This is appeal against order of Commissioner dated 20-3-1984 passed under section 263 of Income-tax Act, 1961 ('the Act') directing ITO to recompute deduction under section 80HH and 80J of Act after excluding premia on import entitlements, exports house premia and drawbacks and revise assessment. 2. assessee is engaged in business of export of sea foods under name and style 'Bharath Sea Foods'. assessment for assessment year 1979-80 was completed on 27-3-1982 by ITO on total income of Rs. 1,62,910. In this assessment, ITO allowed deduction of Rs. 80,000 under section 32A of Act, Rs. 35,368 under section 80HH and Rs. 17,226 under section 80J. Subsequently, Commissioner was of view that assessment order made by ITO is erroneous and prejudicial to interests of revenue. Accordingly, he issued noticed under section 263 in response to which assessee filed reply objecting to invoking provisions of section 263. assessee was heard by Commissioner. After considering submissions of assessee, he passed order dated 20-3-1984 under section 263. He held that ITO's order allowing deduction under section 80HH and 80J after taking into accounts receipts such as import entitlements, drawbacks, etc., was clearly erroneous and decision of Kerala High Court in Cochin Co. v. CIT [1978] 114 ITR 822 would be applicable. Thus, he directed ITO to recompute deductions under sections 80HH and 80J after excluding premia on import entitlements, export house premia and drawbacks and revise assessment accordingly. Against same, assessee has preferred this appeal. 3. learned counsel for assessee kly urged that order of ITO is not erroneous and Commissioner cannot invoke provisions of section 263. assessee is industrial undertaking. It purchases fish and after processing and producing exportable sea foods exports same and on account of exports made, assessee is entitlements which are part of business activities of assessee. It is only by taking into account import entitlements to which assessee is entitled to, price of export commodity is determined. Thus, import entitlements are very much part of business activity of industrial undertaking. In fact, sale of import entitlements is considered as business income of assessee. If that is position, it cannot be said that import entitlements are not directly connected with business activity of assessee. Thus, he submitted that relief under sections 80HH and 80J has been rightly allowed by ITO on same analogy he submitted that export house premia and drawbacks cannot be excluded for computing deduction under section 80HH and 80J. They are very much part of business activity of industrial undertaking and have to be included under section 80HH. He placed k reliance on various decisions. 4. learned counsel departmental representative kly urged that sale o f import entitlements is not business activity of assesse and it is not directly connected with business of industrial undertaking. On account of exports it might be entitled for import entitlements but that does not mean that it is part and parcel of business activity. That is only indirect benefit assessee may derive. But assessee will not be entitled to relief under section 80HH and for purpose of deduction under sections 80HH and 80J import entitlements, export house premia and drawbacks premia have to be excluded. He placed reliance on decisions in Cochin Co.'s case (supra) and CIT v. Cochin Refineries Ltd. [1982] 135 ITR 278 (Ker.). He explained that export house premia and drawbacks are not part of then business activities of assessee. He has obliged third party for showing him as exporter in respect of goods shipped by assessee. But that cannot be considered as business activity of assessee, even though he might have got some commission from third party. Similarly in respect of drawbacks assessee has not manufactured any packing materials for which excise duty is levied. So t h e question of refund of excise duty did not arise at all. Further, packing materials have been manufactured by somebody else who might have paid excise duty. Getting drawbacks cannot be considered as business activity of assessee. Thus, he supported order of Commissioner. 5. We have considered rival submissions. Section 80HH (1) and 80J (1) read as under: "80HH. (1) Where gross total income of assessee includes any profits and gains derived from industrial undertaking, or business of hotel, to which this section applies, there shall, in accordance with and subject to provisions of this section, be allowed, in computing total income of assessee, deduction from such profits and gains of amount equal to twenty per cent thereof." "80J. (1) Where gross total income of assessee includes any profits and gains derived from industrial undertaking or ship or business of hotel, to which this section applies, there shall, in accordance with and subject to provisions of this section, be allowed, in computing total income of assessee, deduction from such profits and gains (reduced by deduction, if any, admissible to assessee under section 80HH and section 80HHA) of so much of amount thereof as does not exceed amount calculated at reate of six per cent per annum on capital employed in industrial undertaking or ship or business of hotel, as case may be, computed in prescribed manner in respect of previous year relevant to assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as relevant amount of capital employed during previous year):" words used in above sections are 'any profits and gains derived from industrial undertaking'. words 'derived from' have been considered by Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. It was observed as follows: ".... It cannot be disputed that expression 'attributable to ' is certainly wider in import than expression 'derived from'. Had expression 'derived from' been used, it could have with some force been contended that balancing charge arising from sale of old machinery and buildings cannot be regarded as profits and gains derived from conduct of business of generation and distribution of electricity ...." (p. 93) Thus, it was held that expression 'attributable to' is wider in import than expression 'derived