EASTERN CHEMICAL AND MINERALSversusCOMMISSIONER OF INCOME TAX

                     \I.


A                   EASTERN CHEMICAL AND MINERALS
                                  v.
                      COMMISSIONER OF INCOME TAX

                                   MARCH 9, 1999

B            (S.P, BHARUCHA, S.S. MOHAMMED QUADRI AND
                       •   R.C. LAHOTI, JJ.] -

            lncom_e_ Tax Act, 1961 :

C        S. 104, 104(3 )-!ncome-tax on undistributed income of com-
  panies-Exemption from-Notificatio11 No. S.O. 3210 dated 8.8.1969 granting
  exemption froni operation of s. 104 to companies exporting goods out of India
  and receiving sale proceeds i11 India or bringing it into India provided sale
  proceeds received from export amount to 50% ofgross receipts of the business
  during previous yeat-Receipts from transfer of import licences-Held, do not
D fall within the requiremel!ts of the Notification:
        !       -                             -                                     ~

           The assessee was granted permission, for the purpose of a barter
     deal, to export ferro silicon and import pesticides and was allowed to
     endorse_ the 1mport licences in favour of actual users on the list of the
E Director General, Technical. For assessment years 1972-73 to 1974-75, the
     assessee, rel>ing upon the income derived from the exports that it had
     made as also upon the consideration that it had realised for the assign·
     ment of the import licences, claimed exemption_from levy of additional
   _income tax under s. 104(1) of the Income Tax Act, 1961 read llith Notifica· .
     lion No. S.O. 3210 dated 8.8.1969. The Notification exempted every Indian
F Company from operation of s. 104 in respect of the previous year relevant
 ',to the assessment year commencing OU 1.4.1970 and in Subsequent years,
     pr~,ided that such company exported any goods or merchandise out of
   .          .                        \ -                           .
 --- India and sale proceeds of the exports was received in or brought into
    .India by or on behalf of the company according to Foreign Exchange
   /
G Regulation Act, 1947 and the said sale proceeds amounted to 50% or more
     ?f the company's i;r'oss receipts during the previous year. The Income Tax
     Officer rejected the claim. On appeal, the Commissioner of Income Tax
     (Appeals) a~ also the IncomeTax Appellate Tribunal did not accept the
     contention of Revenue that the realisation from assignment \ii import
H licences could not be treated as sale proceeds derived from exports, and
                                           948
            EASTERN CHEMICAL AND MINERALS. v. C.I.T.                  949

upheld the the claim of the assessee. The reference made to the High Court   A
was answered in favf'ur of Revenue. Aggrieved, the assessee filed the
present appeals.

      Dismissing the appeals, this Court

      HELD : 1.1. The consideration received by the assessee upon assign-    B
ment of the import licences does not fall within the requirements of
Notification No. S.O. 3210 dated 8.8.1969 and cannot be taken into account
in determining whether 50% or more of the assessee's income is derived
from the sale proceeds of exports. [954-E]
                                                                             c
      1.2. The Notification read with the proviso thereto makes it clear that
for the purposes of determining whether the sale proceeds derived by an
assessee from exports amount to 50% or more of its aggregate gross
income what is to be taken into account are "the sale proceeds of the
exports", that is to say, the export of' any goods or merchandise out of D
India". Further, the sale proceeds of the exports have to be received in or
brought into India in accordance with FERA. What is contemplated is the
export of goods or merchandise out of India, such export to be paid for in
India or abroad. If paid for abroad, such amount has to be brought into
India in accordance with the provisions of FERA. Clearly, the considera-
tion received by an assessee for assignment of import licences received .E
pursuant to the exports cannot be taken into account for the purpose of
determining whether the sale proceeds derived by the assessee from ex-
ports amount to 50% or more of its aggregate gross income. [954-A-C]

      Commissioner of Income Tax Madras-I v. Wheel and Rim Company           F
of India Limited, 107 ITR 168, distinguished.

      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 526-28
of 1992.

     From the Judgment and Order dated 4.4.91 of the Madras High G
Court in T.C. Nos. 632-634 of 1980.

      Dushyant A. Dave and V. Balachandran for the Appellant.

      T.L.V. Iyer, T.C. Sharma and B.K. Brasad for the Respondent.           H
    950                    SUPREME COURT REPORTS                     (1999) 1 S.C.R.

A         . The Judgment of the Court was delivered by

          BHARUCHA, J. Under appeal is the decision of a Division Bench of
    the High Court at Madras. The Division Bench answered in tlie negative
    and in favour of the Revenue the following questions:

B            1. "Whether on the facts and in the circumstances of the case, the
             Appellate Tribunal was right in holding that having regard to the
             Notification under Section 104(3) of the Income Tax Act, 1961 in
             S.O. No.3210. dated 8.8.1969 issued by the Government the asses-
             see was not liable to pay additional tax under section 104 of the
C            Income Tax Act, 1961 for any of the assessment years from 1972-
             73 to 1974-75?

