Foreign exchange fluctuation gain on export proceeds accrues when sale proceeds arise, and enters section 80HHC export profits.

Foreign exchange fluctuation gain arising from export sales was treated as accruing in the year when the export proceeds were earned, because the right to receive the sale consideration arose on the date of sale and later exchange variation only changed the rupee equivalent on realization. The gain was therefore taxable in assessment year 1991-92 rather than 1992-93. As the amount formed part of the export sale proceeds of that year, it was also required to be included in export profits for deduction under section 80HHC, and the computation had to be recomputed on that basis.

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Issues: (i) Whether the foreign exchange fluctuation gain of Rs. 84.06 lakh arising from export transactions had to be assessed in the assessment year 1991-92 or 1992-93. (ii) Whether deduction under section 80HHC had to be recomputed by including that amount in the export profits of assessment year 1991-92.

Issue (i): Whether the foreign exchange fluctuation gain of Rs. 84.06 lakh arising from export transactions had to be assessed in the assessment year 1991-92 or 1992-93.

Analysis: The amount represented sale consideration arising from export transactions made during the previous year relevant to assessment year 1991-92. The right to receive the sale proceeds had accrued on the date of sale, and the later exchange fluctuation merely affected the quantification of the rupee equivalent on realization. The authorities below had proceeded on an incorrect application of the principle of accrual by treating the receipt as income of the later year. The facts were distinguishable from cases where no enforceable right to receive the amount existed in the earlier year.

Conclusion: The amount was taxable in assessment year 1991-92 and not in assessment year 1992-93.

Issue (ii): Whether deduction under section 80HHC had to be recomputed by including that amount in the export profits of assessment year 1991-92.

Analysis: Since the exchange fluctuation gain formed part of the export sale proceeds of the relevant previous year, it was to be included in the export profits for purposes of section 80HHC. The computation made by the Assessing Officer, based on exclusion of the amount from the earlier year, was therefore not sustainable. The order was directed to be amended and the deduction recomputed accordingly.

Conclusion: Deduction under section 80HHC had to be recomputed by including the amount of Rs. 84.06 lakh.

Final Conclusion: The foreign exchange fluctuation gain was held to belong to assessment year 1991-92, and the export deduction was to be worked out on that basis, resulting in deletion of the addition in the later year.

Ratio Decidendi: Where export proceeds are earned during the relevant previous year, a subsequent exchange-rate fluctuation affecting realization does not defer accrual of the income, and such realized amount must be included in the export profits for section 80HHC.

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