The Commissioner of Taxes Vs. M/S. Jute Spinners Ltd. 2017 (2) LNJ 92

Case No: Income Tax Reference Application No. 226 of 2005

Judge: Sheikh Hassan Arif. J.

Court: High Court Division,

Advocate: Mr. S. Rashed Jahangir, Mr. Sarder Jinnat Ali,

Citation: 2017 (2) LNJ 92

Case Year: 2016

Appellant: The Commissioner of Taxes

Respondent: M/S. Jute Spinners Ltd.

Subject: Income Tax

Delivery Date: 2017-09-17

HIGH COURT DIVISION

(SPECIAL STATUTORY JURISDICTION)

 

Sheikh Hassan Arif, J

And

Md. Salim, J

Judgment on

02.08.2016

}

}

}

The Commissioner of Taxes

.. Applicant

-Versus-

M/S. Jute Spinners Ltd.

... Respondent

Income Tax Ordinance (XXXVI of 1984)

Paragraph 28 of the 6th schedule part A

The cash subsidy as given by the government in favour of the assessee being not given to a stranger, rather it has been given to an exporter, the word occurring in paragraph no. 28 of the 6th schedule, part A should be given a liberal interpretation by the court in that the same should be held to include the income derived through subsidy and thereby should allow the asssessee to get rebate equivalent to 50% of the said amount while calculating income.                                               . . . (5)

Income Tax Ordinance (XXXVI of 1984)

Section 44(1)

Any income or class of income specified in part A of the 6th schedule shall be exempted from the tax payable under this ordinance subject to the limits, conditions and qualification laid down therein and accordingly, shall be excluded from the computation of total income. One of such income as specified in the said part A of the 6th schedule is income derived from business of export. The words “derived from the business of export is not decided issue. It needed to be interpreted liberally. When confusion arises in choosing between two different interpretations of a particular word of fiscal law, the interpretation favourable to the assessee should be adopted. The word derive and receive does not mean the same. The meaning of the expression derived from is to be showing the origin and that it is not confined to first degree sources. The focus must be given on effective cause or source except sequently proximate or immediate sources based on liberal meaning.              ...(9,10,12 and 13)

Income Tax Ordinance (XXXVI of 1984)

Section 44(1)

and

Paragraph 28 of the 6th schedule part A.

The words “derived from business of export” deserve a liberal interpretation of this court in favour assessee and as such cash subsidies as received by assessee should be regarded as a income derived from business of export entitling the assessee to have 50% of cash subsidies being deducted in calculating total income.   . . . (16 and 17)

Liberty India Vs. CIT, 317 ITR-218 (Supreme Court); CIT Vs. South Arcut Juciety-176 ITR 117, 113 (SC) and CIT Vs. Up Co-op Fed 176 ITR 439, 441 (SC) and National Board of Revenue Vs. Bata Shoe Co., 42 DLR (AD) 105 ref.

Mr. S. Rashed Jahangir, D.A.G  with

. . . For the applicant.

Mr. Sarder Jinnat Ali with       

Mr. Shaheed Alam, Advocate.

. . . For the respondent no.1.

JUDGMENT

Sheikh Hassan Arif, J: The aforesaid Reference Application, at the instance of the Commissioner of Taxes, Taxes Zone-1, Dhaka, is directed against order dated 30.11.2004 (received by the applicant on 13.12.2004) passed by the Taxes Appellate Tribunal, Division Bench-4, Dhaka in ITA No. 946 of 2004-2005 (Assessment year 2003-2004).

