Decided on July 01,1982



D.V. Junnarkar, Accountant Member - (1.) THE revenue has appealed against the order of the Commissioner (Appeals) holding that the net sale proceeds of Rs. 1,41,218 on the import entitlements was not taxable in the assessment of the assessee.
(2.) The assessee is a manufacturer and exporter of glassware. For the year under consideration, it received cash assistance of Rs. 1,00,848, customs drawback of Rs. 34,123 and Rs. 1,41,218 by way of sale of import entitlements, in respect of the export of glassware carried on by it. The ITO in the income-tax proceedings has taxed the amount of Rs. 1,34,971, being the aggregate of cash assistance and the customs drawback. About this there is no dispute. Even the sale proceeds of import entitlements of Rs. 1,41,218 were initially offered by the assessee for the assessment as taxable profits and they were taxed accordingly. Only during the pendency of the appeal by the assessee before the Commissioner (Appeals), the assessee objected to the taxing of this amount. For the reasons recorded by him in his order, the Commissioner (Appeals) allowed the assessee's appeal on this ground and deleted the addition of Rs. 1,41,218 from the assessment. Being aggrieved by the order of the Commissioner (Appeals), the revenue has appealed before the Tribunal on the ground that the Commissioner (Appeals) erred in holding that the net sale proceeds of Rs. 1,41,218 on import entitlements was not taxable in the assessment of the assessee. In support of the grounds of appeal, the learned departmental representative has relied on the ITAT Bombay Bench 'B' decision in the case of Metro Exporters (P.) Ltd. v. ITO [IT Appeal Nos. 1358 to 1360 (Bom.) of 1979 Comp. Cir. V(5) decided on 23-9-1980] wherein it has been held that the sale proceeds of the import entitlements were revenue receipts and were liable to income-tax. On behalf of the assessee reliance is placed on the Tribunal Bombay Bench 'C' decision in IT Appeal No. 539 (Bom.) of 1979 decided on 2-2-1980 which is published in the June 1980 Issue of the Bombay Chartered Accountants Journal.
(3.) WE have carefully considered the facts and circumstances of the case and the submissions on either side. WE have also considered the following decisions of the various High Courts, which have been taken into consideration by two Benches of the Tribunal while deciding the aforesaid appeals ; CIT v. Kuppuswamy Pillai & Co. [1977] 106 ITR 954 (Mad.), K.N. Daftary v. CIT[1977] 106 ITR 998 (Cal.), Addl. CIT v. K.S. Sheik Mohideen [1978] 115 ITR 243 (Mad.) (FB), Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 (Bom.), CIT v. Wheel & Rim Co. of India Ltd. [1977] 107 ITR 168 (Mad.), Agra Chain Mfg. Co. v. CIT [1978] 114 ITR 840 (All.), Kesoram Industries & Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 (Cal.) and CIT v. Swadeshi Cotton Mills Co. Ltd. [1980] 121 ITR 747 (All.). On a careful perusal of the firstmentioned three decisions which have mainly been relied upon by the Tribunal Bombay Bench 'C' in deciding IT Appeal No. 593 (Bom.) of 1979, the learned judges of the Madras and the Calcutta High Courts were considering the question whether the capital gains arising on the sale of import entitlements were liable for taxation. In these three cases the revenue authorities had proceeded on the basis that the import entitlements were capital assets and questions were accordingly posed before the High Courts. Since the import entitlements admittedly, not having cost anything to the respective assessee, no wonder, the High Courts, following the law as finally explained by the learned judges of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, held that the capital gains arising to the assessee were not taxable in the hands of the recipients. As against this, in the remaining cases noted above, the various High Courts were concerned with the question, which is facing us in the present appeal, viz., whether the grant of subsidy received by the assessee from the Government to assist the business in whatever form or manner was exempt either as a casual or non-recurring receipt or whether it was business income or a capital receipt. In all these cases, the High Courts have held that since the receipts are directly connected with the trade carried on by the assessee, the receipts were of the nature of business income and were liable to income-tax. In particular, reference may be made to the Bombay High Court decision in the case of Dhrangadhara Chemical (supra), where the learned judges have taken note of the following quotation from the case of Pontypridd & Rhondda Joint Water Board v. Ostime (H.M. Inspector of Taxes) [1946] 14 ITR (Suppl.) 45 (HL): The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains. . . . (p. 47) The second proposition constitutes an exception. If the undertaker is a rating authority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient prevents any question of profit arising. . . . (p. 47) After referring to the aforesaid quotation, the learned judges have observed that normally it is well settled that where subsidies or grants are given by the Government to assist a trader in his business they are, generally speaking, payments of a revenue nature. They are supplementary trade receipts and not capital payments, although they might be called advances or might be subject to contingency of repayment. In fact, the Bombay High Court decision referred to above has been followed in some of the other cases referred to above. Following the Bombay High Court decision in the case of Dhrangadhra Chemical (supra), we shall hold that the sale proceeds of the import entitlements earned by the assessee were business income earned by the assessee and were accordingly liable to tax. Therefore, the order of the Commissioner (Appeals), on this issue requires to be reversed and is accordingly reversed.;

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