COMMISSIONER OF INCOME TAX, KARNATAKAversusSTERLING FOODS, MANGALORE

         COMMISSIONER OF INCOME TAX, KARNA TAKA                                 A
                                     v.
                   STERLING FOODS, \.1ANGALORE

                             APRIL 15, 1999

               [S.P. BHARUCHA AND R.C. LAHOTI, JJ.]                             B

      Income Tax Act, 1961

        Section 80HH and 28-Deduction-Profits and gains derived from an
 industrial undertaking-Firm engaged in processing sea food-Sale proceeds       C
from import entitlements-Claim/or relief including income derived from sale
 of import entitlements-Permissibility of-Held, the sale proceeds from import
 entitlements do not constitute profit and gain derived from the assessees'
 industrial undertaking-Thus, not entitled to claim relief in respect of sale
proceeds from import entitlements.
                                                                                D
      Section 28 (as amended in 1990)-Applicability of

      Practice & Procedure

      Binding precedent-Division Bench of High Court-Judgment-Later
co-ordinate Bench not following the Judgment-Held, not justified.               E
      Words & Phrases

     'Derived from '-Meaning of in the context of section 80HH of Income
Tax Acl; 1961.
                                                                                F
       Assessee firm was engaged in processing pr~wns and other sea food
 for export. It earned certain import entitlements granted by the Central
 Government under an Export Promotion Scheme, and sold them to others.
 Subsequently, while claiming relief under Section 80HH of the Income Tax
 Act, 1961, it included the sale proceeds deri~ed from import entitlements. G
 The Tribunal rejected the said claim of the assessee. When an identical
 issue arose for an earlier assessment year, High Court rejected the claim
 of the assessee. However, on Reference in the instant case, High Court
 relying upon the amended provisions in Section 28 of the Act allowed the
'Claim of the assessee. It did,not follow the earlier binding judgment of the
 High Court. Hence the present-appeal.                                        H
                                    699
    700                      SUPREME COURT REPORTS                   [1999] 2 S.C.R.

A           Allowing the appeal and setting aside the order of High Court, this
    Court

        HELD: 1.1. Assessee firm is not entitled to claim relief under Section
    80HH of the Income Tax Act, 1961 in respect of sale proceeds derived from
    import entitlements. [705-B]
B
           1.2. Under Section 80HH of the Income Tax Act, 1961 an assessee is
    entitled to deduction from the profits and gains derived from an industrial
    undertaking. There must be, for the application of the words "derived from",
    a direct onus between the profits and gains and the industrial undertaking.
C   In the instant case, the nexus is not direct but only incidental. The industrial
    undertaking exports processed sea food. By reasons 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 be held to constitute a profit and gain derived from the assessees'
    industrial undertaking. [702-E; 705-C-D]
D
            Bombay Electric Supply Industrial Co. Ltd v. CIT, 113 ITR 84, referred
    to

          Commissioner of Income Tax, Madras-Iv. Wheel and Rin company of
E   India Ltd., 107 ITR 168, distinguished

          National Organic Chemical Industries Ltd. v. Collector of Central
    Excise, Bombay, 106 STC 467, held inapplicable.

          2. The amended provisions of Section 28 of the Act have no relevance
F   to the point in issue and the High Court was in error in relying thereon and
    not following the earlier judgment.

            CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2390-91 of
    1996.

G        From the Judgment and Order dated 22/29.11.90 of the Karnataka High
    Court in l.T.R.C. Nos. 33 and 62of1984.

         Ranbir Chandra, T.C. Sharma, S. Rajappa and S.K. Dwivedi for the
    Appellant.

