2021 (1) TMI 745 - HC - Income Tax

Exemption u/s 10B - failure to receive the convertible foreign exchange within stipulated period - Scope of amended provision of Section 155(11A) - AO restricted the deduction on the ground that out of the total export turnover the foreign exchange realized was calculated by refusing to take into consideration of the payment which was adjusted towards the imports of certain raw materials made by the assessee for the manufacture of the very same goods which were exported - According to the appellant-assessee, the word 'sale proceeds' occurring in section 10B(3) cannot be construed to be only as the total value of the goods exported but would need to be interpreted as net sale proceeds when the competent authority, viz., the Reserve Bank of India, permits such realization of foreign exchange of net sale value - HELD THAT - It is pertinent to note that as per Explanations 1 and 2 to section 10B(3) the sale proceeds shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the said purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. Appellant as submitted that under section 155 (11A), the prior approval of the Reserve Bank of India is not required. The amended provision of Section 155(11A) came into effect from 13.07.2006.When the subject matter of the appeal is pertaining to the assessment year 2004-05, the provisions of the amended section, which came into effect on 13.07.2006, has no application for the present case. Therefore, the appellant cannot take shelter under the amended provision of Section 155(11A). Application seeking approval from the RBI only in the year 2007 - Since the appellant had sought for the approval from the RBI only in the year 2007, the said correspondence shall not be helpful to the appellant in any manner whatsoever for the reason that the subject matter of the appeal is pertaining to the assessment year 2004-05. Explanations 1 and 2 to section 10B(3) are applicable to the case on hand. The materials available on record would clearly establish that the appellant had not obtained prior approval from the RBI as contemplated under Explanations 1 and 2 to section 10B(3) of the Act. That apart, Form 56G would reflect that the Foreign Inward Remittances with regard to the sale proceeds have not been brought in foreign currency during the previous year and within six months period. As per Section 10B of the Act, the entire sale proceeds should have been brought into India in convertible foreign exchange, within the prescribed period. Out of the total export turnover of ₹ 4,25,32,628/-, the foreign exchange realized within the prescribed period was ₹ 2,10,35,760/- . Since the appellant-assessee did not bring the entire sale proceeds in convertible foreign exchange as per the provisions, the authorities disallowed the said deduction. The obligation on the part of the assessee to avail the beneficial section is that the entire sale proceeds ought to have been received in convertible foreign exchange as per the above section. Alternatively, the assessee should have opened a bank account as per the Explanation 2 of the above section. Assessing Officer restricted the deduction to ₹ 9,25,865/-. The appeal preferred by the appellant before the Commissioner of Income Tax (Appeals)-I, Coimbatore was also dismissed by the Commissioner. The Income Tax Appellate Tribunal, 'A' Bench, Chennai, had also confirmed the order passed by the authorities and dismissed the appeal. The reasoning given by the authorities restricting the deduction of ₹ 9,25,865/- is just and proper. - Decided against assessee.

Summary

Issues:
Challenge to order restricting deduction under section 10B of the Income Tax Act for Assessment Year 2004-05.

Analysis:
The appellant, a 100% export oriented unit, claimed exemption under section 10B for the assessment year 2004-05, with total deduction claimed at ?16,84,825 and total export turnover at ?4.25,32,628. The Assessing Officer restricted the deduction to ?9,25,865, citing that only ?2,10,35,760 of foreign exchange was realized out of the total export turnover, not considering the payment of ?2,14,96,917 adjusted towards imports of raw materials for the exported goods. The appellant argued that the term "sale proceeds" in section 10B(3) should be interpreted as net sale proceeds when RBI permits realization of net sale value, not just total value of goods exported.

The Court admitted the appeal based on the substantial question of law regarding the requirement to bring the entire sale value of goods into India and remit it back for imports, as opposed to the decision in J.B. Boda & Co. Pvt. Ltd. case. The appellant relied on Supreme Court judgments emphasizing the receipt of income in convertible foreign exchange without unnecessary formalities.

The Tribunal's decision was upheld, applying the principles from J.B. Boda & Co. Pvt. Ltd. case to section 10A deductions. The Court found that sale proceeds in section 10A should mean net proceeds if goods were purchased on credit from foreign buyers. The distinction between sections 80O and 10A was deemed irrelevant as the deduction principles remain the same.

The respondent argued that the appellant did not obtain prior RBI approval as required by Explanations 1 and 2 to section 10B(3) and failed to bring entire sale proceeds into India, violating section 10B. The appellant's reliance on amended Section 155(11A) was deemed inapplicable as it came into effect after the assessment year in question. The Court emphasized the necessity of prior RBI approval, as highlighted in previous judgments.

Ultimately, the Court found that the appellant did not obtain prior RBI approval, did not bring entire sale proceeds in convertible foreign exchange, and failed to comply with the provisions of section 10B. The authorities' decision to restrict the deduction was upheld as just and proper, leading to the dismissal of the Tax Case Appeal.