Case: Commissioner of Income Tax, Karnataka Vs. Sterling Foods

The judgment and order under appeal (190 ITR 274) was pronounced by a Division Bench of the Karnataka High Court on a reference made by the assessee, and the Revenue is in appeal. The High Court answered in favour of the assessee the following questionon the fact and 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 80HH ofthe Income-tax Act, 1961The identical question had arisen in respect of the same assessee for an earlier year and the High Court had then answered the question against the assessee (150 ITR 293). The assessee had not carried the matter further. Ordinarily, therefore, the Division Bench hearing the assessees appeal for the later assessment year would have been bound by the earlier decision. However, it chose not to do so relying upon the fact that Section 28 ofthe Income Tax Act, 1961 had been amended in the meanwhile bythe Finance Act, 1990 with effect from 1st April, 1962 by insertion of clause (iiia) and clause (iiib) with effect from April 1, 1967, which read as followsprofits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, (18 of 1947).(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India.As we shall point out, these amended provisions have no relevant to the point at issue and the High Court was in error in relying thereon and not following the earlier judgment.The facts are :The assessee firm is engaged in processing prawns and other sea food, which it exports during the Assessment Years 1975-76 and 1976-77. It also earned some import entitlement granted by the Central Government under an Export Promotion Scheme. The assessment was entitled to use the import entitlements itself or sell the same to others. It sold the import entitlements that it had earned to others. Its total income for the aforementioned assessment years included the sale proceeds for such import entitlements and it claimed relief under Section 80HH of the Act in respect also of the sale proceeds of the import entitlements.

Court's reasoning:
7. It appears to us that the later Division Bench did not fully appreciate what had been held by the earlier Division Bench and to what had been so held the provision of Section 28 as amended made no difference. Therefore, in our view, the judgment under appeal would have to be set aside in as much as it did not follow an earlier binding judgment of the High Court itself.8. But learned counsel for the assessee submitted that he was entitled to urge, since the matter related to a different assessment year, that the earlier Division Bench judgment of the High Court was erroneous. Since we are of the view that the earlier judgment was not erroneous, it is not necessary to decide whether the assessee could so urge.We do not think that the source of the import entitlement can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessees industrial undertaking.