The Supreme Court of India held that Sterling Foods’ proceeds from selling import entitlements were not profits “derived from” its industrial undertaking for Section 80HH purposes. The seafood exporter’s exports triggered eligibility under a government scheme, but the Court treated the scheme—not the undertaking—as the source of the entitlements and their sale proceeds.
What did the Supreme Court decide?
In Commissioner of Income Tax, Karnataka v. Sterling Foods, Mangalore, decided on 15 April 1999, the Supreme Court ruled for the Revenue. It allowed the Revenue’s appeals and set aside the Karnataka High Court judgment under appeal. The proceeds from Sterling Foods’ sale of import entitlements could not be included in the profits eligible for deduction under Section 80HH of the Income-tax Act, 1961. Read the Supreme Court judgment.
How did Sterling Foods earn the proceeds?
Sterling Foods processed prawns and other seafood for export in assessment years 1975–76 and 1976–77. Under the Central Government’s Export Promotion Scheme, its exports earned import entitlements. The company could use those entitlements itself or sell them; it sold them and claimed Section 80HH relief on the proceeds.
The chain at issue was: seafood exports → eligibility under the government scheme → import entitlements → sale proceeds. The question was whether that causal chain made the proceeds profits “derived from” the industrial undertaking.
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What does “derived from” an industrial undertaking mean?
The Court required a direct source relationship, not merely a commercial connection. As the judgment put it: “There must be for the application of the words ‘derived from’, a direct nexus between the profits and gains and the industrial undertaking.”
The exports were a condition for receiving the entitlements, but they did not themselves produce the entitlements. The Export Promotion Scheme did. Because the proceeds arose from selling an entitlement created by the scheme, the connection to the undertaking’s industrial activity was incidental rather than direct.
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Why did Section 28 not change the result?
Sterling Foods relied on retrospective amendments to Section 28 that classified profits from sales of licences and export cash assistance as business income. The Court held those amendments did not answer the separate Section 80HH question: whether the profits were derived from the industrial undertaking.
Being taxable as business income did not automatically make a receipt eligible for Section 80HH. The business-income classification and the deduction’s direct-source test were distinct questions.
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For the historical period in dispute, the judgment quoted Section 80HH as allowing a deduction equal to 20% of qualifying profits and gains for specified newly established industrial undertakings or hotel businesses in backward areas. That percentage describes the statutory wording considered in this case; it is not a statement of current law or present-day eligibility.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What was the case outcome?
The Supreme Court allowed the Revenue’s appeals, set aside the judgment under appeal, and answered the referred question in favour of the Revenue. It made no order as to costs.
This decision addresses the historical Section 80HH dispute and the particular import entitlements generated under the scheme before the Court. It does not, by itself, establish the treatment of every export incentive under current legislation or later case law.
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