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2008 (11) TMI 434 - AT - Income TaxDeduction u/s 80HHC - gains earned by cancellation of forward foreign exchange contracts - deduction under section 80HHC in entirety or or ninety per cent - principles of Obiter dictum and ratio decidendi - Denial of deduction u/s 10A. Deduction u/s 80HHC - earned by cancellation of forward foreign exchange contracts - Nature of income - regular business income or speculation income - HELD THAT - The facts of the instant case are mutatis mutandis similar to those considered by the Hon ble Court in Badridas Gauridas (P.) Ltd. s case 2003 (1) TMI 61 - BOMBAY HIGH COURT except for the fact that here the assessee has earned profit on such foreign exchange contracts as against the loss suffered in that case. No distinguishing feature, worth the name was pointed out by the ld. DR in the facts of both the cases. We, therefore approve the view taken by the CIT(A), which is in conformity with that of the Hon ble High Court and accordingly hold that it is a regular business income and not as speculation income. Whether gain should be considered as eligible for deduction u/s 80HHC in entirety as claimed by the assessee or ninety per cent of it be excluded in view of Explanation ( baa ) below section 80HHC(4C)?- HELD THAT - From Persual of the case of K. Ravindranathan Nair 2007 (11) TMI 10 - SUPREME COURT . It is amply clear that the foreign exchange gain on the cancellation of forward exchange contract is independent income and 90 per cent of the same is liable to be reduced from the business income for computing profits of the business as per clause ( baa ) of Explanation ( 1 ) to section 80HHC. AO is directed to re-compute the deduction u/s 80HHC in terms of our discussion. It is absolutely impermissible to argue and for that matter for the courts or the authorities to distort the judgment of the highest court of the land by needlessly endeavouring to brand the ratio decidendi of a judgment as the obiter dictum and ignore the same. Obiter dictum is an expression of opinion by a Judge on a question immaterial to the ratio decidendi, and unnecessary for the decision of the particular case. On the other hand the ratio of a decision is the reasoning for the decision. We, therefore, hold that the remarks of the Hon ble Supreme Court on the exclusion of 90 per cent of the independent income from the business income in terms of Explanation ( baa ) are ratio decidendi of the judgment and hence binding on all under Article 141 of the Constitution. Denial of deduction u/s 10A - income derived from Unit I - Whether sub-section (3) of section 10A is substantive or procedural provision - HELD THAT - It is settled legal position that the substantive amendment is normally prospective unless stated otherwise. On the contrary the procedural provisions are regarded as applicable to pending proceedings as well. Where the statute confers power for the first time, it cannot be held that such power is meant to be exercised in respect of past periods as well. Unless retrospective operation has been assigned by the Legislature to a substantive provision, it can only be regarded as prospective. Our view is fortified by the judgment in the case of S. Subash v. CIT 1998 (11) TMI 11 - MADRAS HIGH COURT . Sub-section (3) was amended with effect from AY 1999-2000 for allowing deduction in ten consecutive assessment years. When the amendment was carried out the assessee had completely exhausted the benefit of deduction available as per law. We are dealing with the AY 1997-98 which is the ninth year beginning with the assessment year relevant to the previous year in which the industrial undertaking began to manufacture. It is still further noted that even the period of ten consecutive assessment years from the beginning of the year in which the industrial undertaking begins to manufacture or produce articles was also over in the AY 1998-99 whereas the amendment was carried out with effect from 1-4-1999. We therefore hold that the CIT(A) was justified in denying the benefit of deduction u/s 10A. In the result, both the appeals are partly allowed for statistical purposes.
Issues Involved:
1. Classification of gains from cancellation of foreign exchange contracts. 2. Eligibility of gains from cancellation of foreign exchange contracts for deduction under section 80HHC. 3. Eligibility of income derived from Unit I for exemption under section 10A. Issue-wise Detailed Analysis: 1. Classification of Gains from Cancellation of Foreign Exchange Contracts: The Revenue argued that the gains from the cancellation of foreign exchange contracts should be treated as speculative income, not eligible for deduction under section 80HHC. The assessee contended that these gains were part of the business income as the contracts were related to its export activities and permissible under the Exchange Control Manual of the Reserve Bank of India. The CIT(A) relied on the Mumbai High Court decision in CIT v. Badridas Gauridas (P.) Ltd. [2003] 261 ITR 256 (Bom.), which held that such gains are business income. The Tribunal upheld this view, affirming that the gains from foreign exchange contracts are regular business income and not speculative income. 2. Eligibility of Gains from Cancellation of Foreign Exchange Contracts for Deduction under Section 80HHC: The core issue was whether the gains of Rs. 2.56 crores from the cancellation of forward exchange contracts should be considered eligible for deduction under section 80HHC in entirety or if ninety percent of it should be excluded as per Explanation (baa) below section 80HHC(4C). The Tribunal referred to the Supreme Court judgment in K. Ravindranathan Nair [2007] 295 ITR 228, which mandated that independent incomes, such as processing charges, should be included in the total turnover and ninety percent of such receipts should be excluded from the gross total income. The Tribunal concluded that the gains from the cancellation of forward exchange contracts are independent income and thus, ninety percent of this amount should be excluded from the business profits for computing the deduction under section 80HHC. 3. Eligibility of Income Derived from Unit I for Exemption under Section 10A: The assessee claimed exemption under section 10A for income derived from Unit I, arguing that the amendment to section 10A extended the tax holiday period from five years to ten years. The Revenue countered that the amendment, effective from 1-4-1999, was prospective and did not apply to the assessment year 1997-98. The Tribunal agreed with the Revenue, stating that the amendment to section 10A is substantive and prospective, applicable from assessment year 1999-2000. Since the assessee had already availed the benefit for the maximum permissible period under the pre-amended section, it was not entitled to the exemption for the assessment year 1997-98. Conclusion: The Tribunal ruled that the gains from the cancellation of foreign exchange contracts are business income but not entirely eligible for deduction under section 80HHC, as ninety percent of such independent income should be excluded. Additionally, the Tribunal upheld the denial of exemption under section 10A for the income derived from Unit I, as the amendment extending the tax holiday period was prospective and not applicable to the assessment year in question. Both appeals were partly allowed for statistical purposes.
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