Balakrishna Eradi, J.
1. In these two references made under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Cochin Bench, has referred to this court for decision the following three questions of law arising out of the consolidated order passed by the Tribunal in two connected appeals relating to the assessment made against a company for the year 1966-67, one of the appeals having been filed by the assessee and the other by the department :
'(i) Whether the Tribunal was right in holding that the assessee cannot avail of the benefit of the Circular No. 27 (LIX-2) of 1955 dated 6th July, 1955, issued by the Central Board of Revenue (annexure 'B') and the clarificatory Circular F. No. 10/49-65-IT(AI) dated October 14, 1965, issued by the Central Board of Direct Taxes (annexure ' C')
(ii) Whether the Tribunal was right in holding that the profit derived by the sale of import entitlements cannot be considered as profits derived from the export of any goods or merchandise out of India within the meaning of Section 2(5)(a)(i) of the Finance Act, 1966
(iii) Whether the Tribunal was right in holding that the assessee is not an 'industrial company' as defined in Section 2(7)(d) of the Finance Act, 1966?'
2. The assessee is a private company carrying on the business of processing and export of fish. In December, 1963, the assessee purchased a fishing trawler from its previous owner who was not a resident of India. For the assessment year 1966-67, the assessee claimed a development rebate of Rs. 48,692 in respect of the said trawler. The Income-tax Officer allowed the assessee's claim for rebate only to the extent of Rs. 15,387 and disallowed the balance claim of Rs. 33,305 on the ground that the assessee had failed to create the requisite reserve during the previous year.
3. During the previous year relevant for the assessment year 1966-67, the assessee-company had been granted import entitlements on the basis of its export performance and by the sale of such import entitlements the assessee had derived a profit of Rs. 5,79,382. In that year, the assessee-company had sustained a loss in its business of export of fish. After setting off the said loss against the profit earned by the sale of the import entitlements the total income of the assessee for the assessment year 1966-67 was determined by the Income-tax Officer at Rs. 1,35,190. The assessee had put forward a plea before the Income-tax Officer that it was entitled to a rebate of tax under Section 2(5)(a)(i) of the Finance Act, 1966, since its total income included profits and gains derived from the export of goods out of India. The said claim for rebate was negatived by the Income-tax Officeron the ground that the total income of Rs. 1,35,190 assessed by him did not include any profits or gains derived by the assessee from the export of goods out of India but represented only the proceeds realised by the sale of import entitlements.
4. Another contention raised by the assessee before the Income-tax Officer was that during the relevant accounting period the assessee satisfied the definition of an 'industrial company' as contained in Section 2(7)(d) of the Finance Act, 1966, and that, therefore, the tax had to be levied only at the rate of 55 per cent. as provided in item I(A)(2) of Paragraph F of Schedule I of the Finance Act, 1966. The Income-tax Officer did not accept the said contention and proceeded to levy tax at a uniform rate of 65 per cent.
5. The assessee took up the matter in appeal before the Appellate Assistant Commissioner of Income-tax, Ernakulam. The Appellate Assistant Commissioner upheld the contentions of the assessee in so far as it related to the claim for development rebate in respect of the trawler. Hence, in reversal of the finding of the Income-tax Officer disallowing the assessee's claim for development rebate to the extent of Rs. 33,305, the Appellate Assistant Commissioner allowed the assessee's claim in full. On the other two points relating to the claims put forward by the assessee for rebate of tax under Section 2(5)(a)(i) of the Finance Act, 1966, and for computation of the tax at the rate of 55 per cent. under item I(A)(2) of Paragraph F of Schedule I of the Finance Act, 1966, treating the assessee as an 'industrial company', the Appellate Assistant Commissioner upheld the correctness of the conclusion reached by the Income-tax Officer that the assessee was not entitled to either of the aforesaid benefits. Both the assessee as well as the department filed appeals before the Income-tax Appellate Tribunal against the aforesaid decision of the Appellate Assistant Commissioner. In I.T.A. No. 556/Coch/70-71, which was the appeal filed by the assessee-company, the findings of the Appellate Assistant Commissioner disallowing the assessee's claim for rebate of tax under Section 2(5)(a)(i) of the Finance Act, 1966, and for the application of the concessional rate of tax under item I(A)(2) of Paragraph F of Schedule I of the Finance Act, 1966, were questioned by the assessee. The appeal filed by the department--I.T.A. No. 611/Coch/70-71--related to that part of the order of the Appellate Assistant Commissioner whereby the assessee's claim for development rebate in respect of the trawler was allowed in full.
