2004 (12) TMI 288 - AT - Income Tax

Deduction u/s 80HHC - FOB value - foreign exchange forward contract - receipt on account of exchange rate fluctuation - Inclusion of exchange rate difference in export turnover - export receipt from total export turnover due to belated receipts - HELD THAT - As the provisions of s. 80HHC clearly provide for deduction of profits derived from the business of exports, it does not make any difference if amount realised in respect of export sales, part of which is being credited when realised in the subsequent year, under the accounting entry of exchange rate fluctuation. We are, therefore, not persuaded to agree with the learned Departmental Representative that by its own conduct of making entry in the books of account the assessee had excluded such receipts from the export realisation and, therefore, no deduction under s. 80HHC, be given to him. Furthermore, the definition of export turnover and total turnover as defined in Explns. (b) and (ba) of s. 80 HHC(4A), specifically excludes freight or insurance attributable to the transport of goods or merchandise beyond the custom station as defined in Customs Act, 1962. Thus the 'export turnover' and 'total turnover' have been defined in a negative manner not to include freight or insurance, at nowhere it excludes exchange rate difference to be received by the assessee. When the definition specifically excludes certain items, from the export and total turnover, it would automatically follow that the remaining items of sale proceeds received in or brought into India in convertible foreign exchange, shall form part of export and total turnover. Thus, the amount received by the assessee on account of exchange rate difference is nothing but realisation from the goods exported by it and hence such proceeds have to be included for computation of deduction u/s 80HHC. From the record we do not find that assessee had entered into any foreign exchange forward contract and that receipt on account of exchange rate fluctuation was due to any such forward contract. We therefore, do not find any reason to examine such receipts with reference to forward exchange contract. There is also no material on record to indicate that amount received on account of exchange rate difference was due to delayed receipt of payment. We are, therefore, not inclined to agree with the contention of learned Departmental Representative that if there is any delay in receipt of export sales, source of such receipt does not remain directly from the export so as to qualify the receipt eligible for deduction u/s 80HHC. No dispute to the proposition that interest income received on account of delayed payment of export bills, cannot be said to have derived from export of goods. From the record we find that there was not only direct and proximate nexus between the exchange fluctuation receipt and the export turnover, but the receipt on account of exchange fluctuation only flows out of export proceeds. If there was no export, there was no question of receiving any convertible foreign exchange. What the assessee has got is exactly the amount of foreign exchange for which export bill was issued. The converted amount of Indian currency credited in the bank account of the assessee was equivalent to the Indian value of money converted from foreign exchange, as per the rate prevailing on the date of conversion by the bank, after the foreign currency has been transferred by the bank of foreign buyer. It is not the case of the Department that amount credited on account of exchange rate fluctuation pertains to the foreign currency received in excess of the export bill drawn by the Indian exporter. Once it is held to be part of sale proceeds, there is no gain in saying that it was not derived from export sale. We are therefore not persuaded to agree with the learned DR that such income is only incidental to export sales and therefore benefit of deduction u/s. 80HHC cannot be given by treating it as derived from export sales and that 90 per cent of such income is to be reduced from profits of the business in terms of Expln. (baa). IThus, we are inclined to reverse the findings of the lower authorities to the effect that exchange rate difference partake the character of income enumerated in Expln. (baa), 90 per cent of which is required to be excluded from the profits of the business , while computing deduction u/s 80HHC, and direct the AO to allow deduction u/s 80HHC with reference to the amount received by the assessee on account of exchange rate of fluctuation. Thus this ground in all the appeals filed by the assessee as well as by the Revenue is allowed in favour of assessee. In the result, all appeals of the assessee on this ground are allowed. Export receipt out of total export turnover on account of belated receipts of export sales - As per our considered view the deduction can be declined only if such foreign convertible exchange are not brought into India within the extended period beyond six months, only if the competent authority (RBI) did not grant approval. Furthermore as per the provisions of s. 155(13), where in the assessment of any year the deduction under s. 80HHC has not been allowed on the ground that such income has not been received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, has not been brought into India, for and on behalf of the assessee with the approval of the RBI or such other authority as is authorised in terms of law for the time being in force, for regulating the payment and billing in foreign exchange and subsequently such income or part thereof, has been or is received in or brought into India in the manner aforesaid, the AO shall amend the assessment so as to allow deduction u/s 80HHC, in respect of such income or part thereof as he so received in, or brought into, India. For this purpose the provisions of s. 154 shall so far as may be applied thereto and the period of four years shall be reckoned from the end of any previous year in which such income so received in or brought into India. Thus, we direct the AO to allow the claim of deduction keeping in view the provisions of s. 80HHC(2)(a) r/w s. 155(13), after verifying that due ex post facto permission has been received by the concerned assessee from the competent authority in this regard. We direct accordingly. In the result, the appeals and the CO of the assessees are allowed in part as indicated above, whereas the appeal of the Revenue is dismissed.

