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2008 (12) TMI 296 - AT - Income TaxClaim for exemption u/s 10B - 100 per cent EOU - income derived from export - Third Memeber decision difference of opinion between JM and AM - Whether the export foreign exchange gain is the business income of the EOU and, therefore, exempted u/s 10B? - AO excluded the amount of net foreign exchange gain which it received on account of gain on foreign exchange on conversion of export receipts in export sales - CIT(A) directed AO to treat the foreign exchange gain, as business income of the EOU and allow the assessee's claim. Order of JM - HELD THAT - In the case of Renaissance Jewellery (P.) Ltd. 2005 (5) TMI 246 - ITAT BOMBAY-G , held that foreign exchange gain is in the same nature as the sale proceeds and hence eligible for exemption under section 10A of the Act. By following the said decision of the ITAT, we uphold the order of the CIT(A) in directing AO to treat the foreign exchange gain as business income of the EOU and allow the assessee's claim for exemption u/s 10B. The Revenue's appeal thus fails. Order of AM - Assessee has derived the income in question because of his making an investment in EEFC account. To make a deposit in EEFC account is not an activity of actual conduct of the business of the EOU. It is a step removed from the actual conduct of the business of the EOU. Hence, the said income cannot be held to be a profit actually derived from EOU. My above view finds support from the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT 2003 (4) TMI 3 - SUPREME COURT . Therefore, the income is not deductible u/s 10B. I therefore, set aside the order of Ld. CIT(A) and restore back the order of AO on this issue. THIRD MEMBER ORDER - The receipt of the sale consideration is in US Dollar. It was credited/deposited in EEFC Account of the assessee to be retained in US as per guidelines for operating this account. In this account, the receipts may be kept in foreign currency instated of converting it to Indian rupee. The gain accounted for by the assessee is the excess rupee value of US on the date of realization of sales proceeds credited. Therefore, the exchange gain on the date of deposit in the EEFC account has to be used on account of sales realized in US Dollar on that date. The exchange gain is thus sales realization of the billed amount in US and would be an income derived from the export of goods and articles. Assessee has also recorded gain being the difference in rates on the date of withdrawals from the EEFC account and the date of deposit in that account. Such gain would not be part of sales as once the sale consideration is deposited in EEFC Account, the exchange gain accrued thereafter would not be a part of the turnover and consequently not a profit arising from the export of goods and the amount to that extent would be an income earned by the assessee derived from export and that which assessee had also not claimed/surrendered its claim u/s 10B. On a perusal of break-up chart of the exchange gain, we find that the receipt of net foreign exchange gain includes exchange gain on the sales realization in US Dollar on the date of its receipt and deposit in EEFC account and balance is with regard to exchange gain on import payment. Therefore, the assessee would be entitled to the deduction u/s 10B with regard to exchange gain only which is the gain on the day of deposit of US in the EEFC Account. In my opinion, therefore, the assessee should be granted deduction u/s 10B with regard to exchange gain. I hold accordingly.
Issues Involved:
1. Treatment of foreign exchange gain as business income. 2. Eligibility for exemption under Section 10B of the Income Tax Act, 1961. 3. Difference of opinion between Judicial Member and Accountant Member. 4. Referral to Third Member for resolution. Issue-wise Detailed Analysis: 1. Treatment of Foreign Exchange Gain as Business Income: The primary issue in this case was whether the foreign exchange gain of Rs. 15,51,239 should be treated as business income of the Export Oriented Unit (EOU). The assessee argued that the foreign exchange gain was similar to the sale proceeds and thus should be considered business income. The Judicial Member agreed, referencing the case of Renaissance Jewellery (P) Ltd. v. ITO, which held that foreign exchange gain is of the same nature as the sale proceeds and hence eligible for exemption under Section 10A of the Act. 2. Eligibility for Exemption Under Section 10B: The assessee claimed exemption under Section 10B of the Income Tax Act, 1961, for the foreign exchange gain. The Assessing Officer excluded the gain from the exemption, arguing that it was not directly derived from export proceeds but from subsequent transactions in the EEFC account. The CIT (Appeals) sided with the assessee, following decisions in similar cases, and directed the Assessing Officer to treat the foreign exchange gain as business income and allow the exemption under Section 10B. 3. Difference of Opinion Between Judicial Member and Accountant Member: The Judicial Member upheld the CIT(A)'s decision, asserting that the foreign exchange gain should be treated as business income and thus eligible for exemption under Section 10B. Conversely, the Accountant Member disagreed, stating that the gain resulted from investments in the EEFC account, which is a step removed from the business activities of the EOU. He cited the Supreme Court's decision in Pandian Chemicals v. CIT, emphasizing that the income must directly arise from the business activities of the EOU to qualify for the exemption. 4. Referral to Third Member for Resolution: Due to the difference of opinion, the matter was referred to a Third Member. The Third Member analyzed the facts and previous judgments, including CIT v. Sterling Foods and Pandian Chemicals Ltd. v. CIT. The Third Member concluded that the foreign exchange gain on the date of deposit in the EEFC account should be considered part of the sales realization and thus eligible for exemption under Section 10B. However, any gain accrued after the deposit in the EEFC account would not qualify as it is not directly derived from the export activities. Conclusion: The Third Member resolved the issue by determining that the foreign exchange gain of Rs. 15,31,518, realized on the date of deposit in the EEFC account, should be treated as business income and eligible for exemption under Section 10B. The remaining Rs. 19,721, gained from subsequent transactions, was not eligible for the exemption. Thus, the assessee's claim was partially allowed, aligning with the Judicial Member's perspective but with a nuanced distinction regarding the timing of the gain.
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