COMMISSIONER OF INCOME TAX-IIISURAT vs. BHOJAL GEMS(R.F)

Facts

The Revenue has filed a Tax Appeal against the order of the Income Tax Appellate Tribunal (ITAT) dated November 30, 2005, for Assessment Year 1997-98. The assessee, Bhojal Gems, is engaged in cutting, processing, and exporting polished diamonds. The assessee claimed deduction under Section 80HHC for export sales, which was rejected by the Assessing Officer and confirmed by the CIT (Appeals). The ITAT partly allowed the assessee's appeal. The Revenue is challenging the ITAT's decision on two specific grounds concerning the computation of deduction under Section 80HHC.

Held

The High Court held in favour of the assessee on both issues. Regarding the first issue, the Court relied on the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. vs. CIT, which clarified that for Section 80HHC, only the net interest, after deducting any related expenses, that has been included in the business profits should be considered for deduction under Explanation (baa). The Court found this question to be against the Revenue. For the second issue concerning rejected and rough diamonds, the Court followed its own prior decision in Tax Appeal No. 62 of 2006, which held that such exports are eligible for deduction under Section 80HHC. Consequently, the Court answered this question in favour of the assessee. The appeal was decided in favour of the assessee, and the impugned order of the ITAT was confirmed.

Key Issues

1. Whether, on the facts and circumstances and in law, the Appellate Tribunal was justified in holding that interest received on Fixed Deposits should be netted out for the purpose of computing deduction under Section 80HHC of the Income Tax Act, 1961? The assessee contended that the issue is settled by the Supreme Court in ACG Associated Capsules Pvt. Ltd. vs. CIT, which held that only net interest should be considered for deduction under Explanation (baa) to Section 80HHC. The assessee also cited a Gujarat High Court decision in Tax Appeal No. 1139 of 2010. The Revenue did not dispute these contentions. 2. Whether, on the facts and circumstances and in law, the Appellate Tribunal was justified in holding that the export of rejected and rough diamonds are eligible for deduction under Section 80HHC of the Act? The assessee argued that this Court has previously held in Tax Appeal No. 62 of 2006 that rejected rough diamonds exported are eligible for deduction under Section 80HHC. The Revenue did not dispute this contention.