision, there cannot be any doubt whatever that unless and until it is proved that the assessee-company derived profits and gains from export of goods or merchandise, there is no question of granting any rebate to it under the said provision. Rule 2 of the Income-tax (Determination of Export Profits) Rules, of 1964 and 1965, is in identical terms and it reads as under : 2. " Computation of qualifying income.-(1) Where the total income of an assessee referred to in sub-clause (i) of clause (a) of sub-section (5) of section 2 of the Finance Act, 1964 (5 of 1964 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export of any goods or merchandise out of India (hereinafter referred to as the qualifying income) shall be computed in accordance with the provisions of sub-r. (2) or sub-r. (3) or sub-r. (4) of the Rule, as the case may be. Sub-rule (2) lays down the method of computation of qualifying income, where in the opinion of the ITO it is possible to ascertain profits and gains on the exports. Sub-rule (3), on which strong reliance was placed by Mr. Shah, provides for the computation of the qualifying income where, in the opinion of the Income-tax Officer, profits and gains on the export cannot be ascertained. If the computation of profits and gains in the manner specified in sub-r. (3) presents exceptional difficulties, the ITO is empowered to determine the qualifying income on any other reasonable basis on the data available. In the instant case, Mr. Shah has not been able to satisfy us as to why the assessee-company was not in a position to work out profits and gains derived by it from export of goods. It is submitted that the assessee-company is not in a position to do so because it has not maintained separate accounts in regard to its export trade. Now, sub-r. (3) will be attracted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be ascertainable not on account of any act or omission on the part of the assessee but for genuine and special reasons. What such genuine and special reasons are, would depend upon the facts of each case. In the instant case, if there is any difficulty in ascertaining the profits and gains derived from the export sales, it is because the assessee-company chooses not to keep or reconstruct separate accounts and not because of its helplessness. The assessee-company cannot by its own act or omission make profits on export unascertainable and then come forward and claim that as such profits and gains are unascertainable, they should be computed under sub r. (3) of r. 2. Before the aid of sub-r. (3) can be taken, the ITO has to be satisfied that such profits and gains have in fact arisen or accrued but they cannot be ascertained. As already pointed out above, the requisite satisfaction can be reached only in a case where unascertainability of the profit is on account of genuine and special reasons and not on account of any act or omission on the part of the assessee. The assessee-company has, in, our opinion, failed to bring its case within the four corners of sub-r. (3) of r. 2 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic design. How can " profits from exports " be ever derived by reference to profits from non-export business? One can conceive of profits in export business in respect of a company which incurs overall loss in non-export business or entire business. It would be taxing one's commonsense to place an interpretation which would countenance drawing an inference that the export business resulted in a profit if the non-export business resulted in profit or that by any rational process one can guess at the profits from the export business as bearing any percentage of the non-export profit. We, therefore, have no hesitation in repelling the specious plea. Therefore, unless we know what goods are exported, it would be difficult to ascertain the " whole business " of which such export forms part for the purpose of sub-r. (3). We are not examining this aspect of the matter in detail but only indicating that even if sub-r. (3) were attracted, there is no material on record on the basis of which a computation of profits and gains of export could be made under the said sub-r. (3). We are not examining this aspect in detail for the obvious reason that the assessee-company has failed to make out a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-company it is stated that in the assessment year 1964-65, the cash incentives on export amounted to Rs. 30,56,101 and incentives in kind amounted to Rs. 54,46,219. The cash incentives and incentives in kind were Rs. 30,29,667 and Rs. 60,34,455, respectively, in the assessment year 1965-66. It was contended that both the cash incentives and incentives in kind must be taken into account while computing the profits. As already pointed out above, the assessee whose total income includes any profits and gains derived from export of goods or merchandise out of India is entitled to the benefit of rebate under s. 25(a)(i) of the relevant Finance Act. The question which arises for our consideration is whether the benefits which were acquired as a result of the export of goods could be said to be profits and gains derived from such exports. What is the meaning of the word "derive"? The meaning given to the word " derive " in the Concise Oxford