Satish Chandra, C.J. - (1.) THE assessee manufactures and sells carpets. For the assessment year 1974-75, it had claimed relief under Section 2(8)(c) of the Finance Act, 1974 (20 of 1974). It claimed that it was an industrial company as denned in these provisions and so it was liable to tax at the rate of 55%. THE ITO did not accept this plea. He held that in the process of selling carpets to buyers the assessee has shown a loss. THE ultimate profit has resulted because of receipt of import entitlement or cash subsidy in view of the export incentive scheme of the Government of India. This was not the profit earned from the manufacturing business of the assessee. He levied tax at the rate of 65%. THE assessee filed an appeal before the AAC which was partly allowed. THE assessee and the department both took up the matter to the Tribunal. THE Tribunal considered the matter elaborately and held that the admitted position was that the assessee was a manufacturer of carpets. He sold his products exclusively in America and Europe. Only the defective or sub-standard material was sold locally. THE assessee was suffering loss, yet he continued to persist in this business. One of the reasons impelling him to do so was the benefit of the export incentive scheme of the Government of India. Under that Scheme the assessee was granted import licences or cash subsidy. THE loss actually incurred in the export sales was made up by the sale of import licences granted to the assessee. THE receipt from the sale of import licences actually enabled the assessee to make some profit at the end of the year. In the assessment year in question, the assessee was able to show profits primarily because of the sale of import licences. THE Tribunal held that the import licences were received by the assessee as a direct result of exporting carpets to the foreign countries. THEse licences were sold and the income arising from such sales was attributable to the manufacturing activities of the assessee, namely, manufacture of carpets. THEre was hence a close and intimate relation between the exporting business and the income derived from the sale of import licences. THE assessee was held liable to be assessed at the rate of 55%.
(2.) AT the instance of the CIT, the Tribunal has referred the following main question of law for our opinion; "Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the assessee-company was an 'industrial company' within the meaning of Section 2(7)(d) of the Finance (No. 2) Act, 1967 or Section 2(6)(d) of the Finance Act, 1968, so as to be entitled to concessional rates of tax in the assessment year 1974-75 ? " The relevant and material portion of Clause (d), which defines an "industrial company", is as follows : "(d) 'industrial company' means a company which is mainly engaged in the business of......or in the manufacture or processing of goods...... Explanation.--For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of......manufacture or processing of goods.........if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VIA of the Income-tax Act) is not less than fifty-one per cent. of such total income." The assessee is undoubtedly a company engaged in the business of manufacturing goods, namely, carpets. It will be entitled to the benefit of this provision, if the income "attributable to" the activity of manufacturing of carpets is not less than 51% of its total income. On facts, it has been found that if the income relating to the sale of import licences is included and is taken into consideration, it exceeds 51% of the total income.
(3.) THE question for our consideration is whether the income derived from the sale of import licences is attributable to the activity of manufacturing of carpets. In Cambay Electric Supply Industrial Company Ltd. v. CIT [1978] 113 ITR 84, the Supreme Court had occasion to consider the expression "attributable to" occurring in Section 80E (as it stood prior to its amendment by the Finance (No. 2) Act, 1967). The court had held hat the legislature had deliberately used the expression "attributable to" having a wider import than the expression "derived from", thereby intending to cover receipts from sources other than the actual conduct of the business of the specified industries. Keeping this construction of the phrase "attributable to" in mind it cannot be gainsaid that the import entitlement or its sale proceeds were received from sources, though other than the actual manufacturing and export of carpets, directly connected with that activity. But for the actual export of carpets the assessee would not have earned the import entitlement or cash subsidy. The receipt from the sale of import licences was hence attributable to the activity of exporting carpets within the meaning of the aforesaid Clause (d). The Tribunal was, in our opinion, right in upholding the assessee's contention.;