ASSTT.COMMISSIONER OF INCOME TAX vs. SONAL DIAMONDS PVT. LTD.

Facts

The assessee, Sonal Gems, engaged in manufacturing and import/export of diamonds, filed its return for Assessment Year 2001-2002 declaring an income of Rs. 19,10,410/-. The Assessing Officer (AO) determined the income at Rs. 30,44,350/-. The Commissioner of Income Tax (Appeals) [CIT(A)] dismissed the assessee's appeal. The Income Tax Appellate Tribunal (ITAT), by its order dated 02.12.2005, allowed the assessee's appeal. The Revenue has filed the present appeal before the High Court against the ITAT's order. The High Court admitted the appeal on specific questions of law.

Held

Regarding the first issue concerning the deduction under Section 80HHC on the export of rejected diamonds, the High Court noted that a similar question was considered in Tax Appeal No. 62/2006. In that prior case, the High Court held that if rejected rough diamonds are exported, they are eligible for deduction under Section 80HHC, and no case was made out for admitting the appeal on that specific question. Therefore, the High Court found this issue concluded in favour of the assessee. For the second issue concerning exchange rate fluctuation, the High Court relied on the Supreme Court's decision in CIT v. Priyanka Gems. The Court held that income arising from foreign exchange fluctuation on export is directly related to the export business and is eligible for deduction under Section 80HHC, as it is earned on accrual basis at the time of export. The appeal was accordingly answered in favour of the assessee.

Key Issues

The High Court had to decide the following questions of law: 1. Whether the ITAT was correct in allowing deduction under Section 80HHC on the export of rejected diamonds, including the turnover of rough and rejected diamonds, despite the provision in Section 80HHC(2)(b)(ii) excluding unprocessed mineral and ores from deduction. 2. Whether the ITAT was correct in allowing deduction under Section 80HHC by including Rs. 12,82,675/- received on account of exchange rate fluctuation, without considering Rule 115 of the Income Tax Rules. The Revenue argued that rejected diamonds are unprocessed mineral ores and thus not eligible for deduction under Section 80HHC. It also contended that exchange rate fluctuation income should not be included without considering Rule 115. The judgment does not record specific arguments from the assessee's side for these issues.