Background Facts:

2.            Short background facts are that, the assessee-company, being engaged in the business of export, submitted its income tax return for the assessment year 2003-2004 showing a net loss of Tk. 19,65,157.00 from the manufacturing and sale of jute goods through export to abroad and also to local market in Bangladesh. In the said return, the assessee disclosed an export subsidy as received from the government for an amount of Tk. 90,59,865.00. Thereupon, the DCT estimated its income from business after allowing depreciation of Tk. 2,02,489.00 and adding the said exports subsidy to the income and, thereby, estimated taxable income for an amount of Tk. 92,18,830/-. However, in the said income determination, no tax rebate was given on the said export subsidy as received by the assessee. Being aggrieved by the said assessment order, the assessee preferred appeal before the Commissioner of Tax (Appeals), Taxes Appeal Zone-1, Dhaka, whereupon, the Commissioner (Appeal), vide order dated 04.08.2004 passed in BuLl Bf£m fœ ew- 29/p¡x-3/LA-1/2003-2004, amongst others, allowed export subsidy on the said amount of Tk. 90,59,865.00 for an amount equivalent to 50% of the same. Being of aggrieved by this allowance of subsidy, the department preferred an appeal before the Taxes Appellate Tribunal, whereupon, the Division Bench No. 4, Dhaka of the Tribunal, vide order dated 30.11.2004 passed in ITA No. 946 of 2004-2005 (Assessment year 2003-2004), upheld the said decision of the Commissioner (Appeal). This reference application, at the instance of the department, is directed against the said order of the Tribunal with the following question of the law for the answer of this Court:-

1)      Whether, on the facts and in the circumstances of the case, the Commissioner of Taxes (Appeals) was justified in passing order to allow export  rebate on cash subsidy?

2)      Whether, on the facts and in the circumstances of the case, the Taxes Appellate Tribunal, Division Bench-4, Dhaka was legally justified to allow 50% export rebate on cash subsidy under para-28 of the sixth Schedule, Part-A of the Income Tax Ordinance, 1984?”

3.            The reference application is contested by the assessee-respondent.

         The main question of law for the answer of this Court in this reference application is whether the cash export subsidy, as received by the assessee from the government, should be allowed 50% rebate in calculating the total income of the assessee.

Submissions:

4.            Mr. S. Rashed Jahangir, learned Deputy Attorney General appearing for the department, at the beginning, has drawn this Court’s attention to the relevant provisions of law, in particular Section 44 read with paragraph 28 of the 6th  Schedule to the Income Tax Ordinance, 1994 (“the said Ordinance”). Learned DAG then submits that, the Legislature has made it clear by providing paragraph 28 under the said 6th Schedule that only the income received from the business of export by an assessee is entitled to such rebate in calculating total income in view of the said provisions. Drawing this Court’s attention to the specific words as used in the said provision, namely Paragraph 28 of the 6th Schedule, learned DAG submits that, the provision being “derived from the business of export”, any other income of the assessee derived from other sources, be it from government or from local market, will not come under the purview of this provision and, thereby, will disentitle the assessee to avail such opportunity of rebate as granted by the statute under the said provision. When attention of the learned DAG has been drawn to the decisions of two Division Benches of this Court on similar issue, namely in IT Reference Application No. 281 and 282 of 2002 (The Commissioner of Taxes vs. Bengal Jute Industries Ltd ), 20 Kar Adalat (2011)-32 and IT Reference Application No. 377 of 2004 (Rupali See Foods  limited vs. The Commissioner of Taxes), 22 Kar Adalat (2013)-302, learned DAG submits that, the said Division Benches of this Court in those cases did not consider the issues involved, in particular the provisions and the words used under paragraph 28 of the 6th Schedule, Part A, to the said Ordinance. This being so, according to him, since the real purport of the words “derived from the  businesses of export” is yet to be interpreted by this Court, the same should be decided by this Bench from that angle. Further drawing this Court’s attention to the above cited decisions, learned DAG argues that, it is evident from those decisions that the said Division Benches of this Court confined themselves to the interpretation of Section 28 (1) (c) of the said Ordinance and as such the said decisions should not be made applicable in the facts and circumstances of the present case.

5.            Mr. Shaheed Alam, learned advocate appearing for the assessee, on the other hand, submits that, since the Commissioner (Appeal) as well as the Tribunal have committed no illegality, this Court should answer the questions in this reference application in the affirmative i.e. in favour of the assessee.

