TMI Blog2008 (2) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... nly due to the export and not due to other activities of the assessee. If the assessee has not exported any article then the question of any gain or loss due to foreign exchange does not arise. Therefore, we decide this issue in favour of the assessee and set aside the order of the CIT(A). Accordingly, gain on foreign exchange would be included in the total turnover while computing the deduction under s. 10A of the Act. Interest on fixed deposits for the computation of deduction u/s 10A - In view of the decision In the case of CIT vs. Menon Impex (P) Ltd. [ 2002 (9) TMI 75 - MADRAS HIGH COURT] . We are also of the opinion that the interest on deposits cannot be regarded as income derived from industrial undertaking. There is no direct nexus between the interest on deposits and the industrial undertaking. Therefore, we decide this issue against the assessee and the order of the CIT(A) in this regard is upheld. Exclusion of expenses incurred towards salaries, travelling and other perquisites of the employees in connection with providing technical services outside India for the purpose of section 10A - To understand the meaning of computer software and profits and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aside in this regard. Setting off of b/f losses from the current year business income before claiming deduction u/s 10A - We are of the view that the CIT(A) was not justified in holding that the total income of the assessee for any relevant assessment year is required to be computed after taking into consideration the carried forward losses incurred after 1st April, 2001 and after setting off the loss if there is any positive income is left the same is exempted under s. 10A. We accordingly set aside the impugned order of the CIT(A) and allow the deduction under s. 10A without setting off the brought forward losses. This issue is thus decided in favour of the assessee and against the Revenue. In the result the appeal is partly allowed. - Member(s) : T. R. SOOD., VIJAY PAL RAO. ORDER VIJAY PAL RAO, J.M This appeal of the assessee is directed against the order of the CIT(A)-III, Chennai, dt. 14th Feb., 2007 for the asst. yr. 2003-04. The following issues arc raised in the present appeal for consideration and adjudication: (1) The learned CIT(A) has erred in excluding foreign exchange fluctuation gains from profits of business, in the process of calcu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the computer software. The AO has disallowed the claim of exemption under s. 10A of the Act on the ground that the assessee has earned income on account of gain due to foreign exchange fluctuation which is not an income derived from the export oriented undertaking of the assessee from the export of computer software. Therefore, the AO has disallowed the claim of exemption under s. 10A. Similarly, exemption under s. 10A on interest income on bank deposits was also disallowed. As far as the expenses incurred towards insurance of Rs. 17,600, telecommunication charges of Rs. 45,90,334, travelling expenses of Rs. 20,26,419 and foreign branch expenses Rs. 10,14,78,942 are concerned, the AO was of the view that foreign expenses incurred by the foreign branch in foreign currency outside India were for the purposes of rendering services outside India. The same view applied for travelling expenses incurred in foreign currency. Therefore, these expenses are to be excluded from the export turnover as per Expln. 2(iv) to s. 10A and accordingly, these expenses were excluded from the export turnover for the purpose of computation of deduction under s. 10A of the Act. The AO also disallowed the br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no role of the assessee in earning the said income. He has relied upon the orders of the CIT(A) as well as the AO in this respect. 6. We have considered the rival contentions as well as the material on record. In the case of Renaissance Jewellery (P) Ltd. vs. ITO, the Mumbai Bench of this Tribunal has held as under: 26. We have carefully considered the submissions made before us by both the sides and have gone through the provisions of law and the precedents relied upon by learned counsel for the assessee. In our view, this issue is covered in the assessee's favour by several cases relied upon by learned counsel for the assessee and discussed above. There is no material difference between the requirement of s. 80HHC and s. 10A. The profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee. Such profits are, therefore, in the same nature as the sale proceeds and there is no reason why deduction under s. 10A should not be allowed in respect of such exchange gain. Therefore, we vacate the order of the learned CIT(A) on this issue. We are also of the view that the gain from the fluctuation of foreign ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and the order of the CIT(A) in this regard is upheld. 10. As regards the issue of expenses incurred towards salaries, travelling and other perquisites of the employees in connection with providing technical services outside India, the learned counsel for the assessee submitted that the assessee is engaged in the creation and development of computer programs. The software development in the year under consideration was done partly in India and partly outside India for various reasons like client's insistence, the need to integrate the work done by the assessee with the work done by another technical staff maintained outside the country was in the course of developing and creating software programs as well as for the purpose of marketing the product and skill sets of the assessee. He further contended that the technical staff retained outside India was only for contribution of services in the development of software programs as per the requirement and satisfaction of the clients which is also economical and convenient for the assessee to achieve the performance levels. Therefore, the services rendered by the technical staff outside India were only to the development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Explanation 2(i) and (iv) to sub-s. (8) of s. 10A reads as under: (i) 'computer software' means- (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means; and (iv) 'export turnover' means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-s. (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; Explanation 3 to sub-s.(8) of s. 10A reads as under: For the removal of doubts, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side India in connection with the development of computer software. We therefore direct that in computing the figures of export turnover and total turnover relevant for the application of the formula in sub-s. (3) of the s. 80HHE, no exclusion be made of any expenditure incurred in foreign currency other than those already done by the appellant company. In the result, this ground of appeal by the appellant company for all the years stands allowed. While deciding the issue the Bangalore Bench has relied upon the decision of the Hon'ble apex Court in the case of Bajaj Tempo Ltd. vs. CIT (1992) 104 CTR (SC) 116 : (1992) 196 ITR 188 (SC). 