Dictionary is: " get, obtain (from a source, or with the source present in thought) have one's or its origin, etc., from; (pass) ". The meaning given to the word " derive " in Webster's New 20th Century Dictionary, 2nd Edn., is : " to draw fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nquiry was to be made into the genealogy of the item under consideration, enquiry was required to be stopped as soon as the effective source is discovered. Applying the test laid down by the Privy Council, the question to which we have to address ourselves is as to what is the source of the benefits referred to above derived by the assessee-company as a result of the export of goods. If the source is the export of goods, the assessee-company must succeed. In Cochin Company v. CIT[1978] 114 ITR 822, the Kerala High Court dealt with the words " derive profits and gains from export of goods " used in s. 2(5)(a)(i) of the Finance Act, 1966. The provision which was considered by the Kerala High Court was identical with the provision which is under consideration in the instant case. In the case before the Kerala High Court, the assessee had made certain profits by the sale of import entitlements, and one of the questions which arose before the Kerala High Court was whether such profits could be regarded and considered to be profit derived from export of any goods or merchandise out of India with in the meaning of s. 2(5)(a)(i) of the Finance Act, 1966. The same argument which is advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are in pari materia with the provisions which we are called upon to consider in these references. The Madras High Court was of the view that by virtue of r. 2(2) of the Income-tax (Determination of Export Profits) Rules, 1966, framed in pursuance of s. 2(5)(d) of the Finance Act, 1966, the profits and gains derived from the export of any goods or merchandise were required to be ascertained in accordance with the provisions of the I.T. Act. In the view of the Madras High Court, if the profits and gains were so ascertained, the two amounts referred to above will necessarily constitute business receipts referable to or derived from the export of goods and hence the assessee was entitled to a rebate, under s. 2(5)(a) of the Finance Act, 1966, of the aforesaid two amounts. The Madras High Court did not proceed to consider whether the two amounts in question could be said to be " profits and gains derived from export of goods or merchandise out of India ". The reasoning in upholding the claim of the assessee was that the two amounts constituted business receipts referable to or derived from the export of cycle rims. An identical question had come up for consideration before the Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved (p. 962) : " It may be pointed out that even on the proceeds realised from sale of import entitlements, the Madras High Court has held in favour of the assessee on the plea that the amount received by the assessee would have to be disclosed in its business income as income referable to its export business. It is perhaps on that limited footing that the Madras High Court upheld the assessee's contention as regards the inclusion of this amount for the purpose of obtaining the benefit of a comparable provision in the Finance Act, 1966. By no stretch of imagination can a similar argument be made available to the savings effected by the assessee in the case before us which, it was submitted, was its notional profit. However, we do not propose to rest our decision on this limited point, viz., that whatever be the position for items similar to items (1) and (2), i.e., for cash subsidies and sale proceeds of import entitlements, the notional savings resulting from the third type of case cannot be regarded as profits derived from export. In our view, the point would be required to be decided and concluded against the assessee by reason of the fact that the word 'derived', as far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the assessee-company that a cash subsidy or allowance was given. There is, therefore, a direct nexus between the export of goods and earning of income in the shape of cash subsidy or allowance. The proximate source of cash subsidy or allowance is export of goods. In our opinion, therefore, cash subsidy or allowance has to be taken into consideration in ascertaining profits from exports made by the assessee-company. However, the income derived by sales of transferable import entitlements or import licences and savings effected as a result of import of materials and commodities at a price lower than the ruling home market price under the import entitlements or licences which are not transferable stands on a different footing. In the present case, we are not concerned with the income derived from sale of import entitlements or import licences which are transferable because Mr. Shah appearing for the assessee-company submitted that we are only concerned with the cash subsidy or allowance and savings effected by import of raw materials so far as the assessment years under consideration are concerned. We, therefore, do not propose to express any final opinion on the question wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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