2011 (12) TMI 620 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for deduction u/s 80-IC of the Income-tax Act, 1961.
2. Inclusion of interest income on FDRs in eligible profit for deduction u/s 80-IC.
3. Treatment of gain on account of exchange difference.

Summary:

1. Eligibility for deduction u/s 80-IC of the Income-tax Act, 1961:
The revenue appealed against the orders of the CIT(A) for AY 2005-06 and 2006-07, challenging the treatment of the assessee's products as handicrafts for the purpose of deduction u/s 80-IC. The assessee had filed returns declaring nil income and claimed deductions u/s 80-IC(2). The Assessing Officer (AO) did not elaborate on the issue and followed the CIT(A)'s order from AY 2004-05, which was under appeal. The CIT(A) allowed the deduction, which was upheld by the ITAT for AY 2004-05, confirming that the assessee had undertaken substantial expansion and met the criteria for deduction u/s 80-IC. The ITAT found that the CIT(A) had discussed the issues comprehensively, and the AO's remand report accepted that the products qualified as handicrafts. Thus, the ITAT rejected the revenue's appeal on this issue for both years.

2. Inclusion of interest income on FDRs in eligible profit for deduction u/s 80-IC:
The CIT(A) did not adjudicate this ground for AY 2005-06. Therefore, the ITAT remitted this ground to the CIT(A) for adjudication.

3. Treatment of gain on account of exchange difference:
The AO assessed the gain on exchange difference under "income from other sources," but the CIT(A) treated it as business income, as it resulted from unrealized sales. The ITAT upheld the CIT(A)'s decision, finding no error in treating the gain as business income.

Conclusion:
The appeal for AY 2005-06 was partly allowed for statistical purposes, and the appeal for AY 2006-07 was dismissed. The decision was pronounced in the open court.