2006 (5) TMI 122 - AT - Income Tax

Revenue Appeals Partially Allowed: AO to Reassess Exchange Fluctuations, DEPB & Scrap Sales for Section 80HHC Compliance.

The Tribunal partially allowed the Revenue's appeals, remanding several issues back to the AO for further examination. The AO was instructed to reassess ... Deduction u/s 80HHC - reference to DEPB - Profits Of The Business - HELD THAT:- In our considered view, the view expressed by the AO that the sale of DEPB licences having taken place in the subsequent year, the assessee was not justified in reflecting the sale proceeds in the year under appeal and claiming deduction u/s 80HHC in respect of the same is correct. We, however, agree with the alternative contention advanced on behalf of the, assessee that the said amount has got to be excluded from the sale proceeds also and to be excluded from the profits and gains of the business reflected by the assessee. The Accounting Standard AS-12, in our view, is not applicable in respect of the sale of DEPB licences in the subsequent year. The assessee had received the licences in the year under appeal but the same had been sold in the subsequent year and accordingly the income relating to such transaction is assessable in the subsequent assessment year. The AO is accordingly directed to rework the deduction u/s 80HHC after excluding the sale proceeds of DEPB licences from the turnover as well as from the profits of the business. We direct accordingly. In the result, the appeal of the Revenue are partly allowed. Issues Involved:1. Reduction of 90% of exchange fluctuation from profit and gains of business.2. Deduction under section 80HHC without profit under sub-section 3(a), (b), or (c).3. Reduction of 90% of DEPB sales from profit and gains of business.4. Accrual of DEPB sales in the subsequent year.5. Exclusion of scrap sales from total turnover for deduction calculation under section 80HHC.6. Deduction under section 80HHC on export turnover without RBI extension evidence.Issue-wise Detailed Analysis:1. Reduction of 90% of Exchange Fluctuation from Profit and Gains of Business:The assessee received more money in Indian currency due to foreign exchange rate fluctuation. The AO considered the benefit of exchange fluctuation as part of turnover but treated the portion related to the preceding year as other receipts under Expln. (baa) to section 80HHC. The Tribunal noted that the CIT(A) did not address this issue adequately and directed the AO to reconsider the issue, keeping in mind the decision of the Delhi Bench of the Tribunal in the case of Smt. Sujata Grower vs. Dy. CIT and any other relevant decisions. The assessee must be given a reasonable opportunity to be heard.2. Deduction under Section 80HHC Without Profit under Sub-section 3(a), (b), or (c):The AO denied the deduction under section 80HHC for the assessee's turnover of Rs. 61,65,919 due to a lack of evidence showing that the time for collection of the sale proceeds in foreign exchange was extended by the RBI. The CIT(A) allowed the deduction based on evidence that the extension was granted by the concerned collecting banks. The Tribunal directed the AO to verify the claim that the foreign exchange was received within the extended time granted by the competent banking authorities and decide the claim under section 80HHC accordingly.3. Reduction of 90% of DEPB Sales from Profit and Gains of Business:The AO treated DEPB sales as falling under 'any other receipt or charges' and not as an export incentive under section 28(iiib). The Tribunal noted that the issue must be decided afresh in light of the retrospective amendment to section 80HHC. The Tribunal referred to a previous order in similar cases, directing the AO to reconsider the issue, taking into account the Ministry of Finance's office memorandum stating that export premium does not qualify for deduction under section 80HHC as it does not involve earnings in foreign exchange.4. Accrual of DEPB Sales in the Subsequent Year:The assessee received DEPB related to current year exports but sold the licences in the subsequent year, reflecting the sale proceeds in the current year to claim a deduction under section 80HHC. The AO argued that the sale proceeds should be reflected in the subsequent year. The Tribunal agreed with the AO, stating that the income from DEPB sales should be assessed in the subsequent year. The AO was directed to rework the deduction under section 80HHC after excluding the sale proceeds of DEPB licences from both the turnover and the profits of the business.5. Exclusion of Scrap Sales from Total Turnover for Deduction Calculation under Section 80HHC:The CIT(A) directed the exclusion of scrap sales from the total turnover for calculating the deduction under section 80HHC. The Departmental Representative argued that scrap sales should also be excluded from the profits of the business. The assessee conceded to this argument. The Tribunal directed the AO to recalculate the deduction under section 80HHC by excluding scrap sales from both the turnover and the profits of the business.6. Deduction under Section 80HHC on Export Turnover without RBI Extension Evidence:The AO denied the deduction under section 80HHC due to a lack of evidence that the RBI extended the time for collection of sale proceeds in foreign exchange. The CIT(A) allowed the deduction based on evidence from concerned banks. The Tribunal directed the AO to verify the certificates from the banks and ensure the foreign exchange was received within the extended time granted by the competent banking authorities, then decide the claim under section 80HHC accordingly.Conclusion:The appeals of the Revenue were partly allowed, with several issues remitted back to the AO for fresh consideration and verification in accordance with the law and relevant judicial decisions.