2008 (8) TMI 387 - AT - Income Tax

Deduction u/s 80HHC - business of export of diamond - Whether CIT(A) directed the AO to include the exchange rate gain difference pertaining to the exports of earlier years in the export turnover for arriving at the allowable deduction u/s 80HHC without appreciating the facts of the case including nature of receipt and treatment of the same in the books of account was right ? - A. Whether the exchange rate gain is part of export turnover or income from other sources? - HELD THAT - The learned D.R. has contended that the exchange rate difference pertaining to the exports made in the earlier year is to be categorized under the head Income from other sources and hence no deduction can be allowed on this amount. We are not convinced with the view canvassed on behalf of the Revenue for the obvious reason that the gain due to fluctuation in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the rate has increased subsequent to sale but prior to realization. When goods are exported, the invoice is raised in the currency of the country from where the goods are sold. Subsequently, when the amount is realized in that foreign currency and then converted into Indian rupee, the entire amount is relatable to the exports made. In our opinion the ld. DR cannot go beyond the assessment order and bring an altogether different case, thereby undoing what has been done by the AO. The power to modify the assessment order to the advantage of the Revenue, apart from suo motu action by the AO under sections 147 or 154, lies only with CIT u/s 263, which cannot be usurped by the ld. DR while arguing the appeal. It is, therefore, held that the foreign exchange fluctuation gain is part of export turnover. B. Year in which deduction is admissible - determination of the year in which foreign exchange rate difference is liable to be included in the export turnover for the purpose of deduction under this section, that is, the year in which realization was made subsequently or in the earlier year when export was effected - In our considered opinion there is no effect on the computation of deduction in the year of export, whether the difference in export realisation due to fluctuation in the foreign currency rate is received in the same year or within six months from the end of the previous year or within such further period as may be allowed by the competent authority. Once the amount is found to be so received, it would relate to export turnover of the year in which the export was actually made. We further note that when the definition of export turnover was amended by the Finance Act, 1990, by which the words received in or brought into India were substituted for the word receivable , identical amendment was also carried out in clause (a) of sub-section (2) of section 80HHC. So this argument advanced on behalf of the assessee does not bring his case any further. C. Effect of section 155(13) - It was submitted by the ld Counsel for the assessee that by virtue of this insertion, there was a need to bifurcate the year into two parties, viz., the first period from the beginning of the year and up to the date of insertion of this sub-section and the second, period after that. In his opinion, the assessee would be entitled to deduction in the former period in the year in which foreign exchange gain is received and for the later period the benefit would be allowed in the year in which export is made. We are not convinced with this submission as we do not find any overlapping of section 80HHC coming by the insertion of subsection (13) of section 155. The facts with which we are confronted in the present appeal are already governed by the definition of 'export turnover' read with sub-section (2)(a) because the exchange rate difference was realized within the stipulated statutory permissible period of six months from the end of the previous year. We, therefore, hold that this contention raised on behalf of the assessee, is bereft of any force. We, therefore, hold that the view of the ld. CIT(A) in directing the inclusion of the gain due to exchange rate difference in the year of receipt and allowing deduction u/s 80HHC in later year, is not sustainable. The impugned order is, therefore, overturned pro tanto. D. Computation of deduction - We observe that the assessee included the amount of foreign exchange difference in the current year's income and claimed deduction accordingly. Now we have set aside impugned order upholding the assessee's action and held in the earlier part of this order that the deduction is permissible in the preceding year when export was made and not in the current year. In that view of the matter, the impugned order granting deduction in the current year would stand reversed and the earlier year's order would require modification. Accordingly we direct the Assessing Officer to consequently exclude the disputed amount of foreign exchange fluctuation difference from the income of the current year and include it in the income of the immediately preceding year in which the exports were made by the assessee and allow deduction accordingly in accordance with and subject to the provisions of this section in such earlier year. In result, the question posed before the Special Bench is replied in affirmative and the appeal of the Revenue is allowed for statistical purposes.

Issues Involved:
1. Whether the exchange rate gain is part of export turnover or income from other sources.
2. The year in which deduction is admissible under Section 80HHC for exchange rate gain.
3. The effect of Section 155(13) on the computation of deduction.
4. Computation of deduction under Section 80HHC.

Issue-wise Detailed Analysis:

A. Whether the exchange rate gain is part of export turnover or income from other sources
The learned Departmental Representative contended that the exchange rate difference pertaining to the exports made in the earlier year should be categorized under the head "Income from other sources" and hence no deduction can be allowed on this amount. However, the Tribunal held that the gain due to fluctuation in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds. The Tribunal emphasized that the entire amount realized in Indian rupees remains attributable to the exports made in foreign currency. It was noted that the AO had already accepted the exchange rate gain of Rs. 1,000 as part of export turnover but denied similar treatment to Rs. 2,000, which was inconsistent. Therefore, the foreign exchange fluctuation gain is part of export turnover.

B. Year in which deduction is admissible
The main question was whether the foreign exchange rate difference should be included in the export turnover for the purpose of deduction under Section 80HHC in the year of realization or the earlier year when export was effected. The Tribunal observed that the definition of 'export turnover' in Explanation (b) below Section 80HHC(4C) refers to the sale proceeds received in or brought into India by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow. The Tribunal concluded that the amount qualifying for 'export turnover' includes the amount realized during the financial year and the amount realized within six months from the end of the year. Thus, the exchange rate difference pertaining to the exports made in the earlier year is part of the export turnover of the year in which such export is made, provided the sale proceeds are realized within the prescribed period.

C. Effect of Section 155(13)
The learned Counsel for the assessee argued that the insertion of Sub-section (13) to Section 155 by the Finance Act, 1999, w.e.f. 1st June, 1999, required bifurcation of the year into two parts for the purpose of deduction. However, the Tribunal noted that Section 155(13) deals with cases where deduction was earlier denied due to non-receipt of convertible foreign exchange within the prescribed period and subsequently received. The Tribunal held that if the amount is realized within the statutory permissible period of six months from the end of the previous year, Section 155(13) would not apply. Therefore, the contention raised on behalf of the assessee was without merit.

D. Computation of deduction
The Tribunal observed that Section 80AB and Section 80HHC(4B) require that the qualifying income must be included in the gross total income for the deduction to be allowed. The Tribunal held that the deduction is permissible in the year of export and not in the subsequent year of realization. Consequently, the AO was directed to exclude the disputed amount of foreign exchange fluctuation difference from the income of the current year and include it in the income of the immediately preceding year in which the exports were made, and allow deduction accordingly.

Conclusion:
The Tribunal concluded that the exchange rate gain is part of the export turnover and not income from other sources. The deduction under Section 80HHC is admissible in the year of export, provided the foreign exchange is realized within the prescribed period. Section 155(13) does not affect the computation of deduction in cases where the foreign exchange is realized within the statutory period. The AO was directed to adjust the computation of deduction accordingly. The appeal of the Revenue was allowed for statistical purposes.

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