6. By a common order dated November 30, 1972, the Tribunal disposed of the two appeals aforementioned along with three other appeals arising out of assessments made against the same company for the years 1965-66 and 1969-70. The Tribunal held that the claim put forward by the asses-see for development rebate in respect of the fishing trawler is not covered either by Section 33(1A)(a) of the Act or any other provision contained in the Act. A contention had been advanced before the Tribunal on behalf of the assessee that even though the claim put forward by the company for development rebate could not be rested on Section 33(1)(a) or Section 33(1A)(a) of the Act, the assessee was entitled to be granted the said relief under Circular No. 27, dated July 6, 1956, issued by the Central Board of Revenue read along with the subsequent circular dated October 14, 1965, issued by the Central Board of Direct Taxes. The Tribunal negatived the said contention holding that the circular dated 6th July, 1955, provided only for allowance of development rebate in respect of second-hand ships purchased by Indian shipping concerns and that the said position was not to any extent modified by the subsequent circular of 14th October, 1965. Accordingly, the Tribunal held that the assessee was not entitled to any development rebate in respect of the second-hand shipping trawler purchased by it in December, 1963. But, since the decision of the Income-tax Officer allowing development rebate to the assessee to the extent of Rs. 15,387 had not been appealed against by the department and the department had only complained against the order of the Appellate Assistant Commissioner allowing in full the assessee's claim for development rebate, the Tribunal set aside the order of the Appellate Assistant Commissioner in so far as it allowed development rebate of Rs. 48,692 and restored the order of the Income-tax Officer on that aspect. The appeal filed by the department was allowed by the Tribunal to the said extent.
7. On the question relating to the assessee's claim for rebate of taxunder Section 2(5)(a)(i) of the Finance Act, 1966, the Tribunal agreed withthe view taken by the Appellate Assistant Commissioner and the Income-tax Officer that the profits obtained by the assessee by sale of importentitlements cannot be regarded as profits or gains derived from the exportof goods out of India so as to bring the case within the scope of Section2(5)(a)(i). In this view, the Tribunal held that the assessee was not entitledto any rebate of tax under the aforesaid section.
8. Dealing with the contention put forward by the assessee that it could be taxed only at the rate of 55 per cent. under Section 2(7)(d) of the Finance Act, 196,6, read with Paragraph F of Schedule I thereof, since the assessee was a domestic 'industrial company' as defined in Section 2(7)(d) aforementioned, the Tribunal took the view that even though the assessee-company was carrying on only the business of processing and export of fish and consequently fulfilled the requirements of the definition contained in the body of Clause (d) of Section 2(7) it had to satisfy also the requirements of the Explanation to the said sub-section if it should succeed in its claim to be treated as an 'industrial company'. On this basis, the Tribunalproceeded to hold that since the income derived by the assessee from the business of manufacture or processing of goods during the relevant accounting period was less than 51 per cent. of its total income for the assessment year 1966-67, the requirements of the Explanation to Section 2(7)(d) of the Finance Act of 1966 were not satisfied and the assessee was not, therefore, entitled to the benefit of the concessional rate of tax specified in Item I(A){2) of Paragraph F of Schedule I of the Finance Act, 1966.
