COMMISSIONER OF INCOME TAX Vs. PRIYANKA GEMS

JUDGEMENT

(1.) All these appeals involve single identical question pertaining to deduction under section 80HHC of the Income Tax Act, 1961 ("the Act" for short) relating to the receipts arising out of the fluctuation of rate of foreign exchange. The facts are slightly different in different cases. However, there being broad similarities, we may refer to the facts from Tax Appeal No.1468 of 2006, which is treated as lead matter.

(2.) For the purpose of all Tax Appeals, we adopt following substantial question of law:-

(3.) Respondent assessee M/s.Priyanka Gems was engaged in the business of export. The assessee filed the return of income for Assessment Year 2003-04 on 28.11.2003 declaring total income of Rs.5,13,00,591/-. This return was taken in scrutiny. One of the issues considered by the Assessing Officer pertained to the exchange rate difference. Assessing Officer noted that the assessee had received a net of Rs.71,23,361/- by way of exchange rate difference on the export made in the earlier year. At the same time, the assessee had incurred net loss of Rs.84,35,102/- due to exchange rate fluctuation on the exports made in the same year. After adjustments of the said two sums, the assessee claimed a negative income of Rs.13,11,741/- on account of exchange rate difference. The Assessing Officer thereupon inquired with the assessee why the said amount of Rs.71.23 lakhs (rounded off) being the exchange rate difference relating to the exports of the earlier period should not be deducted from the export turnover and 90% thereof be not excluded from the business profit for the purpose of computation of deduction under section 80HHC of the Act. He was of the opinion that such amount should be treated as income from other sources. The assessee opposed such proposal relying on its earlier elaborate representation on the same issue for the Assessment Year 2001-02 and pointed out that for the said year Income Tax Appellate Tribunal ("the Tribunal" for short) had already accepted the assessee's stand. It was pointed out that during the year under consideration it represented the exchange rate difference as on 31st March of the previous year, and the date of actual realization of the export proceeds. Since such proceeds were received during the previous year, the same had accrued only during that period. It was pointed out that according to the Accounting Standard-11, mandatory items, namely, cash, receivables, payables, etc should be reported at the closing rate i.e. the rate of exchange prevailing at the balance sheet date. The assessee had accordingly adopted the closing rate while reporting the figure of sundry debtors for the immediately preceding year. It was pointed out that when export proceeds are received after the exports are made, it is not possible in every case to realize 100% of the bill amount before the end of the relevant year specially when the exports are made at the fag end of the year. It is because of this that the legislature has permitted a time limit of six months in order to effect remissions. Such time limit is also extendible. The assessee also contended that Rule 115 of the Income Tax Rules, 1962 has no bearing on the computation of the deduction under section 80HHC of the Act. The assessee relied on the decision of this Court in the case of Hindustan Trading Corporation vs. Commissioner of Income-tax, 160 ITR 15 (Guj)in which the Court held that such receipt arising out of the foreign exchange rate fluctuation was revenue receipt.