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India Leather Corporation (P) Ltd., Madras v. Commissioner Of Income Tax, Madras .
Factual and Procedural Background
The assessee, a private limited company operating a tannery called Southern India Tanneries, manufactures leather by chemically processing hides and skins and also trades in leather on a commission basis. For the Assessment Year (A.Y.) 1966-67 it reported total profits of Rs 5,05,045, of which Rs 3,73,870 came from selling chemicals imported under licences granted on the strength of its earlier leather export performance. Although its distributable income was computed at Rs 2,59,289, the company declared dividends of only Rs 1,00,000.
The Income-tax Officer (ITO) concluded that the profit from sale of imported chemicals was not “attributable to” the company’s manufacturing or processing activity. Because income from such activity constituted less than 51 % of total income, the ITO held that the exemption in Section 104(4) of the Income-tax Act, 1961 was unavailable and levied additional tax of Rs 58,937 under Section 104. The Appellate Assistant Commissioner and, on further appeal, the Income-tax Appellate Tribunal (ITAT) affirmed the levy.
At the assessee’s instance, the ITAT referred the following question to the Madras High Court: whether the Rs 3,73,870 profit from sale of imported chemicals was rightly held not attributable to the assessee’s manufacturing activity. The High Court answered the question in the affirmative (against the assessee). Certified for appeal under Section 261 of the Act, the matter came before the Supreme Court along with related Special Leave Petitions concerning A.Y. 1967-68.
Legal Issues Presented
- Whether profit earned from the sale of chemicals imported under licences based on the assessee’s export performance is “income attributable to” the assessee’s manufacturing or processing activity within the meaning of the Explanation to Section 104(4) of the Income-tax Act, 1961.
Arguments of the Parties
Assessee’s Arguments
- The phrase “income attributable to” in the Explanation to Section 104(4) is of wide amplitude and should encompass profits arising from sale of chemicals imported by virtue of export performance in leather, hides and skins.
- Reliance was placed on Cambay Electric Supply Industrial Co. Ltd. v. CIT and Ashok Leyland Ltd. v. CIT to stress that “attributable to” has a broader scope than “derived from”.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 2 SCC 644; 113 ITR 84 | “Attributable to” has a wider connotation than “derived from”. | The Court accepted the wider meaning but emphasised that a causal connection must still exist between the income and the manufacturing activity. |
| Ashok Leyland Ltd. v. CIT (1997) 1 SCC 729; 224 ITR 122 | Reiterated the expansive scope of “attributable to” in fiscal statutes. | Used to examine, yet ultimately reject, the assessee’s claim that the impugned income was sufficiently connected to its manufacturing process. |
Court's Reasoning and Analysis
The Supreme Court acknowledged that “attributable to” is broader than “derived from”, but stressed that the expression still demands a real and proximate causal connection. Drawing on Stroud’s Judicial Dictionary, the Court noted that a result is “attributable” only when it is wholly or materially caused by the referenced activity.
Examining the facts, the Court observed that:
- The disputed income arose from selling imported chemicals, not from manufacturing leather.
- The import licences were earned on the strength of the assessee’s export turnover, yet less than 10 % of the exports comprised goods manufactured by the assessee itself; the remainder were third-party goods exported on commission.
- Given this minimal contribution of self-manufactured goods to export performance, the profit from chemical sales lacked a direct and substantial link to the manufacturing process.
Consequently, the income could not be regarded as “attributable to” manufacture or processing under Section 104(4). The High Court and Tribunal were therefore correct in upholding the levy of additional tax.
Holding and Implications
Appeal Dismissed. The Supreme Court affirmed the Madras High Court’s judgment, sustaining the additional tax assessment under Section 104 for A.Y. 1966-67. The connected Special Leave Petitions for A.Y. 1967-68 were also dismissed.
Implications: The assessee remains liable for the additional tax. The decision underscores that, despite the wide reach of the term “attributable to”, a proximate causal nexus is imperative; mere remote or indirect links to manufacturing activity do not suffice for exemption under Section 104(4). No new precedent was created, but the ruling reinforces existing interpretative principles regarding the scope of “attributable to” in tax statutes.
Order
1. This appeal by the assessee is directed against the judgment of the Madras High Court dated 14-11-1978 in Tax Case No. 33 of 1975 relating to the Assessment Year 1966-67.
