1995-VIL-207-ITAT-
Equivalent Citation: ITD 054, 425, TTJ 054, 075,
Income Tax Appellate Tribunal CALCUTTA
Date: 09.03.1995
MAGNUM EXPORTS PRIVATE LIMITED.
Vs
ASSISTANT COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : R. V. EASWAR., R. ACHARYA.
JUDGMENT
Per Sri R.V Easwar, J.M.--- The assessee is a private limited company engaged in the export of garments. In this appeal we are concerned with the assessment year 1989-90 corresponding to the accounting year ended on 31-3-1989.
2. During the assessment proceedings, the Assessing Officer noticed that there was no export of garments during the year and that the receipts of the assessee consisted of duty draw back and sale of R.E.P. licence received against earlier exports. In the course of scrutiny of the accounts he found that the assessee had not taken into account the amount of Rs. 7,25,854 received by the assessee as sale proceeds of the export quota, while computing the taxable income. The assessee contended that the sale proceeds represented capital receipt since the export licence which was sold related to the capital structure or the very frame work of the business. It was also pointed out that the assessee did not deal in export licences and it was no part of its business to purchase and sell or in any manner deal in export licences. According to the assessee the export licence was an intangible asset of capital nature.
3. The Assessing Officer did not accept the assessee's contentions. He was of the view that the export entitlement was received in the course of the assessee's regular business and therefore, the sale proceeds represented trading receipts and consequently a part of the assessee's income. He also relied on the provisions of section 28(iiia) inserted by the Finance Act, 1990 with retrospective effect from 1-4-1962. He, therefore, brought the sum of Rs. 7,25,854 to tax as income from business.
4. The assessee's appeal to the CIT(A) on this point was rejected substantially on the same grounds as were taken by the assessing authority.
5. In ground No. 2 before us, the assessee challenges the view of the departmental authorities on this point. The learned counsel for the assessee submitted that section 28(iiia) is not applicable to the facts of the case since that section referred only to profits on sale of a licence granted under the Imports (Control) Order, 1955 made under the Imports & Exports (Control) Act, 1947 whereas the licence in the instant case was an export licence given under the Exports (Control) Order, 1977. Alternatively it was contended that even on general principles of Income-tax Law, the sale proceeds of the export licence constituted capital receipt in the assessee's hands as the licence related to the structure or frame work of the assessee's business. Mr. Murarka in this connection drew our attention to the relevant Exports (Control) Order and the export licencing procedure framed thereunder as well as other documents in connection with the grant and sale of the export licence. According to him a collective reading of these documents would show that the export licence was a condition precedent for the export of the garments and in this sense the licence constituted the frame work of the business, without which the assessee cannot engage itself in the business of exports. When the very asset which produces income is parted with, the consideration therefor can represent only a capital receipt and cannot be considered as the profits of the business. Mr. Murarka also relied upon the fact that it was not the assessee's business to trade in export licences and, therefore, the export licence cannot be viewed as stock-in-trade. Various authorities were cited by him and they are the following:
1. Pyrah (Inspector of Taxes) v. Annis & Co. Ltd. [1958] 33 ITR 604(CA). 2. Seshasayee Bros.(P.) Ltd v. CIT [1961] 42 ITR 568 (Mad.).
3. Erode Transports (P.) Ltd v. CIT [1969] 71 ITR 283 (Mad.).
4. Addl. CIT v.Ganapathi Raju Jogi [1993] 200 ITR 612 (SC).
6. On the other hand, the learned DR., besides strongly relying on section 28 (iiia) of the Act as well as on the fact that the receipt was incidental to the business, drew our attention to the following authorities :
1. Agra Chain Mfg. Co. v. CIT [1978] 114 ITR 840 (All.).
2. CIT v. Swadeshi Cotton Mills Co. Ltd [1979] 117 ITR 321 (All.).
3. CIT v. Wheel & Rim Co. of India Ltd [1977] 107 ITR 168 (Mad.).
4. CIT v. Ashoka Lungi Co. [1979] 120 ITR 413 (Mad.).
5. Jeewanlal (1929) Ltd. v. CIT [1983] 139 ITR 865 (Cal.).
6. Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 (Bom.). 7. Lundhiana Central Co-operative Consumers' Stores Ltd v. CIT [1980] 122 ITR 942 (Punj. & Har.).
