TMI Blog1975 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... as right in holding that the profit derived by the sale of import entitlements cannot be considered as profits derived from the export of any goods or merchandise out of India within the meaning of section 2(5)(a)(i) of the Finance Act, 1966 ? (iii) Whether the Tribunal was right in holding that the assessee is not an ' industrial company ' as defined in section 2(7)(d) of the Finance Act, 1966 ? " The assessee is a private company carrying on the business of processing and export of fish. In December, 1963, the assessee purchased a fishing trawler from its previous owner who was not a resident of India. For the assessment year 1966-67, the assessee claimed a development rebate of Rs. 48,692 in respect of the said trawler. The Income-tax Officer allowed the assessee's claim for rebate only to the extent of Rs. 15,387 and disallowed the balance claim of Rs. 33,305 on the ground that the assessee had failed to create the requisite reserve during the previous year. During the previous year relevant for the assessment year 1966-67, the assessee-company had been granted import entitlements on the basis of its export performance and by the sale of such import entitlements the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not entitled to either of the aforesaid benefits. Both the assessee as well as the department filed appeals before the Income-tax Appellate Tribunal against the aforesaid decision of the Appellate Assistant Commissioner. In I.T.A. No. 556/Coch/70-71, which was the appeal filed by the assessee-company, the findings of the Appellate Assistant Commissioner disallowing the assessee's claim for rebate of tax under section 2(5)(a)(i) of the Finance Act, 1966, and for the application of the concessional rate of tax under item I(A)(2) of Paragraph F of Schedule I of the Finance Act, 1966, were questioned by the assessee. The appeal filed by the department--I.T.A. No. 611 /Coch/70-71--related to that part of the order of the Appellate Assistant Commissioner whereby the assessee's claim for development rebate in respect of the trawler was allowed in full. By a common order dated November 30, 1972, the Tribunal disposed of the two appeals aforementioned along with three other appeals arising out of assessments made against the same company for the years 1965-66 and 1969-70. The Tribunal held that the claim put forward by the assessee for development rebate in respect of the fishing tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1966, read with Paragraph F of Schedule I thereof, since the assessee was a domestic " industrial company " as defined in section 2(7)(d) aforementioned, the Tribunal took the view that even though the assessee-company was carrying on only the business of processing and export of fish and consequently fulfilled the requirements of the definition contained in the body of clause (d) of section 2(7) it had to satisfy also the requirements of the Explanation to the said sub-section if it should succeed in its claim to be treated as an " industrial company ". On this basis, the Tribunal proceeded to hold that since the income derived by the assessee from the business of manufacture or processing of goods during the relevant accounting period was less than 51 per cent. of its total income for the assessment year 1966-67, the requirements of the Explanation to section 2(7)(d) of the Finance Act of 1966 were not satisfied and the assessee was not, therefore, entitled to the benefit of the concessional rate of tax specified in Item I(A)(2) of Paragraph F of Schedule I of the Finance Act, 1966. In the light of the findings aforementioned, the Tribunal dismissed the appeal filed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. Before the Tribunal, the assessee seems to have rested its claim for grant of development rebate mainly on Circular No. 27 dated 6th July, 1955, issued by the Central Board of Revenue. Reliance was also placed on a subsequent circular dated October 14, 1965, issued by the Central Board of Direct Taxes, wherein it is stated that the instructions issued in Board's Circular No. 27 dated July 6, 1955, will apply in respect of only second-hand ships or machinery acquired or installed by an assessee for the purpose of his business on or before March 31, 1964. Copies of the two circulars aforementioned have been appended to the statement of the case as annexures " B " and " C " respectively. It is difficult to see how an assessee can found a claim for the grant of any allowance or deduction by way of development rebate solely on the terms of a circular issued by the Central Board of Revenue/Central Board of Direct Taxes when his case does not satisfy the condition laid down in the specific provision contained in the Act authorising the grant of such allowance or deduction. However, having regard to the very restricted scope of question No. (i) referred to this court we do not wis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (XLVII-16)of 1962, dated December 3,1962, permitting the allowance of development rebate, etc., in respect of second-hand machinery or plant imported by an assessee from abroad, will apply only in respect of such ships and such machinery or plant as have been acquired or installed by an assessee for the purpose of his business on or before March 31, 1964. The admissibility of development rebate in respect of previously used ships acquired and previously used machinery or plant installed after March 31, 1964, will be governed by the provisions of section 33(1A) of the Income-tax Act, 1961, and the conditions mentioned in the preceding paragraph would, therefore, have to be satisfied before development rebate could be allowed in such cases. " There cannot be any doubt that the circular (annexure " B ") deals only with the subject of granting allowances by way of development rebate in respect of second-hand ships purchased abroad by " shipping concerns ". The provisions of the said circular have no application in respect of claims for such rebate put forward by assessees who are not " shipping concerns ". It is, however, contended that the scope of the circular has undergone a mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchandise out of India, he shall be entitled to a deduction, from the amount of income-tax with which he is chargeable, of an amount equal to the income-tax calculated at one-tenth of the average rate of income-tax on the amount of such profits and gains included in his total income." The argument advanced on behalf of the assessee is that since the assessee had become eligible for the import entitlements only on account of its having exported goods out of India, the income derived by conversion of the import entitlements into money by a process of sale should be regarded as profits or gains derived from the said activity of the export of goods. We are unable to accept this contention. Profit or gain can be said to have been " derived " from an activity carried on by a person only if the said activity is the immediate and effective source of the said profit or gain. There must be a direct nexus between the activity and the earning of the profit or gain. The income, profit or gain cannot be said to have been " derived " from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner. See Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of a domestic industrial company not being one in which the public are substantially interested tax has to be levied at 55 per cent. on so much of the total income as does not exceed Rs. 10,00,000 and at 60% of the balance, if any, of the total income. From the facts set out by the Tribunal in the statement of the case, it is seen that the assessee's only business is processing and export of fish. The order of the Tribunal--annexure " A "--also proceeds on this basis. The Tribunal, however, held that in order that the assessee should be an " industrial company " for the purposes of the Finance Act, 1966, the assessee must satisfy not merely the requirement of the definition of the expression " industrial company " contained in the body of the said Act but also the terms of the Explanation appended to the said section. Proceeding on this basis, the Tribunal held that inasmuch as during the relevant previous year the income attributable to the business of manufacture or processing of fish was less than 51 per cent. of the total income of the assessee, the terms of the Explanation were not satisfied, and, hence, the assessee could not be regarded as an " industrial company " ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the main business is of the type referred to in the definition clause. The expression " mainly " has been used in clause (d) of section 2(7) not for the purpose of excluding companies which are engaged solely in the business of the type referred to in the said clause ; on the other hand, the intention of Parliament in using that expression is to bring within the scope of the definition those companies also which are engaged in a plurality of business activities including any one of the types of business specified in the section, provided that such business can be said to be the main activity of such company. It is wrong to think that the word " mainly " occurring in the portion " mainly engaged in the business of ................. " in clause (d) necessarily means only " principally " and that hence it presupposes the existence of more than one business activity for every " industrial company ". On a reference to the Shorter Oxford English Dictionary it will be seen that the word " mainly " is also occasionally used to mean " entirely ". In our opinion, Parliament has used the word " mainly " in clause (d) in its broadest sense so as to take in companies which are " entirely " eng ..... X X X X Extracts X X X X X X X X Extracts X X X X
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