             2. Whether on the facts and in the circumstances of the case, the
             Appellate Tribunal was right in holding, that the amounts realised
             by the assessee from the transfer of its import licences constituted
D            sales proceeds derived by it from its export within the meaning of
             the Notification S.O. No-3210, dated 8.8.1969 and therefore the
             assessee would be entitled to enjoy the exemption from the opera-
             tion of the provision of Section 104 of the Income Tax Act. 1961?"

E        As indicated in the questions, we are concerned with the Assessment
    Years 1972- 73 to 1974-75.

           To appreciate what is involved, it is necessary to set out, at the outset,
    the provisions of Section 104 of the Income Tax Act, 1961 so far as they
    are- relevant:
F
             "104. Income-tax on undistributed income of certain companies -
             (1) Subject to the provisions of this section and of sections 105,
             106, 107 and 107A, where the Income-Tax Officer is satisfied that
             in respect of any previous year the profits and gains distributed as
             dividends by any company within the twelve months immediately
G            following the expiry of that previous year are less than the statutory
             percentage of the distributable income of the company of that
             previous year, the Income Tax Officer shall make an order in
             writing that the company shali apart from the sum determined as
             payable by it on the basis of the assessment under Section 143 or
H            Section 144, be liable to pay income-tax at the rate of -
   EASTERN CHEMICAL AND MINERALS. v. C.I.T. [BHARUCHA, J.] 951

           (a) fifty percent, in the case of an investment company;             A

           (b) thirty seven per cent, in the case of a trading company, and

           (c) twenty five per cent, in the case of any other company.

           on the distributable income as -reduced by the amount of             B
        dividends actually distributed, if any.

           (2) ................. .

            (3) if the Central Government is of opinion that it is necessary
        or expedient in the public interest so to do, it may, by notification
        in the Official Gazette and subject to such conditions as may be
                                                                                c
        specified therein, exempt any class of companies to which the
        provisions of this section apply from the operation of this section."

      A notification dated 8th August, 1969 (No.S.0.3210) was issued in
exercise of the powers conferred by Seciion 104(3). It read thus :              D
           "In exercise of the powers conferred by sub-section (3) of
        section 104 of the Income-Tax Act. 1961 (43of1961), and in partial
        modification of the Ministry of Finance (Department of Revenue
        and Insurance) Notification No. S.0.2007 dated the 6thJune.1967,
        the Central Government, being of opinion that it is necessary and       E
        expedient in the public interest so to do, hereby exempts every
        Indian Company (not being an investment company as defined in
        clause (ii) of section 109 of the Act) from the operation of the said
        section 104, in respect of the previous year relevant to the assess-
        ment year commencing on the 1st day of April, 1970, and any             F
        subsequent year :

           Provided that such Indian company, in the course of its busi-
        ness. -

           (a) exports any goods or merchandise out of India; or                G
            (b) performs any constructional operations or renders any
        service outside India; or

           (c) provides or makes available to any enterprise or institution,
        association, or other body established outside India, any technical     H
                                                                                                  I -




    952                   SUPREME COURT REPORTS                      (1999] 1 S.C.R.
A            know-how being any patent, invention, model, design, secret for-
           - mula or process, or similar property right, or information concern-
             ing industrial, commercial or scientific knowledge, experience or
             skill,

                and the sale proceeds of the exports referred to in item (a) or,
B           as the case may be, the income accruing to the company from the
            activities of its business referred to in item (b) or ( c) is received
            in or brought into India by the company or on its behalf in
            accordance with the Foreign Exchange Regulation Act, 1947 (7 of
            1947), and any rules and orders made thereunder :
c                    .                                         .
                 ProVIded further that the sale proceeds denved by the company·
                                                                                '· .'.)\"'
            from the exports, if any. referred to in item (a) and the gross
          - ·receipts derived by it from the activities of its business referred to
             in item (b) or item (c) or both, during the previous year, amount.
             in the aggregate, to 50 per cent or more of the aggregate amount
D            of the sale proceeds and all other gross receipts of the business
             during the previous year credited to the profit and loss account of
             the company."
                                                                         '
                                                                         ~     -
         The assessee had, by a letter dated 26th March, 1969, written by the
E Government of India, Ministry of Commerce, been granted permission to
  export for the purpose of a barter deal, ferro-silicon manufactured by the
  Mysore Iron and Steel Works, Bhadravati, upto a value of Rs.52 lacs
  (f.o.b.). Against this value the assessee was permitted to import pesticides
  as therein enumerated of a total value that did not exceed Rs.22 lacs. The
  assessee was informed that the import licences that would be issued in this
F regard could be endorsed in favour of actual users on the list of the
  Director General, Technical Development.