7. On a careful consideration of the facts of the case, the various authorities cited by both the sides and their contentions, we are of the view that the assessee is entitled to succeed on this point. It is common ground that the assessee's business is not that of dealing in export licences. Therefore, the export licence obtained by it cannot constitute stock-in-trade in its hands. On the other hand, from the relevant provisions of the Exports (Control) Order, 1977 issued on 24-3-1977 by the Ministry of Commerce, we find that as per Rule 3 no person shall export any goods of the description specified in Schedule 1 to the order, except under and in accordance with a licence granted by the Central Government or by an officer specified in Schedule 2. It is common ground that the garments fell under Schedule 1 and, therefore, it required a licence if an assessee wanted to export them. In the case of a person engaged in the business of export of garments such as the assessee, the garments constitute the stock-in-trade, but the export licence without which the garments cannot be exported, constitutes a capital asset. The judgment of the Madras High Court in the case of Seshasayee Bros. Ltd. cited by Mr. Murarka is authority for this proposition. In that case the assessee which was a public limited company, obtained a licence from the Government of India for the manufacture of Vanaspati products. The licence was sold and the sale proceeds were brought to tax as business income. The first appellate authority held that it was a capital receipt taxable to capital gains. The Tribunal agreed with the view that the receipt was business income and not capital gains. On a reference at the instance of the assessee, the Madras High Court held that the licence was a valuable asset and a capital asset in the assessee's hands and the sale thereof would give rise to liability under section 12B of the Income-tax Act, 1922 and the sale proceeds were not assessable to tax as trading receipts. The Bombay High Court in the case of CIT v. Automobile Products of India Ltd [1983] 140 ITR 159 dealt with the case of sale of a licence granted to the assessee to manufacture diesel engines in collaboration with a foreign company. Due to some difficulties the assessee transferred the licence to another company for a price. On these facts it was held by the Bombay High Court that the transfer of industrial licence impaired the profit making structure of the assessee and, therefore, the sale price represented capital receipt.
8. In the present case also, as we have already seen, unless the assessee obtained an export licence it cannot export garments out of India. The licence thus gave the assessee the right to export garments and this valuable right is a capital asset in its hands. The assessee, as we have already seen, is not also engaged in the business of obtaining and selling licences. In fact, Rule 4(2) of the Exports (Control) Order places restrictions on the transfer of licence. It states that no licence can be transferred without obtaining the written permission of the licencing authority which granted the licence. This rule indicates the intention of the Government not to encourage trading activity in licences. The assessee obtained the export licence on the basis of its earlier export performance. The licence postulates the allocation of export entitlement by the Apparel Export Promotion Council, New Delhi. The assessee was accordingly allotted the export entitlements. As per the conditions for the transferability of the licence prescribed by the Ministry of Commerce by public notice dated 15-10-1987, the licence can be transferred either fully or partly to another registered exporter of garments at any time up to 30th September of the relevant year subject to certain conditions. These conditions are not relevant for our purpose except that a transferee of the licence cannot himself transfer the licence to another exporter. This also indicates the intention of the Government of India to discourage the trading activity in licence.
9. In the case of Kettlewell Bullen & Co. Ltd v. CIT [1964] 53 ITR 261, the Supreme Court observed as under at page 270 of the report :
" Whether a particular receipt is capital or income from business, has frequently engaged the attention of the courts. It may be broadly stated that what is received for loss of capital is a capital receipt : what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Cases on the borderline give rise to vexing problems. The Act contains no real definition of income ; indeed it is a term not capable of a definition in terms of a general formula."
In the case of CIT v. Maheshwari Devi Jute Mills Ltd [1965] 57 ITR 36, the Supreme Court observed at page 40 as under :
" There is no doubt that when a businessman disposes of his capital for whatever reason, unless it is a part of his circulating capital, the receipt is capital and not income which is taxable. Distinction between revenue and capital in the law of income-tax is fundamental. Tax is ordinarily not levied on capital profits : it is levied on income. It is well-settled that sale of stock-in-trade or circulating capital or rendering service in the course of trading results in a trading receipt : sale of assets which the assessee uses as fixed capital to enable him to carry on his business results in capital receipt."
