2006 (8) TMI 246 - AT - Income Tax

Deduction u/s 80HHD - bills for services rendered to foreign tourists - income generated in exchange fluctuation - HELD THAT - The actual income was exact value realized by the assessee when its bills were honoured by foreign tourists. In order to arrive at the net foreign exchange receipts, the amounts certified under Item 2A, in Form 10CCA are to be considered. However, while considering the total receipts and net receipts of foreign exchange, the AO in the instant case has wrongly reduced the exchange fluctuation income instead of adding the same to the foreign tour receipts. The issue regarding treatment of income/loss arising out of exchange fluctuation is no more res integra and by plethora of decisions, it has been held that, such amount is part and parcel of sale proceeds in convertible foreign exchange. Tribunal, Delhi Bench in the case of Sharp Credit Ltd. vs. Dy. CIT 2004 (4) TMI 272 - ITAT DELHI has held that total turnover of export receipts includes profit/loss in exchange fluctuation. Similarly, Tribunal, Ahmedabad Bench in the case of Priyanka Gems vs. Asstt. CIT 2004 (12) TMI 288 - ITAT AHMEDABAD-B , order authored by one of the Members constituting this Bench have dealt with the issue in great length and held that in case of export business, income earned or loss incurred on account of fluctuation in exchanged rates, forms part of the sale proceeds earned in convertible foreign currency and, therefore, eligible for deduction u/s 80HHC/80HHD of the Act. Thus, we direct the AO to verify the records and relevant certificate in Form 10CCA, and consider the foreign exchange earning actually realized by the assessee, after considering the excess amount realized due to exchange rate fluctuation as forming part of income eligible for deduction u/s 80HHD. Accordingly, the AO is directed to recompute the deduction u/s 80HHD of the Act. Tax credit available u/s 115JB - HELD THAT - In the instant case, the assessee is engaged in business of handling inbound foreign tourists and entire income was received in convertible foreign exchange. A tax credit u/s115JB of the Act was claimed while computing advance tax and net tax. The AO computed interest without giving this credit. In view of the decisions referred to above, we do not find any merit in the action of the AO in computing interest payable under ss. 234B and 234C of the Act without giving credit for tax under s. 115JB of the Act. We, therefore, reverse the action of the lower authorities and direct the AO to recompute interest under ss. 234B and 234C of the Act after giving due deduction for tax credit of Rs. 7,20,934 u/s 115JB of the Act. In the result, the appeal of the assessee is allowed in terms indicated hereinabove.

Summary

Issues Involved:

1. Validity of the CIT(A) and AO's order.
2. Computation of deduction under section 80HHD.
3. Treatment of interest income from EEFC account.
4. Treatment of income from foreign exchange fluctuation.
5. Adjustment of special reserve under section 80HHD.
6. Charging of interest under sections 234B and 234C.
7. Allowance of tax credit under section 115JB.

Issue-wise Detailed Analysis:

1. Validity of the CIT(A) and AO's order:
The assessee contended that the order passed by the CIT(A) and the AO was "bad in law," "devoid of jurisdiction," "arbitrary," "based on conjectures and surmises," and "against the principles of natural justice." The Tribunal examined the procedural aspects and found no merit in these claims, affirming the jurisdiction and procedural propriety of the lower authorities.

2. Computation of deduction under section 80HHD:
The assessee claimed a deduction under section 80HHD at Rs. 76.77 lakhs, while the AO recomputed it at Rs. 98.39 lakhs. The AO excluded interest income from the EEFC account and profits from foreign exchange fluctuations from the business profits, leading to a lower deduction. The Tribunal directed that the business income, inclusive of interest income, should be considered for computing the deduction under section 80HHD.

3. Treatment of interest income from EEFC account:
The AO excluded Rs. 30.92 lakhs earned as interest from the EEFC account from the business profits, arguing it was not "derived" from services provided to foreign tourists. The Tribunal noted that the AO had included this interest in the gross total income and attributed it to the business activities. Consequently, the Tribunal directed that such interest income should be included in the business income for computing the deduction under section 80HHD.

4. Treatment of income from foreign exchange fluctuation:
The AO excluded Rs. 22.57 lakhs from foreign exchange fluctuations from the business income, arguing it was not "derived" from the business of tour operations. The Tribunal held that the profit or loss from foreign exchange fluctuations was part and parcel of the foreign exchange sale proceeds and should be included in the business income for the deduction under section 80HHD.

5. Adjustment of special reserve under section 80HHD:
The assessee argued for an adjustment of the special reserve from Rs. 38.38 lakhs to Rs. 29.51 lakhs, affecting future taxable income. The Tribunal did not find specific mention or detailed analysis on this point, indicating it was either resolved or not a primary focus in the appeal.

6. Charging of interest under sections 234B and 234C:
The AO charged interest under sections 234B and 234C for short payment of advance tax without considering tax credits under section 115JB. The Tribunal, referencing prior decisions, directed that interest under sections 234B and 234C should be recalculated after giving due credit for the tax paid under section 115JB.

7. Allowance of tax credit under section 115JB:
The Tribunal affirmed that tax credit under section 115JB should be considered before charging interest under sections 234B and 234C. The AO was directed to recompute the interest after accounting for the tax credit of Rs. 7,20,934 under section 115JB.

Conclusion:
The Tribunal allowed the appeal, directing the AO to include interest income and foreign exchange fluctuation profits in the business income for computing the deduction under section 80HHD and to recalculate interest under sections 234B and 234C after considering tax credits under section 115JB.