H           Dhruv Mehta, S.K. Mehta and Ms. Shoba for the Respondent.
               C.l.T. v. STERLING FOODS [BHARUCHA, J.]                      701
      The Judgment of the Court was delivered by                                   A
      BHARUCHA. J. The Judgment and order under appeal (190 ITR 274)
was pronounced by a Division Bench of the Kamataka 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 question:
                                                                                   B
        "Whether, on 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 of the Income-
        tax Act, 1961 ?"
                                                                                   c
       The 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 assessee's appeal for the
later assessment year would have been bound by the earlier decision. However,      D
it chose not to do so relying upon the fact that Section 28 of the Income Tax
Act, 1961 had been amended in the meanwhile by the Finance Act, 1990 with
effect from 1st April, 1962 by insertion of clause (iiia) and clause (iiib) with
effect form April 1, 1967, which read as follows:

            "(iiia) profits on sale of a licence granted under the Imports         E
        (Control) Order, 1955, made under the Imports and Exports (Control)
        Act, 1947 (18of1947).

            (iiib) cash assistance (by whatever name called) received or
        receivable by any person against exports under any scheme of the
        qovt. of India."                                                           F
      As we shall point out, these amended provisions have no relevance to
the point at issue and the High Court was in error in relying thereon and not
following the earlier judgment.

      The facts are :
                                                                                   G
           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 entitlements granted by the Central
       Govt. under an Export Promotion Scheme. The assessee was entitled
       to use the import settlements itself or sell the same to others. It sold    H
    702                      SUPREME COURT REPORTS                     [1999) 2 S.C.R.

A           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 SOHH
            of the Act in respect also of the sale proceeds of the import
            entitlements.

B           Section SOHH, so far as it is relevant, read at all relevant times thus:

                "SOHH, Deduction in respect of profits and gains from newly
             established industrial undertakings or hotel business in backward
             areas. (1) where the gross total income of an assessee includes any
             profits and gains derived from an industrial undertaking, or the business
c            of a hotel, to which this section applies, there shall, in accordance
           . with and subject to the provisions of this section, he allowed, in
             computing the total income of the assessee, a deduction from such
             profits and against of an amount equal to .twenty per cent thereof."

                To analyse the provision so far as it is relevant here, if the gross
D
            total income of an assessee includes any profits and gains derived
            from an industrial undertaking, the assessee is entitled to be allowed,
            in the computation of his total income, a deduction from the profits
            and gains derived from the industrial undertaking of an amount equal
            to 20% thereof.
E
           To analyse the provision so far as it is relevant here, if the gross total
    income of an asse~see includes any profits and gains derived from an indus.trial
    undertaking, the assessee is entitled to be allowed, in the computation of his
    total income, a decution from the profits and gains derived from the industrial
    undertaking of an amount equal to 20% thereof.
F
          The question, therefore, was whether the income derived by the assessee
    by the sale of the import entitlements was profit and gain derived from its
    industrial undertaking of processing sea food. The Division Bench of the
    High Court came to the conclusion that the income which the assessee had
G   made by selling the import entitlements was not a profit and gain which it had
    derived from its industrial undertaking. For that purpose, it relied upon the
    decision of this Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT,
    (113 ITR 84). It was there held that the expression "attributable to" was wider
    in import than the expression "derived from". The expression of wider import,
    namely, attributable to was used when the legislature intended to cover
H   receipts from sources other than the actqal conduct ,of the business. The
                C.I.T. v. STERLING FOODS [BHARUCHA, J.)                      703
· Division Bench of the High Court observed that to obtain the benefit of A
  Section 80HH the assessee had to establish that the profits and gains were
  derived frorri its industrial undertaking and it was just not sufficient that a
  commercial connection was established between the profits earned and the
  industrial undertaking. The industrial undertaking itself had to be the source
  of the profit. The business of the industrial undertaking had directly to yield B
  that pr.ofit. The' industrial undertaking had the direct source of the profit and
  not a means to earn any other profit. Reference was also made to the meaning
  of word "source", and it was held that the import entitlements that the
  assessee had earned were awarded by the Central Govt. under the scheme to
  encourage exports. The source referable to the profits and gains arising out
  of the sale proceeds of the import entitlement was, therefore, the scheme of C
  the Central Govt. and not the industrial undertaking of the assessee.

