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2005 (3) TMI 699 - ITAT MUMBAIDeduction u/s 80HHC - Diamond Exporters - Interest on fixed deposits - HELD THAT:- In the case, the value of foreign currency was not to go up, there would not have been gains on cancellation of contracts but then the actual costs, in terms of domestic currency, that the assessee pays when he has to pay for imports in foreign currency does not also go up. Since it is an undisputed position that the imports, in connection with which the assessee had entered into forward contracts, actually took place, this profit on cancellation of forward foreign exchange contracts effectively only reduces the costs of purchases in respect of those imports, and cannot be, by any logic, construed as transactions independent of assessee’s business of importing rough diamonds and exporting cut and polished diamonds. The fact of premature cancellation, therefore, cannot alter the nature of transaction. Thus, we are of the considered view that the credit shown in the profit & loss account as ‘profit on cancellation of forward contracts’ is as integral part of the export business, as purchases or imports. As it effectively controls and reduces the cost of imports, and is integral part of the export business profits, and as, in our considered view, the exclusion clause under clause (baa) of Explanation to section 80HHC cannot apply to these profits, the authorities below were indeed not justified in holding that 90% of these profits is required to be excluded from profits of export business. This amount is not covered by any of the categories which are covered by the aforesaid clause in Explanation to section 80HHC. We, therefore, uphold the contention of the assessee, and direct the Assessing Officer to recompute the deduction u/s 80HHC by, inter alia, not excluding 90% of the profit realized on cancellation of forward foreign exchange contracts, from the profits of export business. The assessee succeeds on this issue. Ground is thus allowed. In the result, the appeal is allowed in the terms indicated above.
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