Summary

Issues Involved:

1. Treatment of exchange difference pertaining to exports for deduction under s. 80HHC.
2. Deduction under s. 80HHC in respect of interest on fixed deposits.
3. Reduction of export receipt out of total export turnover due to belated receipts.
4. Disallowance of 20% of total telephone expenses.
5. Disallowance of foreign traveling expenses.
6. Disallowance of mobile expenses.
7. Unaccounted sales of rejection and addition in closing stock.

Summary:

1. Treatment of Exchange Difference Pertaining to Exports for Deduction Under s. 80HHC:

The common ground in all the appeals was the CIT(A)'s action confirming the AO's treatment of exchange difference as "income from other sources" instead of part of export turnover, thereby declining deduction u/s 80HHC. The Tribunal referred to the decision in Amba Impex vs. Asstt. CIT and various other judgments, concluding that exchange rate difference should be considered part of export turnover and profits. The Tribunal held that such gains are derived from export sales and do not fall under the category of brokerage, commission, interest, or rent as per Expln. (baa) below s. 80HHC(4A). Therefore, the Tribunal reversed the lower authorities' findings and directed the AO to allow deduction u/s 80HHC for exchange rate fluctuation receipts.

2. Deduction Under s. 80HHC in Respect of Interest on Fixed Deposits:

The Tribunal found that the interest on fixed deposits, kept as collateral for export credit facilities, should be netted against the interest paid on such credit facilities. Following the decision in Lalsons Enterprises vs. Dy. CIT, the Tribunal directed the AO to reduce 90% of the net interest received by the assessee while computing deduction u/s 80HHC.

3. Reduction of Export Receipt Out of Total Export Turnover Due to Belated Receipts:

The AO excluded belated export receipts from the total export turnover. The Tribunal directed the AO to allow the deduction u/s 80HHC, considering ex post facto approval from the RBI. The Tribunal emphasized that the deduction can be denied only if the foreign exchange is not brought into India within the extended period approved by the competent authority.

4. Disallowance of 20% of Total Telephone Expenses:

The AO disallowed 20% of telephone expenses due to personal use by partners. The Tribunal upheld this disallowance but directed the AO to recompute the deduction u/s 80HHC based on adjusted profits after disallowance.

5. Disallowance of Foreign Traveling Expenses:

The AO disallowed foreign traveling expenses incurred by the father of the partners. The Tribunal found no material to support that the expenses were not for business purposes. The Tribunal directed the AO to allow the traveling expenses after reducing the unutilized amount.

6. Disallowance of Mobile Expenses:

The AO disallowed 1/5th of mobile expenses for personal use. The Tribunal upheld this disallowance, acknowledging the possibility of personal use by partners.

7. Unaccounted Sales of Rejection and Addition in Closing Stock:

The Tribunal restored the issue of unaccounted sales of rejection and addition in closing stock to the CIT(A) for fresh consideration, directing to provide the assessee an opportunity to present their case.

Conclusion:

The Tribunal allowed the appeals of the assessees on several grounds, reversed the lower authorities' findings on the treatment of exchange difference, and provided specific directions for recomputation and reconsideration on other issues. The appeal of the Revenue was dismissed.