2003 (4) TMI 231 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for deduction under Section 80HHC of the Income Tax Act for profits derived from exporting surplus foreign currency notes.
2. Classification of foreign currency notes as "goods" or "merchandise" under Section 80HHC.
3. Disallowance of 5% of tea and tiffin expenses.
4. Disallowance of 5% of telephone expenses.

Detailed Analysis:

1. Eligibility for Deduction under Section 80HHC:
The primary issue in this case is whether the assessee is entitled to a deduction under Section 80HHC of the Income Tax Act for profits derived from exporting surplus foreign currency notes. The assessee argued that the CIT(A) erred in not allowing this benefit, as the business involved exporting foreign currency notes and bringing the sale proceeds back to India in convertible foreign exchange.

2. Classification of Foreign Currency Notes:
The AO denied the claim on the grounds that the assessee had not exported any manufactured or processed goods or merchandise, thus not qualifying for the deduction under Section 80HHC. The CIT(A) supported this view, stating that foreign currency could not be considered as goods or merchandise. The CIT(A) emphasized that currency is generally understood as a medium of exchange and not as goods, which are typically objects with intrinsic value.

The assessee countered this by referring to the Customs Act, where 'goods' include currency and negotiable instruments. The assessee also cited various legal precedents, including the Supreme Court and High Court judgments, which treated foreign currency as commodities or trading goods. The Tribunal agreed with the assessee, noting that foreign currency has been legally accepted as 'trade goods' or 'merchandise' and thus qualifies for deduction under Section 80HHC(3)(b). The Tribunal reversed the orders of the authorities below, allowing the ground taken by the assessee.

3. Disallowance of 5% of Tea and Tiffin Expenses:
The assessee argued that tea and tiffin expenses are for the welfare of employees and should be fully deductible. However, the CIT(A) observed that these expenses were mostly self-vouched, leaving room for non-genuine or non-business expenditures. The Tribunal upheld the CIT(A)'s decision, agreeing that a nominal disallowance was justified.

4. Disallowance of 5% of Telephone Expenses:
The assessee contended that telephone expenses were necessary for the business of dealing in foreign exchanges and should be fully deductible. The CIT(A) noted that partners might have used the telephones for personal purposes, justifying a 5% disallowance. The Tribunal agreed with this view, finding the nominal disallowance reasonable and dismissing the assessee's ground on this issue.

Conclusion:
The appeal of the assessee is partly allowed. The Tribunal ruled in favor of the assessee regarding the eligibility for deduction under Section 80HHC for profits derived from exporting foreign currency notes, classifying foreign currency as "goods" or "merchandise." However, the Tribunal upheld the CIT(A)'s disallowance of 5% of tea and tiffin expenses and telephone expenses.