SHAH ORIGINALS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) Shah Originals/assessee is the appellant in the subject Civil Appeals. The Commissioner of Income Tax-24, Mumbai/Revenue, is the respondent. The appeals arise from the orders dtd. 22/4/2010 in Income Tax Appeal Nos 431 and 996 of 2008 in the High Court of Judicature at Bombay. The subject matter of the Civil Appeals relates to the assessment years 2000-01 and 2001-02. The appeals presented before this Court have a similar set of facts and a common question for the decision of this Court and, hence, are disposed of by this common judgment.

(2.) The Assessing Officer (AO), by the assessment order dtd. 10/2/2006, disallowed the deduction claim of Rs.26,62,927.00 and added it to the assessee's taxable income. The case of the Revenue is that gain/profit on account of foreign currency fluctuations in the Exchange Earners Foreign Currency (EEFC) account cannot be attributed as an earning from the export of goods/merchandise outside India by the assessee. The assessee has completed the export obligations and received the foreign exchange remittances from the buyers/importers of the assessees goods. The credit of the foreign currency in the EEFC account and positive fluctuation at the end of the financial year cannot be treated as the assessees income/receipt from the principal business, i.e., export of goods and merchandise outside India. It is pointed out by the Revenue that the Reserve Bank Notification No. FERA.159/94-RB dtd. 1/3/1994 permitted foreign exchange earners to open and operate an EEFC account by crediting a percentage of foreign exchange into the account. The guidelines issued in continuation of the Notification dtd. 1/3/1994 allow the units covered by the notification to credit twenty-five per cent or as permitted, in the EEFC accounts and operate in foreign currency. In other words, the credit of foreign exchange to the EEFC account facilitates the foreign exchange earners to use the foreign currency in the EEFC account depending upon the business necessities of the exporter.

(3.) Mr. V.P. Gupta, learned counsel for the assessee, contends that the assessee is a 100% EOU. In the subject assessment year, the assessee has earned foreign currency from the export of garments outside India and, as provided by notification dtd. 1/3/1994, has credited a portion of foreign currency earned in the EEFC account. To meet the business exigencies, the assessee has used the credited amount in the EEFC account to promote or meet its business needs. Sec. 80 HHC provides for a deduction of profits of business from exports. The High Court erred by not noticing that the foreign exchange is chargeable or computed under the head "profits and gains of business or profession". The High Court answered the question framed, viz., whether the Tribunal was right in setting aside the disallowance of gain earned from foreign exchange fluctuations by the assessee without recording findings on crucial matters in issue.