2016 (7) TMI 1181 - AT - Income Tax

Claim for deduction u/s. 80HHC in respect of the gains arising on maturity of foreign contracts - Held that - As by following the decision of Hon ble jurisdictional High Court rendered in the case of M/s Shah Originals (2010 (4) TMI 216 - BOMBAY HIGH COURT ), we hold that the Ld CIT(A) was justified in holding that the income arising from foreign exchange forward contract is not eligible for deduction u/s 80HHC of the Act, since it cannot be considered to be an income derived from export of goods or merchandise. - Decided against assessee.

Summary

Issues:
- Whether the claim for deduction u/s. 80HHC of the Act in respect of gains arising on maturity of foreign contracts was justified.

Analysis:
1. The appeal addressed whether the learned CIT(A) was correct in rejecting the claim for deduction u/s. 80HHC of the Act concerning gains from foreign exchange forward contracts. The assessee, a diamond exporter, earned profits on maturity of foreign exchange contracts, claiming deduction u/s. 80HHC as income derived from export activity. The Assessing Officer deemed it speculation income, denying the deduction. However, the CIT(A) considered it business income but disallowed the deduction as it did not result from export activity.

2. The assessee relied on decisions by the Hon'ble Gujarat High Court, asserting that gains from foreign currency forward contracts are eligible for deduction u/s. 80HHC. Conversely, the Department cited Mumbai Tribunal cases where such deductions were disallowed. The Tribunal followed the decision in CIT Vs. Shah Originals, emphasizing that the gains did not have a direct nexus with export transactions, thus not qualifying for deduction u/s. 80HHC.

3. The Tribunal examined the jurisdictional High Court's ruling in Shah Originals, emphasizing that the timing of the forward contract's maturity did not alter the character of the income. It held that the income from foreign exchange forward contracts did not meet the criteria for deduction u/s. 80HHC, as it was not directly derived from export activities. Consequently, the appeal was dismissed, aligning with the jurisdictional High Court's decision.

In conclusion, the Tribunal upheld the CIT(A)'s decision, denying the deduction u/s. 80HHC for gains from foreign exchange forward contracts, as they were not considered income derived from export activities. The judgment highlighted the importance of the direct nexus between income and export transactions, as established by the jurisdictional High Court's precedent.