2011 (10) TMI 483 - HC - Income Tax

Court Allows Deduction under Section 80HHC for Foreign Exchange Earnings

Anil Kumar Versus Income-tax Officer, Ward 2(3)

The court held that the assessee was entitled to the deduction under section 80HHC of the Income-tax Act, 1961, despite goods not physically passing ... Deduction u/s 80HHC - assessee engaged in purchase, sale of non ferrous metals - purchases made from one country exported to another country at a margin of profit by arranging direct shipment from the purchasing country to the selling country - Revenue contended that for deduction u/s 80HHC, goods exported has to be of Indian Soil after crossing custom barrier - Held That:- Law does not require the goods to be physically exported out of India. When third country trade is a feature of Exim Policy deduction cannot be denied as exports were not made ex-India. It is undisputed that the assessee had earned foreign exchange for the country. The focus and emphasis of foreign policy is to increase the foreign reserves of the country. 'Export' literary means sending goods to another country. So, the word 'export' does not mean only sending goods out of one's own country to another. The wording under 80HHC is different from 80HHE. Thus assesses entitled to benefit u/s 80HHC - Decided in favor of assessee. Issues Involved:1. Entitlement to deduction under section 80HHC of the Income-tax Act, 1961.2. Validity of levy of interest under section 234B.Detailed Analysis:1. Entitlement to Deduction under Section 80HHC:The primary issue was whether the assessee was entitled to the benefit of deduction under section 80HHC of the Income-tax Act, 1961, for profits earned from transactions where goods were purchased in one foreign country and sold to another without physically passing through Indian customs.Facts and Contentions:- The assessee engaged in purchasing goods from one country and selling them to another, with transactions settled through an Indian bank and proceeds received in convertible foreign currency.- The assessing authority denied the deduction, stating that the goods did not pass through Indian customs and thus did not constitute 'export out of India' as required by section 80HHC.- The appellate authority and the Tribunal upheld the assessing officer's decision, emphasizing the necessity of customs clearance in India for claiming the deduction.Legal Interpretations:- Section 80HHC(1) requires that an assessee engaged in the business of 'export out of India' of any goods or merchandise is eligible for deduction if the sale proceeds are received in convertible foreign exchange.- Explanation (aa) to section 80HHC clarifies that transactions within India not involving customs clearance do not qualify as 'export out of India.'- The court noted that the term 'export out of India' does not explicitly require goods to be exported from Indian soil. The focus is on earning foreign exchange.Judicial Precedents and Circulars:- The court referred to various judgments and a circular (Circular No. 621 dated 19.12.1991) to interpret the provisions.- It cited the Supreme Court's decision in J.B. Boda & Co. (P.) Ltd. v. CBDT, which emphasized the objective of earning foreign exchange without unnecessary formalities.- The court also considered the decision in CIT v. Bombay Burmah Trading Corpn., where it was held that the provision does not require that the export should be ex-India.Conclusion:- The court concluded that the authorities misinterpreted the provisions of section 80HHC. The requirement is to earn foreign exchange, not necessarily to physically export goods from India.- The substantial question of law was answered in favor of the assessee, granting the benefit of section 80HHC.2. Validity of Levy of Interest under Section 234B:The second issue was whether the Tribunal was justified in upholding the levy of interest under section 234B of the Income-tax Act.Facts and Contentions:- The assessee argued that the levy of interest was not justified given the circumstances of the case.- The court did not delve deeply into this issue, as the primary focus was on the interpretation of section 80HHC.Conclusion:- The court's primary judgment on section 80HHC indirectly affected the interest levy under section 234B, as the tax liability would change based on the deduction entitlement.- The substantial question of law regarding interest under section 234B was also answered in favor of the assessee.Final Judgment:The appeals were allowed, and the impugned orders were set aside. The assessee was entitled to the benefit of section 80HHC in accordance with the law. The court answered the substantial questions of law in favor of the assessee and against the revenue. No costs were awarded.