2014 (10) TMI 251 - HC - Income Tax

Deduction u/s 80HHC of the Act Receipts arising out of fluctuation of rate of foreign exchange Held that - Following the decision in Commissioner of Income Tax Versus M/s. Priyanka Gems 2014 (3) TMI 938 - GUJARAT HIGH COURT - The foreign exchange gain arising out of the fluctuation in the rate of foreign exchange cannot be divested from the export business of the assessee - once export is made, due to variety of reasons, the remission of the export sale consideration may not be made immediately - Under the accounting principles, the assessee, on the basis of accrual, would record sale consideration at the prevailing exchange rate on the quoted price for the exported goods in the foreign currency rates - There is no distinction possible on the basis of different situations under which foreign exchange fluctuation may result - law permits hedging of foreign exchange fluctuation risk to an importer or an exporter - The exporter may take steps as found commercially prudent to safeguard himself against drastic foreign exchange rate fluctuations and in the process may also limit the possibility of gain in case of favourable currency rate trends - the resultant gain in foreign exchange rate would still be due to the export made by the assessee order of the Tribunal upheld - Decided against Revenue. Amount received on sale of DEPB licence Held that - Following the decision in Commissioner of Income Tax Versus M/s. Priyanka Gems 2014 (3) TMI 938 - GUJARAT HIGH COURT - mere change in the accounting year can have no real impact on the nature of the receipt. The conclusion of the AO that since the year during which such sale proceeds were received by the assessee export was not made, would not in any manner change the situation - The assessee being engaged in the business of export and having made the export, mere fact of the remittance being made after 31st of March of the year when export was made, would not change the situation in so far as, relation of such income to the assessee s export business is concerned. Clause (baa) to the Explanation to section 80HHC provides for exclusion of certain incomes for computation of export profit under section 80HHC the appeal is allowed in part to the extent the Tribunal s decision relates to section 80-IA of the Act - with respect to deduction u/s 80-IA of the Act on sale of DEPB licence Decided against revenue.

Summary

Issues:
1. Whether the amount earned on account of rate difference due to fluctuation of foreign exchange can be considered for calculating profits for deductions under section 80HHC of the Income-tax Act, 1961?
2. Whether the amount received on the sale of DEPB license and foreign exchange fluctuation of rate difference can be considered for deductions under section 80-IA of the Income-tax Act, 1961?

Analysis:

Issue 1:
The court referred to a previous judgment in Tax Appeal No. 1468 of 2006, where the issue was decided in favor of the assessee regarding the amount earned on account of rate difference due to foreign exchange fluctuation for the purpose of deductions under section 80HHC of the Income-tax Act, 1961. Therefore, the court answered this question in accordance with the previous judgment.

Issue 2:
Regarding the second question, the court analyzed two aspects. The first aspect pertained to income arising from the sale of DEPB license for deduction under section 80-IA of the Act, where the court referred to a Supreme Court decision holding in favor of the Department. The second aspect involved foreign exchange fluctuation for deduction under section 80-IA. The court examined various judicial pronouncements and held that foreign exchange gain due to fluctuation cannot be separated from the export business of the assessee. The court emphasized that such income is directly related to the export business and does not lose its character as income derived from export due to time delays or currency fluctuations. The court distinguished cases where the entire export proceeds were received before the fluctuation gain occurred, stating that in such cases, the gain cannot be considered as derived from the export business. Consequently, the court allowed the appeal in part, reversing the decision on the deduction under section 80-IA of the Act related to the sale of DEPB license.

In conclusion, the judgment clarified the treatment of income earned from foreign exchange fluctuation in the context of deductions under the Income-tax Act, emphasizing the direct relation of such income to the export business of the assessee.