10. In the case of CIT v. Prabhu Dayal [1971] 82 ITR 804 it was held by the Supreme Court that compensation for termination of an income producing asset must be considered as a capital receipt. The Rajasthan High Court, while dealing with the case of an assessee who sold his right to levy excise duty within the limits of his jagir, in the case of CIT v. Rao Raja Kalyansingh [1974] 97 ITR 690 (Raj.), held that what was received by the assessee for the sale of the right was compensation for the revenue-yielding asset and, therefore, the receipt cannot be anything but capital. In picturesque terms the High Court observed that " if the compensation is for the hen that lays the egg and not for the egg itself, then it cannot be but capital " (at page 695). A similar view was taken by the Patna High Court in the case of Addl. CIT v. Poddar Auto Dealers [1975] 101 ITR 14 where it was held that the price received for transfer of an agency agreement, which was the assessee's capital asset, must be referable to the fixed capital and is, therefore, a capital receipt. The Court, however, cautioned that whether an asset was a capital asset or a trading asset must be determined on the facts of each case. In the case before the High Court the agency agreement was considered by the High Court as the assessee's " profit-making apparatus ".
11. The aforesaid discussion shows that there is ample authority for the proposition that if an asset which represents the profit-making apparatus or a capital asset referable to fixed capital or to the very structure or frame-work of the business is sold for a price, the receipt must be considered as capital receipt. In the present case the assessee has obtained the licence for export of garments and the obtaining of the licence under the Export (Control) Order, 1977 is the condition precedent for the actual carrying on of the exports. Thus the export licence constitutes the profit-making apparatus of the assessee. It relates to the very frame-work or structure of the assessee's business. If that is sold, the source of income itself is destroyed and the compensation received in respect thereof must undoubtedly be considered as capital receipt. Only if the licence remains with the assessee, can it export the garments and carry on the business. But it is common ground, that there was no export by the assessee during the year. If there is no export at all, which means that there is no business during the year, then the primary condition for the application of section 28 of the Act would be absent and as held by the Supreme Court in the case of Prabhu Dayal, at pages 810 and 811, the section could not be made applicable where an assessee did not carry on business at all during the accounting period.
12. Thus, either way the matter is looked at, the price received by the assessee for the sale of the export licence cannot be brought to tax as business income. The addition of Rs. 7,25,854 is, therefore, deleted.
13. The next aspect to be considered is whether the assessee would be liable for capital gains tax in respect of the aforesaid sum. This question arises as a consequence to our decision to the effect that the receipt of Rs. 7,25,854 is a capital receipt. It was contended by the learned counsel for the assessee that there is no cost of acquisition in respect of the export licence and, therefore, there would be no liability to capital gains tax on the principle of CIT v. B. C Srinivasa Setty [1981] 128 ITR 294 (SC). He also invited our attention to the case of Ganapathi Raju Jogi where the Supreme Court held that route permits secured by transport operators have no cost of acquisition and the sale price received in respect thereof cannot be brought to tax as capital gains. We have carefully considered the contention and find force in it. The assessee has obtained the export licence and under the relevant rules the applicant for an export licence has to give the export performance in the pro-forma and certain other details such as bank certificates, etc. The application with such details has to be accompanied by a sum of Rs. 150 being " non-refundable service charges ". Apart from the service charges, the assessee is required to pay "council charges" to the Apparel Export Promotion Council, New Delhi. The assessee in the present case has paid council charges of Rs. 6,373. From the certificate issued by A.E.P.C. which is at page 28 of the paper book, we find that the council charges are related to the entitlement quantity. There is, however, nothing to show that for obtaining the export licence the assessee has to pay anything more than the service charges to the licencing authority. The council charges are paid to A.E.P.C. which enters the scene only after the export licence is issued by the licencing authority. The function of the A.E.P.C. is merely to allocate the export entitlement and for this purpose it charges council charges which has nothing to do with the export licence. From the papers produced in the paper book it would appear, therefore, that there is no cost of acquisition, as such, for the export licence. The judgment of the Supreme Court cited by the learned counsel for the assessee, though it relates to route permits is equally applicable to the case of export licence. Since there is no cost of acquisition for the export licence there is no liability to capital gains tax also. We hold accordingly.
14. to 18. [These paras are not reproduced here as they involved minor issues].
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