STERLING FOODS VS COMMISSIONER OF INCOME-TAX, 1993 PTD-KARNATAKA-HIGH-COURT-INDIA 1201 (1990)

(a) Income-tax--

----Newly-established industrial undertaking or hotel in backward area-- Income---Special deduction---Profits on sale of import entitlements---To be treated as business income as a result of the amendment of S.28 by Finance Act, 1990 with retrospective effect from 1-4-1962---Assessee entitled to special deduction under S.80-HH in respect of such income---Indian Income-tax Act, 1961, Ss.28 & 80-HH.

Section 28 of the Income Tax Act, 1961, has been amended by the Finance Act, 1990, ii(h effect from April 1, 1962, by the insertion of clause (iii-a) which provides that profits on the sale of a licence granted under the Import (Control) Order, 1955, made under the Imports and Exports (Control Act, 1947, will be considered to be profits and gains of business or profession.

In the assessment year 1979-80, the assessee received a certain sum by way of sale of import licences and export commission. In the return filed, it claimed relief in respect of that receipt under section 80-HH. The claim was rejected by the. Income-tax Officer and the Tribunal. On a reference:

Since profits on sale of import entitlements had to be considered to be income, the assessee would be entitled to the benefit conferred by section 88 HH in respect of it.

(b) Income-tax---

----Reference---Jurisdiction of High Court---Amendment of- law after reference -was made---High Court must decide reference under amended law---Indian Income Tax Act, 1961, S.256.

When a question has been referred to the High Court and, in the meanwhile, the law has been amended with retrospective operation, it would be the duty of the High Court to apply the law so amended if it applies. Application of the relevant law to a problem raised by reference before the High Court is not normally excluded merely because at the date when the Tribunal decided the question, the relevant law was not or could not be brought to its notice.

(c) Income-tax---

---Appellate Tribunal---Decision of High Court binding on Tribunal.

What is applicable to the Courts inferior to the Supreme Court in regard to the law declared by the Supreme Court in terms of Article 141 of the. Indian Constitution will, with. equal force, apply to the Tribunals which are inferior to the High Court and over which the High Court has corrective jurisdiction under the Constitution.

Chatturam Horilram Ltd. v. CIT (1955) 27 ITR 709 (SC); CIT v. Straw Products Ltd. (1966) 60 ITR L56 (SC); CST v. Bijli Cotton Mills (1964) 15 STC 656 (SC); In re: Special Courts Bill, 1978; AIR 1979 SC 478; (1979) 2 SCR 476 and Sterling Foods v. CIT (1984) 150 ITR 292 (Kar.) ref.

Ashok Kulkarni for K.R. Prasad for the Assessee.

G. Chander Kumar, Senior Standing Counsel with S.R. Shivaprakash for the Commissioner.

Date of hearing: 9th October, 1991.

JUDGMENT

M. P. CHANDRAKANTHARAJ URS, J.--- In this income-tax reference case, the following question is referred to us for our answer:--

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the receipt from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under section 80-HH of the Income Tax Act, 1961?"

In the assessment year 1979-80, Messrs Sterling Foods, Mangalore, received a sum of Rs.3,09,800 by way of sale of import licences aid export commission. In the return filed, they claimed relief in respect of that receipt under section 80-HH in respect of sale of import licences. The Income-tax Officer held that since the profit derived from the industrial undertaking resulted in a negative figure, no deduction under section 80-HH was admissible. Therefore, he 'rejected the claim of the -assessee. On appeal, the Commissioner of Income-tax (Appeals) held that the receipts on sale of import licences were revenue receipts and as such there was no question of relief under section 80-HH on such receipts. To come to that conclusion, he followed the order of the Tribunal in the earlier year in the case of the assessee itself. On appeal filed against the order of the Commissioner, the Tribunal, following its earlier order, dated January 7, 1981,in I.TAs: Nos. 190 and 191/Bang of 1979, upheld the order of the Commissioner and dismissed the appeal. Therefore, it referred the question extracted above for answer by this Court.

In the case of Sterling Foods v. C.I.T. (1984) 150 ITR 292, this Court, on identical facts and circumstances, ruled as follows (headnote):

"(i) that the amount received by an assessee 'by the sale of import entitlements is business income and not capital proceeds and that income must be included in the total income of the assessee under section 5 of the Act. The total income of any previous year of the assessee includes income from whatever source derived. Therefore, the fact that the income from the sale of import entitlements falls to be included in the total income chargeable to income-tax, could not by itself confer any right on the assessee to claim relief under section 80-HH.

(ii)The import entitlements were awarded by the Government under a scheme to encourage exports. The source referable to the profits and gains arising out of the sale proceeds of the import entitlements would, therefore, be the scheme of the government and not the industrial undertaking of the assessee."

