TMI Blog2014 (1) TMI 1257X X X X Extracts X X X X X X X X Extracts X X X X ..... ture incurred towards freight, telecommunication charges etc., by company from both export turnover and total turnover for the purposes of deduction u/s 10A of the Act - Decided in favour of assessee. - ITA No.977,1085/Bang/2010 - - - Dated:- 13-5-2011 - GEORGE GEORGE K. And A. MOHAN ALANKAMONY, JJ. For the Appellant : Madhukar Dhakappa ,C.A. For the Respondent : B. Arulappa, Addl. CIT(DR) ORDER:- PER : A. Mohan Alankamony These two appeals instituted by (i) the assessee company as well as (ii) the Revenue are directed against the order of the Ld. CIT (A)-III, Bangalore in ITA No: 183/DC 12(3)/CIT (A)-III/06-07 dated: 9.6.2010 for the assessment year 2004-05. I. ITA No. 977/10- [By the assessee company] 2. Though the assessee company has raised five grounds, a lone ground which survives for adjudication is extracted as under: (i) that the CIT (A) erred in treating the foreign exchange gain of Rs.4.94 lakhs in the nature of 'income from Other Sources'; and that he further erred in not excluding the same for computation of deduction u/s 10A of the Act; - without prejudice, if the foreign exchange gain were to be treated as 'income from Other Sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 'income from Other sources'. on the other hand, if the foreign exchange gain has nexus and connection with the business of the appellant, it has to be included under the head 'profit and gains from business and profession.' But it still has to be excluded in computing the deduction u/s 10A since it is not derived by the export business of the Industrial undertaking. The law on this issue is settled by the Apex Court in the case of CIT v. Sterling Foods Ltd. 237 ITR 571 (SC). 10.1. The Apex Court again considered the Legislative intent behind the use of the word 'derived from' in the case of Pandian Chemicals Ltd. v. CIT - 262 ITR 278 (SC) and reaffirmed its earlier decision in Sterling Foods Ltd. (supra). In that case the assessee made deposit with State electricity Board for the purpose of power connection to the industrial undertaking. The Apex court held that the interest on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself, although electricity may be required for the purpose of the industrial undertaking. Hence, any controversy regarding the use of the word 'derived' in the Act should be treated as settled. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport invoices/debit notes were issued, that due to the day-to-day change in conversion rate between the Indian and foreign currencies, an assessee might be receiving higher or lower amount at a particular point of time in respect of same amount of export sales bills and the difference was recognized as exchange gain or loss as the case may be; further that the assessee was required to reinstate the outstanding amounts based on the exchange rates as on the close of the year in accordance with the provisions of AS - 11; - That the assessee had made the above mentioned exchange gain in relation to the export sales made and reimbursement of expenses incurred in the course of the business carried on by the assessee from its STPI Under-taking; that the assessee had, accordingly, included the same as part of STPI undertaking's profit while computing the tax deduction u/s 10A of the Act as the same arose in the course of business undertaken by the undertaking; and that the assessee had correspondingly also reduced the FE fluctuation loss from the profits of the STPI u/t while computing the tax deduction u/s 10A of the Act on the same premise; - Rebutting the CIT (A)'s theory tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 10A of the Act; Relies on the case laws: (i) CIT v. M/s. Pentasoft Technologies Ltd. 2010; (ii) Renaissance Jewellery (P) Ltd. v. ITO 289 ITR 65 (Mumbai ITAT) (iii) Changepond Technologies (P) Ltd. v. ACIT 119 TTJ 18 (Chennai ITAT) (iv) CIT v. Gem Plus Jewellery India Ltd. 233 CTR 248 (Bombay HC) - without prejudice, if the foreign exchange gain was treated as income from 'Other sources' then the FE loss of Rs.91,43,586/- should also be treated as loss arising from OS and not from 'profit and gains from business and profession' and the FE gain should be allowed to be set off against such FE loss incurred during the same year 7.1. On the other hand, the Ld. D R was vehement in his urge that the authorities below have taken a stand after careful consideration of the issues and, therefore, it was pleaded that the finding of the Ld. CIT (A) requires no intervention at this stage. 8. We have scrupulously considered the rival submissions, diligently perused the relevant case records and also the various case laws on which the assessee had placed unstinted faith. 8.1. It was the stand of the Ld. CIT (A) that if the foreign exchange gain o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue of Pandian Chemicals quoted above cannot be equated with that of the issue on hand. 8.1.3. At this juncture, it would be more appropriate to recall the observations of the Hon'ble Highest judiciary of the land in the case of CIT v. Sun Engineering Works (P) Ltd reported in 198 ITR 297 (SC) wherein it was held that- "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete "law" declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasoning. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." In consonance with the above ruling, the Hon'ble Supreme Court in its subsequent verdict in the cases of (i) CIT v. Woodward Governor India (P) Limited and (ii) in CIT v. Honda Siel Power Products Limited reported in (2009) 312 ITR 254 (SC) observed thus- "15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act. 8.1.5. Taking into account the facts of the issue and also in conformity with the legal position of various judiciaries referred in the fore-going paragraphs, we observe that- (i) the foreign exchange gain was income derived by export bus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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