Deliberations of the Court:

6.            To resolve the issues involved in this reference application, in particular to give proper answer to the submissions put forward by the learned DAG regarding the words “derived from the business of export” as occurring in paragraph 28 of the 6th Schedule, Part A, we have sought assistance from Mr. Sarder Jinnat Ali, learned senior counsel and a renowned Income Tax Practitioner. According to Mr. Sarder Jinnat Ali, learned advocate, the cash subsidy as given by the government in favour of the assessee being not given to a stranger, rather it has been given to an exporter, the words occurring in paragraph 28 of the 6th Schedule, Part A, should be given a liberal interpretation by this Court in that the same should be held to include the income derived through subsidy and thereby should allow the assessee to get rebate equivalent to 50% of the said amount while calculating income. In support of such submissions, Mr. Ali has put reliance on the above cited decisions of this Court. Referring to the said decisions, Mr. Ali submits that, since two differently constituted Benches have already allowed such rebate in favour of the assessee, this Court should also follow those decisions. However, Mr. Jinnat Ali frankly concedes that, the said Division Benches in fact did not give any interpretation as regards the words “derived from the business of export” as occurring in paragraph 28 of the 6th Schedule Part A, to the said Ordinance.

7.            It appears from record, in particular the orders of the lower authorities, that the concerned DCT added the amount of Tk. 90,59,865/-, as received by the assessee on account of cash subsidy, to the total income considering the same as income from other sources. However, the Commissioner (Appeal), vide its order dated 04.08.2004, allowed 50% rebate on the same holding that since the said amount was received by the assessee consequent upon his engagement in export business, he was entitled to such rebate of 50%. On appeal by the department, the Tribunal, vide order dated 30.11.2004, affirmed the said decision of the Commissioner (Appeal).

8.            Therefore, the moot question to be decided by this Court in this reference application is whether such cash subsidies as received by the assessee will fall under the income derived by the assessee form the business of export. To decide the issue, we have carefully examined the earlier two decisions of this Court, namely IT Reference Application No. 281 and 282 of 2002 (The Commissioner of Taxes vs. Bengal Jute Industries Ltd ), 20 Kar Adalat (2011)-32 and IT Reference Application No. 377 of 2004 (Rupali See Foods limited vs. The Commissioner of Taxes), 22 Kar Adalat (2013)-302. It appears that, two differently constituted Benches of this Court have arrived almost same conclusions in those cases in that since the provisions under Section 28 (1)  (c)  of the said Ordinance  include value of any benefit or perquisites, whether convertible into money or not, arising from business as one of the categories of income from business or profession of an assessee, it cannot be denied that what is  received by the assessee as cash subsidy as incentive against the export sales from the government must be an income and such income is no doubt derived from business and to be computed under the head income from business. By adopting such view, the said Benches further held that, the said cash incentives were entitled to be treated as income from business. However, it appears that, the issues involved regarding the provisions under paragraph 28 of 6th Schedule, Part A to the said Ordinance were neither raised nor considered in those cases. Not only that, the said provision under paragraph 28 of the 6th Schedule, Part A was not even referred to by the learned advocates in those cases, though the said provision was very much in the statute book as incorporated therein vide Finance Act, 1995. Therefore, we are of the view that, the ratio decided in those cases, being decided on consideration of different provisions of law, are not applicable in deciding the questions of law as raised in this reference application. 

9.            The issue before this Court, in this reference application, is whether the cash subsidy, as admittedly received by the assessee from the government as an incentive, as the assessee is engaged in the business of export, should be regarded as income derived from the business of export so that an amount equivalent to 50% of the said amount could be deducted in calculating the total income of the assessee. Therefore, the issues before us have to be examined from different angle, i.e. from the aspect of the provisions as provided by paragraph 28 of the 6th Schedule, Part A to the said Ordinance. For better understanding, let us first quote the relevant provisions under sub-section (1) of Section 44 and paragraph 28 of the 6th Schedule, Part A to the said Ordinance.