In the normal course, we would have had no choice but to follow the answer rendered by this Court to the identical question raised for an earlier assessment year but for the fact that section 28 of the Income Tax Act, 1961, has been amended by the Finance Act of 1990 with effect from April 1, 1962, by the insertion of clause (iii-a) and clause 1967, and they read as follows:--

(iii=a) profits on sale of a licence granted under the Imports (Control Order, 1955, made under the Imports and Exports(Control) Act, 1947(18 of 1947)

(iii-b)cash assistance (by whatever name ca1led) received or receivable by any person against exports under any scheme of the Government of India."

Section 28 provides for what income shall be chargeable to income-tax under the head "Profits and gains of business or profession. Therefore, by the amendment effected to section 28, what was held by its court not to be an' income arising out of profits and gains of business or profession, by operation of law, has become such income. Therefore, once, it becomes income, automatically, the benefits conferred by section 80-HH will be attracted to the case of the assessee.

The matter should have ended there by our proceeding to answer the question in favour of the assessee, but Mr. Chander Kumar has raised certain: doubts and, therefore, we shall meet the contentions advanced by Sri Chander Kumar for the Revenue in the light of the decided cases to which we will refer in the course of this order.

Mr. Chander Kumar, learned counsel contends that this Court is bound to follow the earlier ruling in the case on the question referred, ignoring the amendments made, as the duty of the Court is to answer the question in the light of the facts and circumstances that existed when the Tribunal decided the case. For that proposition, he placed reliance on the decision of the Supreme Court in the case of Chatturam Horilram Ltd.. v. CIT (1955) 27 ITR '709. A Bench of, four Judges of that Court had occasion to consider the nature and scope of the' jurisdiction exercised by the High Court irk a referred case arising under the Indian Income-tax Act, 1922. The facts of that case were as follows:--

The assessee company carried on business in Chota Nagpur and it was assessed to tax for the year 1939-40. That assessment came to be set aside by the Income-tax Appellate Tribunal on March 28, 1942, on the ground that the Indian Finance Act, 1939, was not in force during the assessment year 1939-40 in Chota Nagpur which was a partially excluded area. On a reference under section 66, the High Court agreed with the view of the Appellate Tribunal by its judgment, dated September 30, 1943. On June 30, 1942, Bihar Regulation IV of 1942 was promulgated by which the Indian Finance Act of 1939 was brought into force in Chota Nagpur retrospectively from March 30, 1939. The Income-tax Officer thereupon passed an order on February 8, 1944, to the effect that the income of the assessee for the year 1939-40 has escaped assessment and issued to the assessee on February 12, 1944, a notice under section 34. The question was whether that notice was valid. It was therein held by the Supreme Court after considering a number of cases (pp.718, 719):

"Learned counsel for the appellants suggests that the failure of the assessment proceedings in this case must be taken to have been due to the lapse of the Income-tax Authorities. It is said that inasmuch as Regulation IV of 1942 was actually passed during the pendency of the reference in the High Court in respect of the prior proceedings, the result would have been different, if the regulation had been brought to the notice of the High Court. There is, however, no reason to think so. The High Court's jurisdiction was only to answer then particular question that was referred to it by the Income- tax Appellate Tribunal and it is extremely doubtful whether they could have taken notice of a subsequent legislation and answered a different question. Learned counsel for the 'appellant also urged that in any case the deeming provision enacted in Regulation IV of 1942 may be taken to have validated the assessment proceedings previously taken in the year 1939 and at best to have restored the assessment order passed by the Income-tax Officer on the 22^nd December, 1939, and confirmed by the Assistant Commissioner. But this overlooks the fact that the order had in fact been set aside by the Income-tax Appellate Tribunal and that the setting aside was confirmed by the High Court on the reference made to it. Admittedly, the Regulation was passed after the decision of the Income-tax Appellate Tribunal. Notwithstanding that Regulation IV of 1942 purported to be retrospective it cannot have the effect of effecting the result brought about by the decision of the Income-tax appellate Tribunal and the High Court on reference unless there are clear and express words to that effect."

Undoubtedly the above observation has been made by the Supreme Court in that case. Observations made by the Supreme Court, in repelling the contention advanced on behalf of the assessee must be noted to have been made in the context of that case. Even then, if one were to notice the observation to which we have been drawn attention by-supplying emphasis the scope of jurisdiction of the High Court is held to be one of doubt and not one of denial.