9. In the light of the findings aforementioned, the Tribunal dismissed the appeal filed by the assessee. The assessee filed two applications before the Tribunal under Section 256(1) of the Act, one in the appeal filed by the assessee and the other in the appeal preferred by the department, requiring the Tribunal to refer the aforesaid questions of law to this court. Accordingly, the Tribunal has drawn up a consolidated statement of the case dated April 30, 1973, and referred the aforementioned questions of law for decision by this court.
10. The first question referred by the Tribunal relates to the claim put forward by the assessee-company for development rebate in respect of the fishing trawler purchased by it in December, 1963. The grant of development rebate is governed by the provisions of Section 33 of the Act. Clause (a) of sub-section (1) of the said section provides for a deduction being allowed by way of development rebate in respect of a new ship or new machinery which is owned by the assessee and is wholly used for the purpose of business carried on by him. The expression 'new' occurring in Section 33(1)(a) of the Act has, in the context, to be construed in its ordinary grammatical sense as meaning 'not existing before ; now made, or brought into existence, for the first time' and in antithesis to the word 'used'. See Cochin Co. v. Commissioner of Income-tax : [1968]67ITR199(SC) . The fact that in respect of ships and machinery which before the date of acquisition by the assessee were used by some other person separate provisions have been specifically made by Parliament in sub-clauses (a) and (b) of sub-section (1A) of the same section, shows beyond doubt that the term 'new' has been employed in contradistinction with the expression 'used'. Admittedly, the trawler purchased by the assessee was not a 'new' ship and hence Clause (a) of sub-section (1) of Section 33 is not attracted. The only other relevant provision is Clause (a) of sub-section (1A) of Section 33 whereunder a deduction by way of development rebate is allowable in respect of 'used' ships purchased by the assessees. That provision is not, however, of any assistance to the assessee in the present case because its applicability is expressly limited to cases where an assessee has acquired a 'used' ship after the 31st day of March, 1964. The trawler in question was purchased by the assessee in December, 1963, and, hence, sub-section (1A) is also not attracted to the case.
11. Before the Tribunal, the assessee seems to have rested its claim for grant of development rebate mainly on Circular No. 27 dated 6th July, 1955, issued by the Central Board of Revenue. Reliance was also placed on a subsequent circular dated October 14, 1965, issued by the Central Board of Direct Taxes, wherein it is stated that the instructions issued in Board's Circular No. 27 dated July 6, 1955, will apply in respect of only second-hand ships or machinery acquired or installed by an assessee for the purpose of his business on or before March 31, 1964. Copies of the two circulars aforementioned have been appended to the statement of the case as annexures 'B' and 'C' respectively.
12. It is difficult to see how an assessee can found a claim for the grant of any allowance or deduction by way of development rebate solely on the terms of a circular issued by the Central Board of Revenue/Central Board of Direct Taxes when his case does not satisfy the condition laid down in the specific provision contained in the Act authorising the grant of such allowance or deduction. However, having regard to the very restricted scope of question No. (i) referred to this court we do not wish to say anything further on this matter. The question that we are called upon to decide is whether the Tribunal was right in holding that the assessee cannot avail of the benefit of Circular No. 27 dated 6th July, 1955 (annexure 'B'), and the clarificatory circular dated October 14, 1965 (annexure 'C'). Since it was the circular dated 6th July, 1955 (annexure 'B'), which was relied on by the assessee as the main basis for supporting its claim for development rebate it will be useful to extract its text in full. It reads :
'A question has been raised as to whether the 'development rebate' allowance now admissible under Section 10(2)(vib) should be allowed in the case of a second-hand ship purchased abroad by a shipping concern. This allowance is admissible in respect of machinery or plant being new, which has been installed after 31st March, 1954, and which is wholly used for purposes of his business carried on by an assessee. Thus, strictly speaking, this allowance would not be admissible in the case of a second-hand ship. Attention is, however, invited to Board's Circular No. 62 (XIX-2) of 1951, dated the 23rd October, 1951, in which instructions were issued that initial depreciation allowance should be concession ally granted to an Indian shipping company in certain circumstances. The Board have now, therefore, decided that the benefit of 'development rebate' may likewise be allowed to an Indian shipping concern in respect of a second-hand ship, acquired by it after 31st March, 1954, provided the ship concerned had not been used in Indian waters by an Indian owner on or before that date. The fact that such a ship had been used on or before that date in Indian waters by any non-Indian owner or Indian charterer (as distinguished from owner) will not prevent the Indian shipping concern from getting thebenefit of the concessional 'development rebate' allowance in respect of the ship.'
