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Sterling Foods v. Commissioner Of Income-Tax.

Karnataka High Court

Nov 22, 1990

Judgment

Subsequent
References

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Judicial Opinion Summary — High Court (M.P. Chandrakantharaj Urs, J.)

Factual and Procedural Background

This is an income-tax reference. The question referred was:

“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 80HH of the Income-tax Act, 1961?”

For the assessment year 1979-80, Messrs. Sterling Foods, Mangalore, received Rs. 3,09,800 by way of sale of import licences and export commission. In their return they claimed relief under section 80HH in respect of sale of import licences.

The procedural history in the provided opinion is:

The Income-tax Officer held that because the profit from the industrial undertaking was negative, no deduction under section 80HH was admissible and thus rejected the assessee's claim.
The Commissioner of Income-tax (Appeals) held that the receipts on sale of import licences were revenue receipts and therefore relief under section 80HH was not available; he followed an earlier Tribunal order concerning the assessee.
The Appellate Tribunal, following its earlier order dated January 7, 1981 (I.T.A Nos. 190 and 191 of 1979), upheld the Commissioner’s order and dismissed the appeal. The question above was referred to this Court for answer.

Legal Issues Presented

Whether the receipt from the sale of import entitlements could be included in the income of the assessee for the purpose of computing relief under section 80HH of the Income-tax Act, 1961.

Arguments of the Parties

Assessee's Arguments

The assessee (Sterling Foods) claimed relief under section 80HH in respect of the receipts from the sale of import licences.

Revenue's Arguments

Mr. Chander Kumar, for the Revenue, contended that this Court was bound to follow the earlier ruling in the case on the question referred and that the Court should answer the question in light of the facts and law as they existed when the Tribunal decided the case. He relied on the Supreme Court decision in Chatturam Horilram Ltd. v. CIT [1955] 27 ITR 709 to support the proposition that a High Court should not take notice of subsequent legislation when answering a reference.
As a limb of the above contention, it was argued that because this Court exercises an advisory jurisdiction under article 143(1), it should not go beyond the question referred on facts and circumstances existing on the date of the reference.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Sterling Foods v. Commissioner of Income-Tax, Karnataka [1984] 150 ITR 292	Held on identical facts that amount received by sale of import entitlements is business income (not capital) and that the source of such income was the Government scheme rather than the industrial undertaking; accordingly the head under which income fell did not support relief under section 80HH.	The Court acknowledged this earlier decision on identical facts but held that amendments to section 28 (insertions of clauses (iiia) and (iiib)) altered the legal position for the assessment year in question, reducing the binding effect of the earlier decision for the present assessment year.
Chatturam Horilram Ltd. v. CIT [1955] 27 ITR 709 (SC)	Observed that a High Court called upon to answer a reference might be in doubt whether it could take notice of subsequent legislation and answer a different question; suggested limitation on taking subsequent legislation into account in some contexts.	The Revenue relied on this authority to argue that the Court should not take subsequent amendments into account. The Court treated the observations as context-specific and noted that the scope expressed was one of doubt rather than absolute denial; it did not accept the contention that Chatturam prevented consideration of later retrospective amendments in all cases.
Commissioner of Income-Tax v. Straw Products Ltd. [1966] 60 ITR 156	Addressed taking into account orders or legislation (a 1962 Order) that were said to be retrospective, and discussed whether such orders could be relied on in a reference/appeal context.	The Court said it was fully supported by this decision for the proposition that a court may take notice of an intervening order or amendment that retrospectively affects the law applicable to the transaction under reference.
CST v. Bijli Cotton Mills [1964] 15 STC 656	Explained that a tribunal/high court must apply the law applicable to the transaction date, but if the law is amended with retrospective effect and the question referred is sufficiently framed (and does not require fresh facts), the High Court is bound to apply the amended law.	The Court relied on this passage (from the Constitution Bench) to hold that it was the duty of the High Court to apply the law as amended retrospectively when the question was couched broadly enough and did not require investigation of fresh facts.
Special Courts Bill, 1978, In re (1979) 1 SCC 380 (AIR 1979 SC 478)	Observed that views expressed by the Supreme Court in exercise of advisory jurisdiction may nevertheless be binding on courts inferior to the Supreme Court.	The Court cited this passage to support the proposition that advisory jurisdiction does not imply that the Court's answers are non-binding on subordinate tribunals; thus the High Court's interpretation can bind tribunals under its corrective jurisdiction.