from'. In CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 Privy Council observed as under: "The word 'derived is not term of art. Its use in definition indeed demands enquiry into genealogy of product. But enquiry should stop as soon as effective source is discovered. In genealogical tree of interest land indeed appears in second degree, but immediate and effective source is rent, which has suffered accident of non-payment. And rent is not land within meaning of definition." In that case, Privy Council held that interest on rent was not agricultural income as it was not revenue derived from land. above decision of Privy Council was applied by Supreme Court in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1. In light of above decisions we have to give only restricted meaning to words 'derived from' used in sections 80HH and 80J. If we read section from that angle, it would be clear that profits and gains should be one which is derived from industrial undertakings which means that that profit or gain should be directly from very business activity of industrial undertaking and said activity is immediate and effective source of said profits and gain. There should be direct nexus between activity and earning of profit and gain. Merely because activity has helped to earn income or profit and indirect way it cannot be held that income or profit and gain has been derived from industrial undertaking. business of industrial undertaking in instant case is export of sea foods. On account of exports assessee was entitled for import entitlements. profit on sale of import entitlements is to be treated as business income as held by Kerala High Court in D. K. Industries v. CIT [1984] KLT 697. In this decision, it was further observed that import entitlement is not derived from export but it is very right which gives rise to import. In our view profit on sale of import entitlements is not directly attributable to immediate source being business of export of sea foods of industrial undertaking. profit derived on sale of import entitlements is only earned in indirect way. That cannot be treated as business activity of industrial undertakings. 6. We may refer to decision of Kerala High Court in Cochin Co,'s case (supra). It was observed as under: "The argument advanced on behalf of assessee is that since assessee had become eligible for import entitlements only on account of its having exported goods out of India, income derived by conversation of import entitlements into money by process of sale should be regarded as profits or gains derived from said activity of export of goods. We are unable to accept this contention. Profit and gain can be said to have been 'derived' from activity carried on by person only if said activity is immediate and effective source of said profit or gain. There must be direct nexus between activity and earning of profit and gain. income, profit or gain cannot be said to have been 'derived' from activity merely by reason of fact that said activity may have helped to earn said income o r profit in indirect or remote manner - CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC) and Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1(SC). When this principle is applied to facts of present case it becomes clear that profits earned by assessee by sale of import entitlements cannot be regarded as profits or gains 'derived' from export of goods out of India. We find that similar question had arisen before this Court in ITR No. 99 of 1971 and by judgment dated 29th May, 1973, which is not so far reported, Division Bench of this Court held that profits realised by assessee in that case by sale of import licences obtained by it on strength of import entitlements could not be said to be profits derived by assessee from export of goods out of India. We are in respectful agreement with said view. It then follows that Tribunal was right assessee's claim for rebate under section 2(5) (a) (i) of Finance Act, 1966. ..." (p. 830) It has been held therein that income, profit or gain cannot be said to have been 'derived' from activity merely by reason of fact that said activity may have helped to earn said income or profit in indirect or remote manner. profits realised by sale of import licences obtained by it on strength of import entitlements could not be said to be profits derived from export of goods out of India. 7. In Cochin Refineries Ltd.' case (supra) Kerala High Court observed as under: "No doubt these decisions lend weight to argument of learned counsel for revenue, Shri P. K. R. Menon, that words 'derived from' in section 80J of Act cannot have wide import so as to include any income which can in some manner be attributed to business. derivation of income must be directly connected with business in sense that income is generated by business. It would not be sufficient if it is generated by exploitation of business asset. In case before us, income by way of interest from deposits is no doubt income derived by investing surplus cash of assessee generated as profits of industrial undertaking. But, it is not money derived from business activity of industrial undertaking but by business activity of deposit of business asset in banks. Within meaning of term 'derived from' it will not be possible to hold that income so generated is income falling within section 80J ...." (p. 287) It was held therein that derivation of income must be directly connected with business in sense that income is generated by business. Within meaning of term 'derived from' it will not be possible to hold that income to generated is income falling within section 80J. 8. decision of Kerala High Court in Cochin Co.'s case (supra) was followed by Bombay High Court in Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951. It was observed as under: "It is thus clear Privy Council restricted effect and meaning to be ascribed to word 'derived'. In its view, if inquiry was to be made as to be stopped as soon as effective source is discovered. To translate principle and apply same to facts of case before us, answer to inquiry, viz. what is source of savings effected by assessee-company on palm oil, would have to be ended by giving answer that source was import entitlements or licence which permitted assessee-company to import this palm oil at international prices which were lower than those prevailing in home market. This then must be considered to be source of saving and further inquiry as to how or why assessee-company got import entitlements or licence is not permitted in view taken by Privy Council ...." (p. 961) In this decision it was held that word 'derived from exports' cannot be accepted as equivalent to 'referable to export'. 