Exchange Rate Gains Considered Part of Export Turnover, Affecting Deductions u/s 80HHC for Export Year.

The Tribunal held that exchange rate gain is part of export turnover, not income from other sources. Deductions under Section 80HHC are admissible in the year of export if foreign exchange is realized within the prescribed period. Section 155(13) is inapplicable if the foreign exchange is received within the statutory period. The AO was instructed to adjust the deduction computation by including the exchange rate gain in the income of the year when exports were made. The Revenue's appeal was allowed for statistical purposes.

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Issues Involved:
1. Whether the exchange rate gain is part of export turnover or income from other sources.
2. The year in which deduction is admissible under Section 80HHC for exchange rate gain.
3. The effect of Section 155(13) on the computation of deduction.
4. Computation of deduction under Section 80HHC.

Issue-wise Detailed Analysis:

A. Whether the exchange rate gain is part of export turnover or income from other sources
The learned Departmental Representative contended that the exchange rate difference pertaining to the exports made in the earlier year should be categorized under the head "Income from other sources" and hence no deduction can be allowed on this amount. However, the Tribunal held that the gain due to fluctuation in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds. The Tribunal emphasized that the entire amount realized in Indian rupees remains attributable to the exports made in foreign currency. It was noted that the AO had already accepted the exchange rate gain of Rs. 1,000 as part of export turnover but denied similar treatment to Rs. 2,000, which was inconsistent. Therefore, the foreign exchange fluctuation gain is part of export turnover.

B. Year in which deduction is admissible
The main question was whether the foreign exchange rate difference should be included in the export turnover for the purpose of deduction under Section 80HHC in the year of realization or the earlier year when export was effected. The Tribunal observed that the definition of 'export turnover' in Explanation (b) below Section 80HHC(4C) refers to the sale proceeds received in or brought into India by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow. The Tribunal concluded that the amount qualifying for 'export turnover' includes the amount realized during the financial year and the amount realized within six months from the end of the year. Thus, the exchange rate difference pertaining to the exports made in the earlier year is part of the export turnover of the year in which such export is made, provided the sale proceeds are realized within the prescribed period.

C. Effect of Section 155(13)
The learned Counsel for the assessee argued that the insertion of Sub-section (13) to Section 155 by the Finance Act, 1999, w.e.f. 1st June, 1999, required bifurcation of the year into two parts for the purpose of deduction. However, the Tribunal noted that Section 155(13) deals with cases where deduction was earlier denied due to non-receipt of convertible foreign exchange within the prescribed period and subsequently received. The Tribunal held that if the amount is realized within the statutory permissible period of six months from the end of the previous year, Section 155(13) would not apply. Therefore, the contention raised on behalf of the assessee was without merit.

D. Computation of deduction
The Tribunal observed that Section 80AB and Section 80HHC(4B) require that the qualifying income must be included in the gross total income for the deduction to be allowed. The Tribunal held that the deduction is permissible in the year of export and not in the subsequent year of realization. Consequently, the AO was directed to exclude the disputed amount of foreign exchange fluctuation difference from the income of the current year and include it in the income of the immediately preceding year in which the exports were made, and allow deduction accordingly.

Conclusion:
The Tribunal concluded that the exchange rate gain is part of the export turnover and not income from other sources. The deduction under Section 80HHC is admissible in the year of export, provided the foreign exchange is realized within the prescribed period. Section 155(13) does not affect the computation of deduction in cases where the foreign exchange is realized within the statutory period. The AO was directed to adjust the computation of deduction accordingly. The appeal of the Revenue was allowed for statistical purposes.

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