Court's Reasoning and Analysis

The Court's analysis proceeded in the following steps (expressed only as contained in the opinion):

The Court observed that section 28 of the Income-tax Act defines income chargeable to tax under the head "Profits and gains of business or profession." The Finance Act amendments introduced clauses (iiia) and (iiib) into section 28 (as recited in the opinion), which read:
- (iiia) 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);
- (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
These insertions, the Court noted, make such receipts income under the head "Profits and gains of business or profession" by operation of law.
Given that the amendment caused the receipts from sale of import licences and export incentives to fall within section 28 as business income for the relevant assessment year (1979-80), the Court held that the benefits conferred by section 80HH would be attracted if the receipts are income.
The Court then addressed the Revenue’s contention that the Court must follow its earlier ruling on identical facts and could not take notice of subsequent amendments. The Revenue relied on Chatturam Horilram Ltd. The Court examined Chatturam and observed that the Supreme Court's observations there were made in context and expressed as a matter of doubt rather than an absolute bar.
The Court relied on later authority—particularly the Constitution Bench decisions in Straw Products Ltd. and Bijli Cotton Mills—to hold that where the law has been amended with retrospective operation, the High Court must apply the amended law if the question referred is broad enough to permit consideration of the amended law and the application does not require investigation of fresh facts. The Court concluded that these authorities supported taking notice of the retrospective amendments to section 28 for the assessment year in issue.
Finally, the Court rejected the Revenue's separate limb that the Court's "advisory jurisdiction" precluded it from going beyond the facts and law existing at the time of the Tribunal's decision. The Court referred to the Special Courts Bill, 1978, In re, where the Supreme Court indicated that its advisory holdings can be binding on inferior courts; analogously, High Court answers in such references can bind tribunals subject to corrective jurisdiction.

All of the above reasoning and citations are recorded and relied upon in the opinion as presented by the Court.

Holding and Implications

Holding: The Court answered the referred question in the negative and in favour of the assessee. The Court rejected the Revenue's contention that it was bound by the earlier ruling for the purposes of the present assessment year and held that, in view of the amendments to section 28 (clauses (iiia) and (iiib)), the receipts from sale of import licences and export incentives are income assessable under the head "Profits and gains of business or profession" and accordingly attract the benefits under section 80HH as applicable.

Implications:

Direct effect on the parties: The assessee's receipts from the sale of import licences and related export incentives are to be regarded as business income under section 28 for the assessment year in question, and the assessee is entitled to claim relief under section 80HH accordingly, subject to applicable conditions under that section (as the opinion frames the outcome).
No novel precedent beyond application of existing principles: The Court grounded its decision in statutory amendments to section 28 and in existing Supreme Court authority about applying retrospective amendments when answering references. The opinion does not assert the creation of a new legal principle beyond applying those amendments and authorities; it confines itself to answering the referred question in the light of the amended law and cited authorities.

Order: The Court stated "Order accordingly."

Show all summary ...

The Judgment of the Court was delivered by

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 80HH of the Income-tax Act, 1961?”

2. 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 and export commission. In the return filed, they claimed relief in respect of that receipt under section 80HH 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 80HH 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 80HH 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.T.A 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.

3. In the case of Sterling Foods v. Commissioner Of Income-Tax, Karnataka. [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 charge-able 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.”

4. 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 (iiia) and clause (iiib) with effect from April 1, 1967, and they read as follows:

“(iiia) profits on sale of a licence granted under the Imports (Con trol) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (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;”

5. 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 this 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 80HH will be attracted to the case of the assessee.

6. 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.

7. 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 in 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 the 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 22nd 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 effacing 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.”

(emphasis* supplied).

8. 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.

9. 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 Commissioner Of Income-Tax 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.

10. Mr. Desai, learned counsel for 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):

‘Undoubtedly 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 so 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 not 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.’

11. 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.”

12. 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.

13. 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 mean 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, (1979) 1 SCC 380 : AIR 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.”

14. 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.

15. 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.

16. Order accordingly.