2. The assessee is a private limited company carrying on the business of tanning hides and skins by chemical process and selling the resultant leather as well as purchase and sale of leather on commission basis. It owns a tannery known as Southern India Tanneries where the tanning of hides and skins by chemical process is done. During the Assessment Year 1966-67 the total profit of the assessee was Rs 5,05,045 which included Rs 3,73,870 earned by sale of chemicals imported on the strength of licences granted on the basis of export of leather, hides and skins in earlier years. The distributable income of the assessee for the Assessment Year in question was Rs 2,59,289 but it had distributed only Rs 1,00,000 as dividend. The assessee claimed that it was a company whose main business was manufacture of leather, processing of hides and skins with chemical process and the provisions of Section 104 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) do not apply in view of sub-section (4) of Section 104. The Income Tax Officer held that profit of Rs 3,73,870 earned by the assessee by sale of imported chemicals could not be said to be attributable to its activity of manufacture or processing of goods and consequently the assessee could not be considered as a company falling within the purview of Section 104(4) since the income attributable to such activity was less than 51% of its total income. He, therefore, levied additional tax of Rs 58,937 under Section 104. The said order of the Income Tax Officer was affirmed in appeal by the Appellate Assistant Commissioner and by the Income Tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) on further appeal. The Tribunal, in its order, has taken note of the fact that during the previous year ending 31-12-1965 the total export sales of the assessee were Rs 3,99,13,372 out of which export sales of hides and skins manufactured by it were to the extent of Rs 32,49,000 only. The Tribunal has observed that the sale of goods manufactured by the assessee was less than 10% of the total export and that the rest were all goods of third parties, purchased and exported by it on commission basis. On these facts the Tribunal held that it could not be said that the profit derived by the appellant by sale of imported chemicals had direct relationship or connection with its manufacturing activity. At the instance of the assessee the Tribunal referred the following question for the opinion of the High Court:
“Whether the profit of Rs 3,73,870 obtained by the assessee during the relevant previous year by the sale of chemicals imported by it on the strength of licences issued to it based on its export performance of leather both manufactured and purchased by it was rightly held as not attributable to the manufacturing activity carried on by it.”
3. By the impugned judgment the High Court has answered the said question in the affirmative, i.e, against the assessee and in favour of the Revenue. The High Court has held that though the export business of leather manufactured or purchased by the assessee was the remote cause for import entitlement which in turn had given rise to the earning of income from sales of imported goods and could in one sense be said to be connected with manufacturing, such connection was not sufficiently proximate to enable the Court to say that the income was attributable to the manufacturing process of leather.
4. The High Court granted certificate of fitness for appeal to this Court under Section 261 of the Act in view of the decision of this Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 2 SCC 644, (1978) 113 ITR 84. Hence this appeal.
5. Mrs Janaki Ramachandran, the learned counsel for the assessee, has invited our attention to the provisions contained in the Explanation in sub-section (4) of Section 104 of the Act which reads as under:
“For the purposes of clause (a) of this sub-section, the business of a company shall be deemed to consist mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power if the income attributable to any of the aforesaid activities included in its gross total income for the relevant previous year is not less than fifty-one per cent of such total income.”
6. The submission is that the expression “income attributable to any of the aforesaid activities” in the Explanation are words of wide amplitude and that income earned by the assessee on the sale of chemicals imported under import licences obtained by the assessee on the basis of the export of leather, hides and skins should be treated as income attributable to the business of manufacture of such goods by the assessee. In support of the said submission, the learned counsel has placed reliance on the decisions of this Court in Cambay Electric Supply Industrial Co. Ltd. (1978) 2 SCC 644, (1978) 113 ITR 84 and Ashok Leyland Ltd. v. CIT (1997) 1 SCC 729, (1997) 224 ITR 122.
7. We have perused the said judgments of this Court. It is no doubt true that the words “attributable to” have a wider meaning than the words “derived from”. But at the same time it cannot be ignored that normally the word “attributable” implies that “for a result to be attributable to anything it must be wholly, or in material part, caused by that thing”. [See Stroud's Judicial Dictionary, 5th Edn., Vol. I, p. 223.] A causal connection is necessary. In order that income can be said to be attributable to manufacture or processing of goods for the purpose of Explanation to Section 104(4) of the Act the earning of the income must be directly connected with manufacture or processing of goods. It is also necessary that material part of the said income should have been earned by that activity. In the present case the profit of Rs 3,73,870 was earned by the assessee by the sale of chemicals imported by it. The import licences for such imports were obtained by the assessee on the basis of its export performance in respect of goods in which the goods manufactured or processed by the assessee was less than 10%. Keeping in view these facts the High Court as well as the Tribunal have rightly taken the view that there was no direct or sufficiently proximate connection with the activity of manufacturing and the income derived from the sales of chemicals imported by the assessee under the import licences obtained on such export performance could not be held to be income attributable to the business of manufacture or processing carried on by the assessee for the purpose of Section 104(4) of the Act. In these circumstances, we do not find any merit in the appeal and the same is accordingly dismissed. No order as to costs.
SLPs (C) Nos. 8179 of 1980 and 4141 of 1981
8. These special leave petitions relating to the Assessment Year 1967-68 raise the same question as is involved in CA No. 292 of 1982 and are, therefore, dismissed.
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