14. In view of the above discussion, we are of the opinion that the technical services provided outside India by the assessee are only for the development of computer software which is also a part of the requirement of the assessee in development of software as part of the requirements and specifications of the clients and therefore, the said activity of the assessee comes under the definition of on site development of computer software including services for development of software outside India as provided in Expln. 3 to sub-s. (8) of s. 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the deduction under s. 10A is available on the gross income derived from export activity without giving effect to the brought forward losses and only after the deduction under s. 10A the brought forward losses would be set off against the remaining 10 per cent taxable income. He has referred Form No. 1 as replaced by new IT Return ITR-6 wherein (Form No. 1) deduction under s. 10A is placed in Sch. B and item 18 of Sch. B specifically deals with deduction under s. 10A/10B/10C. He contended that this supports the view that the income from a s. 10A unit is first included for the purposes of computing business income and deducted under Item 18 from the source itself to compute the profits from the business. Even new IT return, ITR-6 shows the same pattern. The description of Col. 34 is profit or loss before deduction under s. 10A/10AA/10B/10BA which the amount of deduction under s. 10A would be for each undertaking separately. Therefore, deduction under s. 10A is to be allowed without setting off of brought forward losses. He has relied upon the judgment of the Hon'ble Andhra Pradesh High Court in the case of Smt. Abida Khatoon Anr. vs. CIT (1973) 87 ITR 627 (AP), judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was entitled to set off her share of loss in the AOP against her income under other heads. The question referred to us in all the three cases are answered in favour of the assessee and against the Department. In the case of CIT vs. Mother India Refrigeration Industries (P) Ltd., the Hon'ble Supreme Court has held as under: In CIT vs. Ravi Industries Ltd. (1963) 49 ITR 145 (Bom) the same position has been clarified by the Bombay High Court. The Court has observed that the unabsorbed depreciation does not lose the character and attributes when it is carried forward to the following year; such unabsorbed depreciation of the earlier year which is carried forward to the current year and which is deemed to be of the current year under proviso (b) to s. 10(2)(vi) can be set off, unlike other business losses against income under other heads. Such being the purpose for which the legal fiction is created it is difficult to extend the same beyond its legitimate field and will have to be confined to that purpose. It is, therefore, not possible to accept the contention of counsel for the assessee that because of the legal fiction, the unabsorbed carried forward losses sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IV of the Act should be separately kept under that column and consequently, the scope of total income and undisclosure of such income was decided. The Hon'ble Supreme Court following the decision V.D.M. Rm. M. Rm. Muthiah Chettiar vs. CIT (1969) 74 ITR 183 (SC) held that the assessee could not be said to have concealed her income by not disclosing in the return filed by her the amount representing the shares of her husband and minor daughters in the firm. In the case of Asstt. CIT vs. Webspectrum Software (P) Ltd. cited supra, the Bangalore Bench of the Tribunal has held as under: 14. As per s. 10A(1) the assessee is entitled to deduction of profits and gains from the undertaking which is entitled for deduction. It is mentioned that such deduction is subject to provisions of s. 10A. It is nowhere mentioned in the section that such deduction should be restricted to the total income of the assessee computed under the provisions of the Act before allowing such deduction. Wherever the legislature wanted to restrict the deduction the legislature has provided such restriction. In s. 24 of the IT Act deduction in respect of interest is restricted as per proviso to s. 24(b). Simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gains of business or profession are to be computed in accordance with the provisions contained under ss. 30 to 43D. Sec. 70 of the IT Act governs the setting off a loss from one source against income from another source under the same head of income. Sec. 10A is not part of the section mentioned in s. 29 of the IT Act. Hence business losses of the undertaking whose income is not exempt under s. 10A cannot be set off to ascertaining the profits and gains derived by an undertaking from the export of computer software. Hence business losses of other units will not be set off against the profits of the undertaking engaged in export of computer software for the purposes of determining the allowable deduction under s. 10A of the IT Act. Unabsorbed business loss is to be set off under s. 72 of the IT Act and the same is not mentioned under s. 29 of the IT Act. Hence unabsorbed business losses will not be set off against the profit of the undertaking engaged in the export of computer software for the purposes of ascertaining the deduction admissible under s. 10A. 14. As per s. 72(2) unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the deduction under s. 10A is to be allowed without setting off the brought forward losses. After the amendment w.e.f. 1st April, 2001 onwards the brought forward loss pertaining to the specific undertaking eligible for deduction under s. 10A are allowed to be carried forward and set off against the income of such undertaking in the future assessment year but within the block period which means that during the tax holiday period if any loss is to be carried forward and set off within the block period itself. Thus it is clear that the computation of profit of the specific undertaking for the purpose of computation of deduction is to be as per the provisions of s. 10A. Only after the computation of deduction under this section, carry forward of losses can be set off against the remaining income of the said undertaking. 21. In this case the AO initially disallowed set off of carried forward losses out rightly. But the CIT(A) has modified the order of the AO and held that the total income of the assessee for any relevant assessment year is required to be computed after taking into consideration all carried forward losses incurred after 1st April, 2001 and after setting off such lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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