         The assessee claimed that it was entitled to the exemption from the
  levy of additional income-tax under Section 104(1) read with the said
  notification. For this purpose, it relied upon the income derived from the
G exports that it had made as also upon the consideration that it had realised
  for the assignment of the import licences obtained pursuant to such ex-
  ports. The Income Tax Officer rejected the assessee's contention. The
  Commissioner of Income Tax (Appeals) accepted it, as also did the Income                   ,l
  Tax Appellate Tribunal. The Tribunal noted. that it was common ground
H that if the realisation from the transfer of the assessee's import licences
                                                                                                        ..
          EASTERN CHEMICAL AND MINERALS. v. C.I.T. [BHARUCHA, J.] 953

      were considered as sale proceeds derived from exports, they would con- A
      stitute more than 50% of the aggregate amount of the gross ,,receipts
      credited, to the profit and loss account for all the assessment years. It was
      the contention of the P..evenue that the import licence realisation could not
      be treated as such sale proceeds. The Tribunal relied upon a judgment of
      the Madra~ High Court in Commissioner of lllcome Tax Madras-fv. Wheel
      and Rim Company of India Limited, (107 ITR 168) and held that, having
                                                                                    B
      regard to the integrated nature of the scheme, the import licence realisa-
      tion by the assessee would constitute sale proceeds derived by it from
      exports within the meaning of the said notification.

             Arising out of the judgment and order of the Tribunal, the questions    C
      quoted above were referred to the High Court. The High Court found,
      rightly, that the judgment in the earlier case referred to above was distin-
      guishable on facts. It analysed the said notification and held that an
      assessee would get its benefit only after it exported goods out of India and
      received the sale proceeds of the exports in India. The receipts from the      D
      transfer of import licences by the assessee to actual users in India did not
      fall within the meaning of the said notification. Admittedly, the import
      licences had been sold by the assessee in India and the sale proceeds
      thereof had been realised in India. The profit realised on such sales could
      not be considered as a part of export sale proceeds. Accordingly, the High
      Court reversed the Tribunal's conclusion.                                      E

            What is involved in this appeal is the construction of the said notifica-
      tion and, particularly, the provisos thereof. The notification exempts every
      Indian company from the operation of Section 104 in respect of the
      previous year relevant to the assessment year commencing on Ist April, F
      1970 and in subsequent years, and we now quote only what are the relevant
      words thereof: "Provided that such Indian company in the course of its
      business .exports any goods or merchandise out of India and the sale
      proceeds of the exports is received in or brought into India by the company
      or on its behalf in accordance with the Foreign Exchange Regulation Act,
      1947 (7 of 1947) and any rules and orders made thereunder; provided G
      further that the sale proceeds derived by the company from the exports
      during the previous year amount, in the aggregate, to 50% or more of the
..l   aggregate amount of the sale proceeds and all other gross receipts of the
      business during the previous year credited to the profit and loss account
      of the company."                                                                H
    954                  SUPREME COURT REPORTS                  [1999] 1 S.C.R.
A         For the purposes of determining whether the sale proceeds derived
    by an assessee from exports amount to 50% or more of its aggregate gross
    income what is to be taken into account are "'the sale proceeds of the
    expor~"; that is to say, the export "of any goods or merchandise out of
    India". Secondly, the sale proceeds of the exports have to be received in or
    brought into India in accordance with FERA. What is contemplated is the
B   export of goods or merchandise out of India, such export to be paid for in
                                                                                   t
    India or abroad. If paid for abroad, such amount has to be brought into
    India in accordance with the provisions of FERA. Clearly, the considera-
    tion received· by an assessee for assignment of import licences received
    pursuant to the exports cannot be taken into account for the purpose of
C   determining whether the sale proceeds derived by the assessee frum ex-
    ports amount to 50% or more of its aggregate gross income.

           No doubt, the barter deal entitles the assessee to import licences.
    The assessee is further entitled to assign these import licences to actual
    users, but the consideration that it receives in regard to such assignment
D   falls outside the scope of the two requirements of the said notification. It
    may be that, as argued by learned counsel for the assessee, the import
    licences arc intended to compwsate the assessee for any loss that it has
    incurred by reason of exp~rt at competitive international rates. Nonethe-
    less, for the purposes of the said notification, the consideration received
E   by the assessee upon assignment of such import licences does not fall
    within the requirements of the said notification as analysed above and
    cannot be taken into account in determining whether 50% or more of the
    assessee's income is derived from the sale proceeds of exports.

          We affirm the judgment of the High Court and dismiss the appeal
F with costs.
    R.P                                                     Appeals dismissed.