13. We shall also read the relevant portion of annexure 'C', which is in the following terms:
'The instructions issued in Board's Circular No. 27 (LIX-2) of 1955 dated July 6, 1955, permitting the allowance of development rebate in respect of second-hand ships acquired by an assessee after March 31, 1954, if such ship had not been used in Indian waters by an Indian owner on or before the said date, as also the instructions issued in Board's Circular No. 40 (XLVII-16)of 1962, dated December 3, 1962, permitting the allowance of development rebate, etc., in respect of second-hand machinery or plant imported by an assessee from abroad, will apply only in respect of such ships and such machinery or plant as have been acquired or installed by an assessee for the purpose of his business on or before March 31, 1964. The admissibility of development rebate in respect of previously used ships acquired and previously used machinery or plant installed after March 31, 1964, will be governed by the provisions of Section 33(1A) of the Income-tax Act, 1961, and the conditions mentioned in the preceding paragraph would, therefore, have to be satisfied before development rebate could be allowed in such cases.'
14. There cannot be any doubt that the circular (annexure 'B') deals only with the subject of granting allowances by way of development rebate in respect of second-hand ships purchased abroad by 'shipping concerns'. The provisions of the said circular have no application in respect of claims for such rebate put forward by assessees who are not 'shipping concerns'. It is, however, contended that the scope of the circular has undergone a material alteration and had become widened in point of its applicability by reason of the statements contained in the subsequent circular of the CBDT evidenced by annexure 'C'. This argument is that while setting out in annexure 'C' the gist of the circular dated 6th July, 1955, in the passage extracted above the CBDT has proceeded on the basis that the earlier circular had permitted the allowance of development rebate in respect of second-hand ships acquired by any assessee after March 31, 1954, without confining such benefit to 'shipping concerns' only. We see no merit at all. in this contention. It. is manifest on a reading of the relevant portion of annexure 'C' that what has been stated by the CBDT in the passage relied on by the assessee is that the circular dated July 6, 1955 (annexure 'B'), will apply only in respect of claims for development rebate relating to ships and machinery acquired or installed by an assessee before March 31, 1964, and that the admissibility of development rebate in respect of previously used ships and machinery acquired or installed after March 31, 1964, will be governed by the provisions of Section 33(1A)of the Act. We find nothing in annexure 'C' which has the effect of altering the scope of the earlier circular evidenced by annexure 'B', Inasmuch as the assessee is not a 'shipping concern', the Tribunal was perfectly right in holding that the assessee is not entitled to the benefit of the circular dated July 6, 1955 (annexure 'B') as clarified by annexure 'C'. We, therefore, answer the first question in the affirmative, that is, against the assessee and in favour of the department.