       The question arose, as aforestated again for the Assessment Year 1979-
 80 and the Division Bench of the High Court, then, basing itself on the
 amendment to Section 28 referred to above, decided otherwise. The relevant
 portion of the judgment and order under appeal reads thus :                         D
              "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 r~trospectively. If it is not binding
         on us, then at the time we are called upon to answer a question for         E
         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 effected from 1962-63 and therefore,
        ·in 1979-80, the income received from the Govt. of India by sale of
         import licences and.incentives for export was income within the meaning     p
         of Section 28 assessable to fax as income from profits and gliins of
         business or profession. It is in that light that we have to answer the
         question."

        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             G
held the provision of Section 28 a~ amended made no difference. Therefore,
in our view, the judgment under appeal would have to be ·set aside inasmuch
a!; it did not follow an earlier binding judgment of the High Court itself.

       But learned counsel for the assessee submitted that he was entitled to
 urge since this matter related to a different assessment year, that the earlier     H
    704                     SUPREME COURT REPORTS                      (1999] 2 S.C.R.

A   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.

           In learned counsel's submission, the profits and gains were derived
    from the assessee's industrial undertaking and were, therefore, entitled to the
B   deduction prescribed by Section 80HH. Learned counsel cited the judgment
    of the Madras High Court in Commissioner of Income-Tax, Madras-Iv. Wheel
    and Rin Company of India Ltd., ( l 07 ITR 168) which, no doubt, is squarely
    on the point and holds in favour of the assessee. To quote what would be
    fully explanatory, "In the fast place as we pointed out already, the receipt by
C   way of subsidy and the receipt by way of the profits due to the sale of import
    entitlement are directly referable to the export of the cycle rims made by the
    assessee and consequently they can be said to be profits and gains derived
    from the export of cycle rims even on the basis of any theory of proximity."

          Our attention was also invited to the judgment of this Court in National
D   Organic Chemical Industries Ltd. v. Collector of Central Excise, Bombay,
    (106 STC 467). The relevant portion of the judgment is contained in para,graphs
    10,11,& 12 and they read thus:

                "10. The dictionaries state that the word "derive" is usually followed
            by the word "from'', and it means : get to trace from a source; arise
E           from, originate in; show the original or formation of.

                11. The use of the words "derived from" in item l l-AA(2) suggests
           that the original source of the product has to be found. Thus, as a
           matter of plain English, when it is said that one word is derived from
           another, often in another language, what is meant is that the source
F
           of that word is another word; often in another language. As an
           illustration, the word "democracy" is derived from the Greek word
           "demos", the people and most dictionaries will so state. That is the
           ordinary meaning of the words "derived from" and there is no reason
           to depart from that ordinary meaning here.
G
               12. Crude petroleum is refined to produce raw naphtha. Raw
           naphtha is further refined, or cracked to produce the said products.
           This is not controverted. It seems to us to make no difference that the
           appellants buy the raw naphtha from others. The question is to be
           judged regardless of this and the question is whether the intervention
H          of the raw naphtha would justify the finding that the said products
                 C.l.T. v. STERLING FOODS [BHARUCHA, J.]                   705
          are not "derived from refining of crude petroleum". The refining of     A
          crude petroleum produces various products at different stages. Raw
          naphtha is one such stage. The further refining, or cracking of raw
          naphtha results in the said products. The source of the said products
          is crude petroleum. The said products must therefore, be held to have
          been derived from crude petroleum."
                                                                                  B
       We do not think that the source of the import entitlements 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 Govt. whereunder the export entitlements become
available. There must be for the application of the words "derived from", a C
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' D
 industrial undertaking.

      In the result, the appeals are allowed. The judgment under appeal is set
aside. The question is answered in the affirmative and in favour of the
Revenue. No order as to costs.
                                                                                  E
S.V.K.1                                                      Appeals allowed.