TMI Blog2011 (5) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... the income or gain has to be derived from export activity, only then the computation formula can be applied - against assessee. - ITA No. 4021/Del/2010 - - - Dated:- 27-5-2011 - A.D. Jain, Shamim Yahya, JJ. C.S. Aggarwal, Sr. Adv., and R.P. Mall, Adv., for the Appellant Jayant Mishra, CIT, DR, for the Respondent ORDER Shamim Yahya: This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 09.6.2010 pertaining to assessment year 2004-05. 2. The main issue raised is that Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the disallowance of claim of deduction under section 10A of the Income Tax Act of Rs. 3,52,90,374/- made by the Asstt. Commissioner of Income Tax. 3. The assessee has also raised an additional ground which reads as under:- "That the Ld. Assessing Officer 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 u/s 10A of the Act on the said sum." Though this ground has been filed in writing and permission sought to raise the same, Ld. couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usal of P and L a/c shows that the appellant itself has segregated the income under two head i.e. 'income from operations' and 'other income'. In Schedule J of the balance sheet, 'other income' is mentioned as 'exchange difference (net)' at Rs. 35,290,374/-. The appellant's contention is that income on account of foreign exchange gain is eligible for deduction u/s 10A of the Act. For ascertaining the allowability of deduction u/s 10A in this case, it is relevant to refer to the provisions of section 10A. As per the specific provisions of section 10A, the deduction under this section is available on such profits and gains as are derived by an undertaking from the export of article or things or computer software. In the present case, the income of Rs. 35,290,374/- is computed on account of the 'exchange difference'. This income is not derived from the export of article or things or computer software. In such circumstances, the said income will not be eligible for deduction u/s 10A of the Act. Ld. A.R. has placed reliance on certain case laws. However, these cases are distinguishable from the present appeal to elaborate, Ld. A.R. has relied on the case of Woodward Governor Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that both the decisions are distinguishable because both the decisions have not considered mandatory decision available fro the Hon'ble Madras High Court in the case of C.I.T. vs. Menon Impex v C.I.T. (supra). In addition the benefit of Third Member decision in the case of ITO v Banyan Chemicals Ltd. (Supra) was also not available in this case. In any case the decision in the case of Menon Impex v. C.I.T. (supra) was followed by the Hon'ble Madras High Court in the case of India Comnet International v. ITO (304 ITR 322). This decision was rendered for the assessment year 2002-03 when sub-section (4) had already been inserted on the statute. Looking into the facts of the case, I find that the Assessing Officer was justified in not allowing the deduction u/s 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. These grounds of appeal are, therefore, dismissed." 7. Against the above order the assessee is in appeal before us. 8. First we shall deal with the additional plea/ground raised by the assessee. Having heard the contentions on this issue, we find that the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The Hon'ble Court finally stated the decision as under:- "....we may stated that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is the mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bonafide; (iii) whether the assessee has given the same treatment to losses claimed to have been accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A of the Income Tax Act. 14. The assessee's submissions in this regard are summarized as under:- "Even, if it is held (assuming to be an income and is taxable), then too, since the liability as debited against its creditor stood reduced from the liability as was credited on the date of making an entry and the liability since stood reduced (which liability as was originally debited was not claimed or allowed as a deduction), then too the source of income remains the same i.e. such an income is derived from export and cannot be different as there is no other source of earning an income like in the case of sale licences, duty draw back, interest income and other income etc., though the cause for such a reduction of the liability by way of book entry may be different, (i.e. by virtue of fluctuation of rate of exchange), none the less source of alleged income would remain from the only business activity carried on by the assessee i.e. exports and as such, the income alleged to have accrued could not be regarded as not an income derived from exports. It be specifically stated that cause of accrual of income reflected is the book entry but the source is the exports activity only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtmental Representative on the other hand supported the orders of the authorities below and the case laws referred therein. 17. We have carefully considered the rival submissions in light of the materials produced and precedents relied upon. We can gainfully refer here the provisions of section 10A(1) and 10A(4) of the IT Act. 10A(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee" 10A(4) For the purposes of sub sections (1) and (1A), the profits derived from exports of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion 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 ..... 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