15. For deciding the second question referred to this court by the Tribunal what we have to consider is whether the profits realised by the assessee by the sale of import entitlements can be regarded as profits and gains derived from the export of any goods or merchandise out of India so as to entitle the assessee to the benefit of rebate of tax under Section 2(5)(a)(i) of the Finance Act, 1966. That section is in the following terms :
'(5) (a) In respect of any assessment for the assessment year commencing on the 1st day of April, 1966, in the case of an assessee being a domestic company or an assessee other than a company,--
(i) where his total income includes any profits and gains derived from the export of any goods or merchandise out of India, he shall be entitled to a deduction, from the amount of income-tax with which he is chargeable, of an amount equal to the income-tax calculated at one-tenth of the average rate of income-tax on the amount of such profits and gains included in his total income. '
16. The argument advanced on behalf of the assessee is that since the assessee had become eligible for the import entitlements only on account of its having exported goods out of India, the income derived by conversion of the import entitlements into money by a process of sale should be regarded as profits or gains derived from the said activity of the export of goods. We are unable to accept this contention. Profit or gain can be said to have been 'derived' from an activity carried on by a person only if the said activity is the immediate and effective source of the said profit or gain. There must be a direct nexus between the activity and the earning of the profit or gain. The income, profit or gain cannot be said to have been 'derived' from an activity merely by reason of the fact that the said activity may have helped to earn the said income or profit in an indirect or remote manner. See Commissioner of Income-tax v. Raja Bahadur Kamakhaya Narayan Singh [1945] 16 ITR 325 and Mrs. Bacha F. Guzdar v. Commissioner of Income-tax : [1955]27ITR1(Mad) When this principle is applied to the facts of the present case it becomes clear that the profits earned by the assessee by the sale of the import entitlements cannot be regarded as profits or gains 'derived' from the export of goods out of India. We find that a similar question had arisen before this court in I. T. R. No. 99 of 1971 and by judgment dated 29th May, 1973, which isnot so far reported, a Division Bench of this court held that the profits realised by the assessee in that case by the sale of the import licences obtained by it on the strength of import entitlements could not be said to be profits derived by the assessee from export of goods out of India. We are in respectful agreement with the said view. It then follows that the Tribunal was right in rejecting the assessee's claim for rebate under Section 2(5)(a)(i) of the Finance Act, 1966. We answer question No. (ii) also in the affirmative, i.e., against the assessee and in favour of the department.
17. That brings us to the last question referred by the Tribunal which relates to the claim put forward by the assessee for the benefit of the concessional rate of taxation applicable to domestic 'industrial company' under item I(A)(2) of Paragraph F of Schedule I of the Finance Act, 1966. 'Industrial company' has been defined in Section 2(7)(d) of the Finance Act, 1966, in the following terms :
' (7) For the purposes of this section and the First Schedule,--...
(d) 'industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.
Explanation.--For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent. of such total income.'
18. Item I(A)(2) of Paragraph F of Schedule I of the Finance Act, 1966, provides that in the case of a domestic industrial company not being one in which the public are substantially interested tax has to be levied at 55 per cent. on so much of the total income as does not exceed Rs. 10,00,000 and at 60% of the balance, if any, of the total income. From the facts set out by the Tribunal in the statement of the case, it is seen that the assessee's only business is processing and export of fish. The order of the Tribunal--annexure 'A'--also proceeds on this basis. The Tribunal, however, held that in order that the assessee should be an 'industrial company' for the purposes of the Finance Act, 1966, the assessee must satisfy not merely the requirement of the definition of the expression 'industrial company' contained in the body of the said Act but also the terms of the Explanation appended to the said section. Proceeding on this basis, the Tribunal held that inasmuch as during the relevant previous year the income attributable to the business of manufacture or processing of fish was less than 51 per cent. of the total income of the assessee, the terms of the Explanation werenot satisfied, and, hence, the assessee could not be regarded as an 'industrial company' entitled to the benefit of the concessional rate of taxation provided for by item I(A)(2) of Paragraph F of Schedule 1 of the Finance Act, 1966. It was contended before us by the learned advocate appearing for the assessee that the conclusion reached by the Tribunal is based on a total misunderstanding of the scope of the Explanation to Section 2(7)(d) of the Finance Act, 1966. Counsel argued that the rule laid down in the Explanation is intended to be applied only in cases where the assessee is a company engaged not merely in the type of business referred to in Sub-section (d) but also in some other kinds of business during the relevant previous year and it becomes necessary to determine whether he can be said to be mainly engaged in the business of the type referred to in the section. On this basis, counsel for the assessee submitted that inasmuch as his client was admittedly engaged only in the business of processing of fish during the accounting period, his case is directly covered by the definition contained in the body of Section 2(7)(d) and hence no occasion arises in this case for applying the principle enunciated in the Explanation.