9. In Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. CIT [1983] 143 ITR 590, Madhya Pradesh High Court held that it may be that it was because of export business that assessee got import licence, yet connection of income resulting from import entitlements to export business is indirect and direct source of this income is import licence. Hence, there is no room for including value of import entitlements in turnover of exports under rule 2(3). 10. Sterling Foods v. CIT [1984] 150 ITR 292 (Kar.) is case directly on t h e point dealing with section 80HH. In that case, assessee-firm was engaged in processing and export of prawns and other sea foods. assessee also earned import entitlements. assessee sold such import entitlements and earned some profits. total income of assessee included sale proceeds of such import entitlements. ITO allowed relief under section 80HH in respect of entire receipts inclusive of sale proceeds of entitlements. Commissioner invoked provisions of section 263 and set aside assessment and directed ITO to redo same after excluding sale proceeds of import entitlements. Tribunal upheld order of Commissioner. On reference, Karnataka High Court observed as under: "Section 80HH was meant to give tax rebate to certain categories of assessee and one who wants to claim such relief must strictly satisfy requirements prescribed thereunder. He must establish that his profits and gains were derived from his industrial undertaking or business of hotel. It is just not sufficient if commercial connection is established between profits earned and industrial undertaking. law requires that such profits must have been derived from industrial undertaking. industrial undertaking must itself be source of that profit. business of that industrial undertaking must directly yield that profit. It must be direct source of that profit and not means to earn any other profit. 'Source' means not legal concept but something which practical man would regard as real source of income. [The assessee may have separate sources of income - see section 3(3) of Act.] All taxable income must necessarily have definite source [see Law and Practice of Income-tax by Kanga and Palkhivala, p. 162. ] If that is concept of 'source', can we legitimately say that profits and gains derived by sale proceeds of import entitlements must be held to have been derived from industrial undertaking of assessee. Far from it, import entitlements were awarded by Central Government under scheme to encourage exports. source referable to profits and gains arising out of sale proceeds of import entitlements would, therefore, be scheme of Central Government and not industrial undertaking of assessee." (p. 297) It was held therein that assessee is not entitled to relief under section 80HH in respect of profits and gains derived from sale of import entitlements. facts of this case are identical with facts of our case and ratio laid down therein squarely applied. We respectfully follow above decisions. 11. case law relied on by assessee's counsel in following cases supports assessee's contention that receipt from sale of import licence was attributable to activity of manufacturing and it is very much business activity of industrial undertaking - CIT v. Wheel & Rim Co. of India Ltd. [1977] 107 ITR 168 (Mad.), ITAT v. B. Hill & Co. (P.) Ltd. [1983] 142 ITR 185 (All.), Jeewanlal (1929) Ltd. v. CIT [1983] 139 ITR 865 (Cal.), Addl. CIT v. Abbas Wazir (P.) Ltd. [1979] 116 ITR 811 (All.), Bharat Carpets Ltd. v. IAC [1982] 2 ITD 278 (Delhi) and ITO v. Mahalkshmi Glass Works (P.) Ltd. [1982] 2 ITD 646 (Bom.). But contrary view has been taken in cases to which we have earlier referred to. We prefer with respect to follow those decisions in preference to decisions relied on by assessee's counsel. 12. import entitlements were obtained under scheme of Central Government and so source for getting profits and gains from sale of import entitlements could be scheme of Central Government and not industrial undertaking of assessee. This finding would equally apply in respect of export house premia. assessee ships its own goods but he will show third party as exporter from whom he receives commission. business of assessee is one of exporting sea foods and not earning income by way of commission from third party who is shown as exporter. Thus, this commission described as export house premia earned by assessee is not derived from industrial undertaking as that is not business activity of industrial undertaking. Thus, assessee will not be entitled to relief under section 80HH and 80J in respect of profits and gains derived from sale of import entitlements and export house premia since of revenue, Commissioner had jurisdiction to invoke section 263 and we uphold his action in invoking section 263. 13. But so far as drawbacks to which reference is made by Commissioner are concerned, full facts are not available. It is not known whether it is in respect of excise duty on packing materials collected from manufacturer and whether customs department has given refund as customs duty with reference to excise duty collected on packing materials. No doubt, decision of Madhya Pradesh High Court in Gwalior Rayon Silk Mfg. (Wvg.), Co. Ltd.'s case (supra) is in favour of assessee so far as drawbacks are concerned. But in assessee's case facts have to be enquired. Hence, to that extent we direct ITO to make afresh in accordance with law. To that extent order of Commissioner is modified and in other respects we uphold his order. 14. In result, appeal is treated as allowed in part. *** A.M. MOOSA BHARAT SEA FOODS v. INCOME TAX OFFICER