Section 44. Exemption.-(1) Notwithstanding anything contained in this Ordinance, any income or class of income or the income of any person or class of persons specified in Part A of the Sixth Schedule shall be exempt from the tax payable under this Ordinance, subject to the limits, conditions and qualifications laid down therein and shall be excluded from the computation of total income under this Ordinance.”

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

(3)    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Paragraph 28 6th Schedule, Part-A: An amount equal to fifty percent of the income of an assessee, other than a company not registered in Bangladesh, derived from the business of export but it shall not apply in case of an assessee, who is enjoying exemption of tax or reduction in rate of tax by any notification made under this Ordinance.

Explanation.—For the purpose of this paragraph,--

(a)   sale of locally manufactured machinery, equipments and other finished products within the country to any agency against its procurement program in foreign exchange quota; and

(b)   Supply of locally manufactured raw materials and other inputs to export oriented industry under internal back-to-back letter of credit, shall also be included in the definition of “business of export”.         

(Underlines supplied)

10.        It appears from the above provision under sub-section (1) of Section 44 that the said provision has started with a non-obstante clause and then provided that any income or class of income specified in Part A of the 6th Schedule shall be exempt from the tax payable under this Ordinance subject to the limits, conditions and qualifications laid down therein and, accordingly, shall be excluded from the computation of total income. One of such income, as specified in the said Part A of the 6th Schedule, is income derived from business of export. The words “derived from the business of export” as occurring under the said Paragraph-28 deserve close scrutiny and examination of this Court as the said words have not yet been interpreted by our Court in any decision.

11.        It appears from the decisions under the Indian Jurisdiction that, the said words “derived from”, as occurring in sub-section (1) of Section 80-I of the Indian Income Tax Act, 1961 have come under consideration and examination in different cases. Those decisions in Indian Supreme Court suggest that they have distinguished the words “derived” from more wider sense “attributable to” and, accordingly, took a restrictive view in that the income should have a direct nexus with the source mentioned in the statute when the words “derived from” is used therein. The authority for that line of view is Liberty India vs. CIT, 317 ITR-218 (Supreme Court) followed by some other decisions. In the said Liberty India case, the Supreme Court of India held that “derived from” is narrower than ‘attributable to’ and that the Parliament intended to cover sources not beyond the first degree”. Kapadia J, as he then was, in the said case held that, a duty drawback received by exporters on customs/excise duty paid on raw materials utilized for export is not “derived from” the industrial undertaking because the “first degree source” is the Customs Act/DEPB Scheme (which grants the exemption) and not the industrial activity that triggers the exemption. It may be mentioned that, under sub-section (1) of Section 80-I of the Indian Income Tax Act, 1961, a deduction from profits and gains of an amount equal to 20% was given in favour of the assessee, if such profits and gains are “derived from” an industrial under-taking or a ship or the business of hotel or the business of repairs to ocean going vessels etc.

12.        However, the above restricted approach of interpretation as given by the Indian Supreme Court in the said Liberty Indian case was highly criticized by the authoritative commentators in the concerned field. Relevant parts of some such criticisms (See Kanga and Palkhivala, the Law and Practice of Income Tax,  Arvind P Datar, 10th Edition, Vol-01 page-1547) are quoted below:- 

“It is respectfully submitted that this conclusion is clearly wrong. Although there are many decisions in which the need for a “direct nexus” has been emphasized, “direct nexus” does not mean “immediate source” or “first-degree source”. In the classic decision on the meaning of “derived”, the Privy Council emphasized that the court must enquire “into the genealogy of the product” and that the search is for the effective (and, by implication, not necessarily immediate) source. The English courts have also held that the meaning of the expression “derived from” is “to trace, or show the origin” and that it is not confined to first-degree sources: the focus is on the effective cause or source, not the sequentially proximate or immediate”. 