19. In our opinion, there is force in the above argument advanced by the counsel for the assessee. It is not disputed that the assessee-company was engaged solely in the business of processing and export of fish during the relevant accounting period. The assessee, therefore, fully satisfied the requirements of the definition of 'industrial company' contained in the body of Section 2(7)(d). Counsel for the revenue advanced a contention that since in the definition contained in Clause (d). Parliament has used the words 'mainly engaged in the business of' the proper interpretation to be placed on the definition clause is to understand it as taking within its scope only companies engaged in a plurality of business activities, amongst which is included also a business of the type referred to in the definition clause. We see no substance at all in this contention. In our opinion, it will be totally wrong to attribute any such intention to Parliament which would have the result of creating an obvious anomaly. As we understand the definition clause, it takes within its scope all companies which are exclusively engaged in the business of the types referred to therein and also companies engaged in a plurality of businesses of which the main business is of the type referred to in the definition clause. The expression 'mainly' has been used in Clause (d) of Section 2(7) not for the purpose of excluding companies which are engaged solely in the business of the type referred to in the said clause ; on the other hand, the intention of Parliament in using that expression is to bring within the scope of the definition those companies also which are engaged in a plurality of business activities including any one of the types of business specified in the section, provided that such business can be said to be the main activity of such company. Itis wrong to think that the word ' mainly' occurring in the portion ' mainly engaged in the business of....,..........' in Clause (d) necessarilymeans only ' principally ' and that hence it presupposes the existence of more than one business activity for every 'industrial company'. On a reference to the Shorter Oxford English Dictionary it will be seen that the word 'mainly' is also occasionally used to mean 'entirely'. In our opinion, Parliament has used the word 'mainly' in Clause (d) in its broadest sense so as to take in companies which are 'entirely' engaged in the businesses of the specified description and also companies which are 'principally' engaged in such types of business.
20. The Tribunal appears to have thought that even if the assessee-company satisfied all the requirements of the definition as contained in the main part or body of Clause (d) still it could not be treated as an 'industrial company' unless it also satisfied the requirements of the Explanation to the said clause. We are unable to uphold the said view taken by the Tribunal. The proper function of an Explanation is to make plain or elucidate what is enacted and not to add to or subtract from it. An Explanation is different in nature from a proviso, for the latter excepts, excludes or restricts while the former explains or clarifies. It appears to us to be manifest that the purpose intended to be served by the Explanation added in Clause (d) is only to clarify how in respect of companies engaged in more than one type of business the criterion of being 'mainly' engaged in any of the specified businesses laid down in the body of the definition clause is to be applied. It is only for this limited purpose that the Explanation lays down that a company shall be deemed to be mainly engaged in the business of the description mentioned in the body of the section if the income attributable to such activity included in the total income of the company for the previous year was not less than fifty-one per cent. of such total income. The said provision contained in the Explanation has no applicability at all in respect of cases like the present one where the sole business activity carried on by the company is of the type referred to in the definition clause. Such a company which fulfills the requirement of the main body of the definition has automatically to be regarded as an 'industrial company' for the purposes of Section 2 and also the First Schedule of the Finance Act, 1966.
21. It follows from the foregoing discussion that the Tribunal was in error in holding that the assessee was not an 'industrial company' as defined in Section 2(7)(d) of the Finance Act, 1966. The correct position is that for the assessment year in question the assessee is entitled to be treated as an 'industrial company' under Section 2(7)(d) and is liable to be taxed only at the concessional rate of fifty-five per cent. as provided, in Item I(A)(2) ofParagraph F of Schedule I of the Finance Act, 1966, for the assessment year 1966-67. Hence, we answer question No. (iii) in the negative, i.e., in favour of the assessee and against the department.
22. We direct the parties to bear their respective costs in these two cases.
23. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as required by sub-section (1) of Section 260 of the Act.