INCOME TAX ACT, 1961

--Deduction under section 10A--Income derived from export of software, etc.Foreign exchange gain from external commercial borrowings (ECB)--Return of income declaring NIL income for assessment year 2004-05 was filed. Regular assessment under section 143(3) was completed at taxable income of Rs. 27,58,30,556. CIT, under section 263, found the assessment order both erroneous and prejudicial to the interest of revenue and directed the AO to frame a speaking order after giving opportunity of being heard to the assessee in this matter. Pursuant to the 263 order, AO framed the assessment order. AO observed that during the year under consideration, assessee-company had raised external commercial borrowings form its parent company for meeting its working capital requirements. The said ECBs were reinstated on 31-3-2004, i.e., at the end of the year which resulted in a notional foreign exchange gain of Rs. 3,82,15,000 to the company. After adjusting the loss on export remittances, net income of Rs. 3,52,90,374 was shown as Other income” in the profit and loss account for the year ended 31-3-2004. AO rejected the assessee's contention that the gain arising on ECB taken to raise the working capital requirements of the company, constitutes business income of the company and is eligible for deduction under section 10A. Accordingly deduction claimed by the assessee under section 10A on foreign exchange gain of Rs. 3,52,90,374 was disallowed. On appeal, CIT(A) held that the AO was justified in not allowing the deduction under section 10A on the 'other income' which is derived on account of fluctuation of foreign exchange and does not satisfy the mandatory conditions of section 10A. Held: Justified.

The fact is that assessee has raised external commercial borrowings from its parent company for meeting its working capital requirements. Now, it is to be considered whether the gain in this regard on account of foreign exchange fluctuation is sourced from the export activity only or not. [Para 18] Section 10A(1) provides for connotation of such profit or gain as are derived from the export of articles or things or computer software. [Para 20] As reiterated by the Apex Court in Liberty India the contention of the words derived from” is narrower as compared to that of words attributable”. By using the expression derived from” in section 10A(1), the Parliament intended to cover sources not beyond the first degree. In the present case, gain is not on account of fluctuation in foreign exchange relating to assessee's export activities. The same is with respect to the external commercial borrowings. This cannot be termed as derived from the export activity of the assessee. The assessee's reliance in this regard on section 10A(4) does not come to its rescue, as the said sub-section only provides the formula for computing profits derived from the export activity. First, the income or gain has to be derived from export activity, only then the computation formula can be applied. [Para 20.2] In the background of the aforesaid discussion and precedents from High Court and Apex Court, there is no infirmity or illegality in the order of the CIT(A). [Para 21]

Income Tax Act, 1961, Section 10A

INCOME TAX ACT, 1961

--Appeal [Tribunal]--Additional ground/plea Admissibility--The assessee has raised an additional ground which reads as under:- That the Ld. AO has erred both in law and on facts in computing the income at Rs. 3,52,90,374 and further erred consequentially in denying the claim of deduction under section 10A on the said sum.” Though this ground has been filed in writing and permission sought to raise the same, the assessee claimed that this is not an additional ground, it is an additional plea. Held: Having heard the contentions on the issue, the issue is purely a legal one and on the anvil of Apex Court decision in the case of National Thermal Corporation v. CIT (1998) 229 ITR 383 (SC) : 1998 TaxPub(DT) 342 (SC), the same is admitted for adjudication. Exchange differences arising on foreign exchange transactions have to be recognized as income or as expenses in the period in which they arise except as stated in paragraph Nos. 10 & 11, which deal with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under section 43A. Further, it has been mentioned in placitum 19 that if the rate of exchange on the balance sheet date is different from the date on which the liability was incurred and the date on which the liability was paid, the effect of exchange difference has to be taken into account in the profit and loss account. In the background of the aforesaid discussion and precedent, this Tribunal is inclined to dismiss the additional ground taken by the assessee. Hence, the additional ground stands dismissed.