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2006 (4) TMI 340 - AT - Income TaxDeductions u/s 80HHC - Computation of Export Turnover - Include the exchange rate gain difference in the export turnover for arriving at the allowable deduction u/s 80HHC - HELD THAT - If there is any exchange rate gain difference again the same will also relate back and required to be included in the export turnover in the year in which goods were exported. In view of this in case the exchange rate gain difference of amount pertain to exports made in earlier years received within six months or extended period as provided in clause ( a ) of sub-section (2) of section 80HHC is required to be included in the Export Turnover in the year in which the goods were exported. We accordingly direct the assessee to furnish details/bifurcation of exchange rate difference and also direct the Assessing Officer to include the same in Export Turnover in the relevant assessment years if the same is qualified for inclusion in the Export Turnover as per clause ( a ) of sub-section (2) of section 80HHC of the Income-tax Act 1961. A plain reading of the provision of clause ( a ) of sub-section (2) of section 80HHC makes it clear that once the competent authority has extended the time in a case where it is necessary or where the sale proceeds have been received within a period of six months from the end of the previous year or within extended period then such sale proceeds are directly relatable to the exports made in earlier year and no further inquiry is necessary. The Legislature in its wisdom has taken into consideration the fact that in the case of exports made sale proceeds are not necessarily realizable immediately within the accounting period in which exports have been made. As a corollary by the time such sale proceeds are received within the prescribed time by virtue of exchange rate difference there might be a situation where a larger amount is received than the amount as reflected in the shipping bill. On a reading of entire scheme of allowing deduction u/s 80HHC it is clear that deduction is to be based upon the actual export sales proceeds realized in Indian Rupees. In the result the appeal of the revenue is treated as allowed to the extent indicated above.
Issues Involved:
1. Inclusion of exchange rate gain difference in the export turnover for deduction under section 80HHC. 2. Adherence to mercantile system of accounting and relevant legal provisions. Issue-wise Detailed Analysis: 1. Inclusion of Exchange Rate Gain Difference in Export Turnover for Deduction under Section 80HHC: The primary issue in this appeal is whether the exchange rate gain difference of Rs. 51,15,047, pertaining to exports of earlier years but realized during the current year, should be included in the export turnover for the purpose of claiming deduction under section 80HHC of the Income-tax Act, 1961. The assessee argued that the exchange rate difference is part and parcel of export sales and should be considered as part of the export turnover irrespective of the year of transaction and its settlement. The assessee relied on Accounting Standard-11 (AS-11) and Rule 115 of the Income-tax Rules, 1962, along with judicial precedents like Smt. Sujata Grover v. Dy. CIT and CIT v. Govinda Chowdhary & Sons. The Assessing Officer (AO) rejected this contention, stating that the exchange difference does not pertain to the relevant previous year and must be considered in the year the exports were made, in accordance with Rule 115 and the mercantile system of accounting. The AO recalculated the deduction under section 80HHC by excluding the exchange difference from the export turnover. The CIT(A) accepted the assessee's contention, allowing the inclusion of the exchange rate gain difference in the export turnover for the year under consideration. The revenue appealed against this decision. During the hearing, the revenue emphasized the definition of "export turnover" under clause (b) of Explanation to section 80HHC, which requires sale proceeds to be received in India within six months from the end of the previous year or within an extended period allowed by the competent authority. The revenue argued that allowing the deduction in both the earlier year and the year of actual receipt would result in double deduction, which is not permissible. The Tribunal noted that the definition of "export turnover" and the provisions of section 80HHC(2) clearly indicate that the export sales proceeds received within the specified period should be included in the export turnover of the year in which the goods were exported. The Tribunal directed the assessee to furnish details of the exchange rate difference and instructed the AO to include the same in the export turnover of the relevant assessment years if it qualifies for inclusion under section 80HHC(2). 2. Adherence to Mercantile System of Accounting and Relevant Legal Provisions: The AO's decision was based on the mercantile system of accounting, which requires income to be determined based on receivables and payables for the relevant year. The AO referred to Rule 115, which mandates finality of transactions as of the last date of the accounting year. The Tribunal emphasized the need for literal interpretation of the legal provisions, as held by the Supreme Court in Vikrant Tyres Ltd. v. First ITO and the Bombay High Court in CIT v. Gopal Krishna Suri. The Tribunal highlighted that the export turnover definition and the provisions of section 80HHC(2) necessitate that the export sales proceeds realized within the specified period must relate back to the year of export. The Tribunal concluded that the exchange rate gain difference pertaining to earlier years, if received within the specified period, should be included in the export turnover of the year in which the goods were exported. This ensures adherence to the legislative intent and avoids any distortion of the provisions. Conclusion: The Tribunal allowed the revenue's appeal to the extent that the exchange rate gain difference of Rs. 51,15,047 should be included in the export turnover of the relevant assessment years if it meets the criteria under section 80HHC(2). The decision underscores the importance of adhering to the specific legal provisions and the mercantile system of accounting in determining the export turnover for deduction purposes.
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