13.        We have examined the above quoted commentary as well as other commentaries of jurists on the said issue viza-viz the said restricted line of interpretation as given by the Indian Supreme Court starting from the case of Liberty India vs. CIT. The decisions of the Indian Supreme Court, though are not binding on us, have persuasive effect in giving interpretation of similar provisions. However, while giving interpretation of our own statute, it has to be borne in mind that, our statute and intention of the Legislature are not same as that of the Indian statute and their Legislative intention. A plethora of judgments of the Indian Supreme Court and various Indian High Courts have laid down the rule of interpretation that a provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee [See CIT vs. South Arcut Juciety-176 ITR 117, 113 (SC) and CIT vs. Up Co-op Fed 176 ITR 439, 441 (SC)]. Not only that, it has been decided by our Apex Court that when confusion arises in choosing between two different interpretations of a particular word of fiscal law, the interpretation favourable to the assessee should be adopted. [see National Board of Revenue vs. Bata Shoe Co,. 42 DLR (AD) 105].

14.        In our endeavor to get the real purport of the words “derived from”, we have examined the dictionary meaning of the same to see in particular whether the words “derived from” mean “received from“. The Oxford Advanced Learners Dictionary (8th Addition) meaning of the word “derive” and the word “receive” are as follows:

Derive-Derive from something; to come or develop from something

Receive-receive from somebody/ something; To get or accept something that is sent or given to you. Example- He received an award for bravery from the police service.

15.        The above two dictionary meaning of the words “derive” and “receive” reveal that they do not mean the same thing, rather the word “derived from” is wider than the word “received from”. When the word “received from” denotes receiving something directly from somebody or something, the word “derived from” denotes something to come or developed from something. Therefore, in line with the criticism as noted by the said author in the above referred text book,- Kanga and Palkhivala, the Law and Practice of Income Tax,  Arvind P Datar, 10th Edition, Vol-01, relying on the decision of the Privy Counsel and English Courts, we are of the view that, the meaning of the expression “derived from” is to show the origin and that it is not confined to first degree sources. Therefore, the focus must be given on the effective cause or sources, not the sequentially proximate or immediate sources. This means, we are unable to accept the restricted meaning of the words “derived from” as given by the Indian Supreme Court in the said Liberty India case. On the other hand, we are inclined to accept the liberal meaning as given by the Privy Council as well as by the English Courts as referred to above.

16.        Besides, if we examine the words “derived from” as occurring in Paragraph 28 of the 6th Schedule Part-A along with the provision under Clause (c) of sub-section (1) of Section 28 of the said Ordinance, we have no option but to hold that, by including the value of any benefit or perquisites arising from business in one of the categories of income from business or profession under Section 28, the Legislature has intended to give wider meaning of the words “derived from business of export” as occurring in paragraph -28 of the 6th Schedule, Part-A. Though the Explanations (a) and (b) to the said paragraph 28 have clarified some other income received by the assessee through sale of locally manufactured machineries equipments and supply of locally manufactured raw materials etc., which have ingredients of foreign currency earning, we are of the view that, the cash subsidies as received by the assessee from the government as because the assessee is engaged in earning foreign currency by way of exporting jute, though not  sequentially proximate or immediate but on the effective cause or source, is in fact  developed or originated because of the export business of the  assessee.

17.        Regard being had to the above facts and circumstances of the case, we are of the view that, the words “derived from business of export” deserve a liberal interpretation of this Court in favour of the assessee and as such the cash subsidies as received by the assessee should be regarded as an income derived from business of export thereby entitling the assessee to have 50% of the said cash subsidies being deducted in calculating its total income in view of the provisions under Section 44(1) read with paragraph 28 of  the 6th Schedule Part A to the said Ordinance.

18.        Therefore, in view of our above conclusion on the interpretation of the relevant provisions, we are of the view that, the questions, as referred to in this reference application, should be answered in the affirmative i.e. in favour of the assessee and against the revenue.  Accordingly, the same are answered in the affirmative i.e. in favour of the assessee and against the revenue.

19.        The Registrar, Supreme Court of Bangladesh, is directed to take steps in view of the provisions under Section 161(2) of the Income Tax Ordinance, 1984.

         Ed.