On the other hand, as we see it, this Court, in the earlier case of the assessee, on identical facts, answered the question posed, having regard to law as it then stood. We have already extracted what was decided by this Court. It cannot be said that that decision is incorrect. What has happened is that that decision as a binding precedent is of little value in the light of amendments made to section 28 retrospectively. If it is not binding on us, then at the time we are called upon to answer a question for the subsequent assessment year, we must look at the law as it was at the relevant time that is relevant for the assessment year 1979-80. Both the amendments have been effective from 1962-63 and, therefore, in 1979-80, the income received from the Government of India by sale of import licences and incentives for export was income within the meaning of section 28 assessable to tax as income from profits and gains of business or profession, It is in that light that we have to answer the question. We are fully supported in the view we have taken by the decision of the Supreme Court in the case of CIT v. Straw Products Ltd. (1966) 60 ITR 156 which dealt with a similar situation in the following terms (at p.162):

"In the alternative, he relies on the 1962 Order set out above. He says that the Order has explained the expression `actually allowed' to mean the depreciation that would have been allowed had the income not been exempted under an agreement with a Ruler. He further says that this order is retrospective because it expressly says that the expression `all depreciation actually allowed under any laws or rules of a merged State shall be deemed always to have meant..."

Mr. Desai, learned counsel foe the respondent, objects to this order being relied on by Mr. Sastri on various grounds. He further says that on a true interpretation of the Order, it does not apply to the case of the assessee: The question then arises whether we are entitled to take into consideration the 1962 Order. Learned counsel has cited various cases and has argued that this being an appeal by special leave from a reference, we should not take the order into consideration. It is unnecessary to refer to the cases because the point is concluded by a judgment of this Court in CST v. Bijli Cotton Mills (1964) 15 STC 656. Shah, J'., speaking for the Court, observed as follows (pp.664, 665):

"Undoubted the Tribunal called upon to decide a taxing dispute must apply the relevant law applicable to a particular transaction to which the, problem relates and that law normally is the law applicable as on the date on which the transaction in dispute has taken place. If the law which the Tribunal seeks to apply to the dispute is amended, so as to make the law applicable to the transaction in dispute. it would be bound to decide the question in the light of the law so amended. Similarly when the question has been referred to the High Court and in the meanwhile the law has been amended with retrospective Operation it would be the duty of the High Court to apply the law cg amended if it applies. By taking notice of the law which has been substituted for the original provision, the High Court is giving effect to legislative intent and does no more than what must be deemed to be necessarily implicit in the question referred by the Tribunal provided the question is couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amended law, and the enquiry does not necessitate investigation of fresh facts. If the question is riot so couched as to invite the High Court to decide the question in the light of the law as amended or if it necessitates investigation of facts, which have not been investigated, the High Court may refuse to answer the question. Application of the relevant law to a problem raised by the reference before the High Court is not normally excluded merely because at the date when the Tribunal decided the question the relevant law was not or could not be brought to its notice.

Therefore, following this judgment, we must hold that Mr. Sastri is entitled to rely on the 1962 Order and it is our duty to answer the reference in accordance with the amendment made by the Order, unless the question referred is not couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amended law."

In that case, the Constitution Bench of .the Supreme Court laid down the law as found in the passage extracted. Therefore, notwithstanding what has been said in Chatturam Horilram Ltd.'s case (1955) 27 ITR 709 (SC), we must hold that the correct view is the view taken by the Constitution Bench in regard to the scope and jurisdiction of the reference.

In this context, we must also notice a contention advanced as a limb of an earlier contention by Mr. Chander Kumar and that contention is that this Court is only exercising an advisory jurisdiction and, therefore, in that special jurisdiction, it will not be open to this Court to go beyond the question referred on the facts -and circumstances that existed on the date the reference was made. We do not think the expression "advisory jurisdiction" which is used more as a convenient expression to describe the special jurisdiction, necessarily means that the advisory jurisdiction will not be binding on the Tribunals which function within the jurisdiction of this Court which are subordinate to it. In this context, it will be useful to refer to a passage in the judgment of the Supreme Court in the case of Special Courts Bill, 1978, In re: A I R 1979 SC 478, 519: (1979) 2 SCR 476:

"We are inclined to the view that though it is always open to this Court to re-examine the question already decided by it and to overrule, if necessary, the view earlier taken by it, in so far as all other Courts in the territory of India are concerned, they ought to be bound by the view expressed by this Court even in exercise of its advisory jurisdiction under Article 143(1) of the Constitution."

Therefore, what is applicable to the Courts inferior to the Supreme Court in regard to the law declared by the Supreme Court in terms of Article 141 of the Constitution will, with equal force, apply to the Tribunals, which are inferior to this Court over which this Court has corrective jurisdiction under the Constitution.

In the light of what we have stated above, we have to reject or repel the contention of Mr. Chander Kumar and answer the question in the negative and in favour of the assessee.

M.BA./2412/T Order accordingly.