- (1.) This appeal by the assessee is directed against the judgment of the madras High court dated 14/11/1978 in Tax Case No. 33 of 1975 relating to the Assessment Year 1966-67.
(2.) The assessee is a private limited company carrying on the business of tanning hides and skins by chemical process and selling the resultant leather as well as purchase and sale of leather on commission basis. It owns a tannery known as Southern India Tanneries where the tanning of hides and skins by chemical process is done. During the Assessment Year 1966-67 the total profit of the assessee was Rs. 5,05,045. 00 which included Rs. 3,73,870. 00 earned by sale of chemicals imported on the strength of licences granted on the basis of export of leather, hides and skins in earlier years. The distributable income of the assessee for the Assessment Year in question was rs 2,59,289 but it had distributed only Rs. 1,00,000. 00 as dividend. The assessee claimed that it was a company whose main business was manufacture of leather, processing of hides and skins with chemical process and the provisions of Section 104 of the Income Tax Act, 1961 (hereinafter referred to as "the Act") do not apply in view of Ss. (4 of Section 104. The Income Tax Officer held that profit of Rs. 3,73,870. 00 earned by the assessee by sale of imported chemicals could not be said to be attributable to its activity of manufacture or processing of goods and consequently the assessee could not be considered as a company falling within the purview of section 104 (4 since the income attributable to such activity was less than 51% of its total income. He, therefore, levied additional tax of Rs. 58,937. 00 under Section 104. The said order of the Income Tax Officer was affirmed in appeal by the Appellate Assistant Commissioner and by the Income Tax appellate tribunal (hereinafter referred to as "the tribunal") on further appeal. The tribunal, in its order, has taken note of the fact that during the previous year ending 31/12/1965 the total export sales of the assessee were rs 3,99,13,372 out of which export sales of hides and skins manufactured by it were to the extent of Rs. 32,49,000. 00 only. The tribunal has observed that the sale of goods manufactured by the assessee was less than 10% of the total export and that the rest were all goods of third parties, purchased and exported by it on commission basis. On these facts the tribunal held that it could not be said that the profit derived by the appellant by sale of imported chemicals had direct relationship or connection with its manufacturing activity. At the instance of the assessee the tribunal referred the following question for the opinion of the High court: "Whether the profit of Rs. 3,73,870. 00 obtained by the assessee during the relevant previous year by the sale of chemicals imported by it on the strength of licences issued to it based on its export performance of leather both manufactured and purchased by it was rightly held as not attributable to the manufacturing activity carried on by it. "
(3.) By the impugned judgment the High court has answered the said question in the affirmative, i. e. , against the assessee and in favour of the revenue. The High court has held that though the export business of leather manufactured or purchased by the assessee was the remote cause for import entitlement which in turn had given rise to the earning of income from sales of imported goods and could in one sense be said to be connected with manufacturing, such connection was not sufficiently proximate to enable thecourt to say that the income was attributable to the manufacturing process of leather.;