COMMISSIONER OF INCOME TAX RAJKOT-I vs. MYSORE FINE AGARBATI

Facts

The assessee, Mysore Fine Agarbati, is a manufacturer and exporter of incense sticks operating from the Kandla Free Trade Zone. For Assessment Year 1999-2000, the assessee filed a return declaring a taxable income of Rs. 73,220/- and claimed deduction under Section 80HHC. The Assessing Officer passed an assessment order under Section 143(3) on March 27, 2002. The Commissioner of Income Tax (Appeals) partly allowed the assessee's appeal on February 7, 2005. The Revenue then appealed to the Income Tax Appellate Tribunal (ITAT), which dismissed the Revenue's appeal on March 24, 2006. The present appeal is filed by the Commissioner of Income Tax, Rajkot-I, against the ITAT's order.

Held

The High Court held that both the CIT(A) and the Appellate Tribunal were justified in directing the Assessing Officer to compute the deduction under Section 80HHC without reducing 90% of the interest on the EEFC account from the business profit. The Court agreed with the reasoning of the Appellate Tribunal in dismissing the Revenue's appeal. The ratio decidendi is that interest income earned on an EEFC account, which is maintained from export proceeds and is integral to the export business, should be treated as income derived from business and is not to be excluded for the calculation of deduction under Section 80HHC. The Court answered the substantial question of law in favour of the assessee and against the Revenue, rejecting the appeal. No issue was expressly left undecided.

Key Issues

1. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that interest received from an Exchange Earners Foreign Currency (EEFC) account was not to be restricted by explanation (baa) of Section 80HHC of the Act while calculating export profits? Assessee's Contention: The assessee argued that the issue is concluded by the High Court's decision in CIT v. Priyanka Gems, which held that income from foreign exchange fluctuation directly related to export business is eligible for Section 80HHC deduction. Therefore, the ITAT was justified in dismissing the Revenue's appeal. Revenue's Contention: The Revenue submitted that the Appellate Tribunal overlooked that deduction under Section 80HHC relates to business profits, and the interest earned from bank deposits is not attributable to the business activity of export. The Revenue contended that since the amount was deposited in the bank, the interest was earned, and Explanation (baa) of Section 80HHC was rightly invoked.