2006 (4) TMI 344 - AT - Income Tax

Summary

Issues Involved:
1. Computation of deduction under section 80HHC.
2. Treatment of unrealized export profits.
3. Inclusion of unrealized export proceeds in total turnover.
4. Allowance of trading loss versus bad debts.

Detailed Analysis:

1. Computation of Deduction under Section 80HHC:
The primary issue revolves around the computation of deduction under section 80HHC of the Income-tax Act, 1961. The assessee, engaged in exporting processed and frozen sea foods, filed a return of income showing 'Nil' income but claimed a deduction under section 80HHC amounting to Rs. 1,69,47,425. The Assessing Officer (AO) noted that out of the total export turnover, a significant sum was not received by the assessee and treated it as domestic sales, reworking the deduction to Rs. 1,12,64,253. The CIT(A) partially accepted the assessee's contention regarding real income and recalculated the deduction, leading to further appeals by both the revenue and the assessee.

2. Treatment of Unrealized Export Profits:
The revenue contended that the CIT(A) erred in allowing unrealized export profits as deductions, citing the Supreme Court judgment in the case of State Bank of Travancore, which held that the concept of real income should not defeat the provisions of the Act. The revenue argued that the assessee's claim was rightly rejected by the AO as the extension for realization of export proceeds was pending. The CIT(A) had accepted the plea of real income, reducing the taxable profit and granting relief, which the revenue contested.

3. Inclusion of Unrealized Export Proceeds in Total Turnover:
The assessee argued that the unrealized export proceeds should not be included in the total turnover for computing the deduction under section 80HHC. The CIT(A) had included the FOB value of unrealized exports in the total turnover, which the assessee contested, citing various judicial decisions. The Tribunal, however, upheld the inclusion of unrealized export proceeds in the total turnover, stating that profit accrues when earned in law, regardless of realization.

4. Allowance of Trading Loss versus Bad Debts:
The assessee alternatively claimed that the unrealized export proceeds should be allowed as a trading loss under section 28(i) of the Act. The CIT(A) rejected this claim, stating that the loss was incurred in the year when the assessee chose to treat it as a loss in its books after efforts for realization failed. The Tribunal upheld this view, noting that the assessee had already claimed the amount as bad debts in a subsequent year, which had been allowed by the Department.

Conclusion:
The Tribunal concluded that the income accrued to the assessee for the year under consideration, and the concept of real income was not applicable merely due to non-realization of sale proceeds. The revenue's appeal was partly allowed, and the assessee's appeal was dismissed, affirming the inclusion of unrealized export proceeds in the total turnover and rejecting the claim for trading loss. The decision emphasized adherence to the accrual system of accounting and the specific provisions of the Income-tax Act regarding deductions and bad debts.