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2016 (12) TMI 405 - ITAT HYDERABAD

2016 (12) TMI 405 - ITAT HYDERABAD - TMI - Foreign exchange gain - eligibility for exemption u/s 10A - AO observed that the gain is from reinstatement of balance in EEFC A/c - Held that:- The export turnover is always brought into India by way of foreign exchange deposited into the EEFC A/c. The assessee has kept the foreign exchange in the EEFC A/c as it did not require the same immediately for its business purposes. By virtue of the deposits remaining in the EEFC A/c, the assessee has gained o .....

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ount of the forward contracts has been held to be in the nature of the business income eligible for deduction u/s 10A of the Act. See Majestic Exports vs. JCIT [2015 (7) TMI 936 - ITAT CHENNAI ] - Amount received from its AE towards the reimbursement of the expenditure - ALP adjustment - Held that:- Having regard to the rival contentions and the material on record, we find that the reimbursement of the expenditure by the AE to the assessee is also on international transaction. The TPO u/s 92 .....

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the returns till 15.11.2011 and the assessee had filed its return of income on 13.11.2011 itself and therefore, the interests u/s 234A of the Act is not chargeable. Since these facts need verification, we deem it fit and proper to remit the issue to the file of the AO for verification of the details and direct the AO to charge interest u/s 234A of the Act only if there is a delay in filing of the return of income inspite of extension of time by the CBDT. This ground is therefore, allowed for st .....

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ved by the assessee is not eligible for exemption u/s 10A of the Act. 3. Brief facts of the case are that the assessee company which is engaged in the business of development and designing of software products filed its return of income for the relevant assessment year on 28.09.2009 by declaring a total income of ₹ 1,08,87,970. During the assessment proceedings u/s 143(3) r.w.s. 144C of the Act, the AO observed that the assessee claimed deduction u/s 10A of the Act of forex gain of ₹ .....

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the CIT (A), who confirmed the order of the AO and the assessee is in second appeal before us. 4. The learned Counsel for the assessee submitted that the assessee has received consideration on export of software in the form of foreign exchange which has been deposited in the EEFC A/c and the valuation of the forex at the end of the relevant A.Y has resulted in the forex gain. Therefore, according to him, the gain is inextricably linked to the export consideration and therefore, such income is e .....

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posited in the EEFC A/c in foreign exchange and there was no prohibition from withdrawing the said amount for its business purposes. It is submitted that the export comes to an end when the sale consideration is deposited into the EEFC A/c and the forex gain or loss on the date of deposit alone is part of export turnover and thereafter if there is any gain on fluctuation of such foreign exchange on the date of conversion, it cannot be considered as business income but has to be treated as income .....

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the bank a/c, it will not lose the character of being export consideration. The gain is on a/c of conversion of foreign exchange. We find that similar issue had arisen in the case of Banyan Chemicals Ltd. before a third Member Bench reported in (2009) 117 ITD 376 (Ahd.) wherein it was held as under: 13. In the case of Smt. Sujata Grover (supra), the Tribunal held that the basically exchange rate fluctuation difference is nothing but part of sales. When the goods are exported to a country outside .....

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e or less than the one recorded in the books of account at the time of making the sales. If the exchange rate is more it results into income from the exchange rate fluctuations and in the reverse case, it becomes loss on that account. Under all circumstances, the basic character of the receipt of the foreign currency remains the same, i.e., it remains attributable to the export effected by the assessee. It also held that the expression "any other receipt of a similar nature" as used in .....

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e independent receipts and are in the nature of income and not turnover or its part. Be that as it may, there is even no exception in s. 10B like that in Expln. (baa) to s. 80HHC. In the case of Renaissance Jewellery (P) Ltd. (supra), the Tribunal, following the aforesaid decision in the case of Smt. Sujata Grover (supra) and the Tribunal decision in the case of Priyanka Gems vs. Asstt. CIT (2005) 94 TTJ (Ahd) 557, held that profit on account of foreign exchange gain is directly referable to the .....

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uded in the profits of export business for the purposes of deduction under s. 80HHC. In the present case, the receipt of the sale consideration is in US dollar. It was credited/deposited in EEFC account of the assessee to be retained in US dollar as per guidelines for operating this account. In this account, the receipts may be kept in foreign currency instead of converting it to Indian rupee. The gain accounted for by the assessee is the excess rupee value of US dollar on the date of realizatio .....

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part of sales as once the sale consideration is deposited in EEFC account, the exchange gain accrued thereafter would not be a part of the turnover and consequently not a profit arising from the export of goods and the amount to that extent would be an income earned by the assessee derived from export and that amount is ₹ 22,960 on which assessee had also not claimed/ surrendered its claim under s. 10B. The assessee has given the break-up of the exchange gain of ₹ 15,51,239 as under .....

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pinion, therefore, the assessee should be granted deduction under s. 10B of the Act with regard to exchange gain of ₹ 15,31,518. I hold accordingly . Therefore, respectfully following the above decision, we hold that the forex gain as on the date of deposit into EEFC A/c only is part of the export turnover as held by the Hon'ble Third Member in the above case. 7. In the result, assessee s appeal is dismissed. ITA No.3221/Hyd/2016 A.Y 2010-11 8. In this appeal, the assessee has raised t .....

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ble profits for exemption u/s l0A of the I.T.Act on the ground that the said amount was derived out of forward contracts and that such income represents income "from other sources". 4. The learned Commissioner of Income-Tax (Appeals) erred in holding that an amount of ₹ 3l,83,463/- is not eligible for exemption u/s l0A of the I.T.Act without considering the explanation that the said amount represents reimbursement of expenses. 5. The learned Commissioner of Income-Tax (Appeals) o .....

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ismissed. 10. As regards Ground No.3, brief facts are that the assessee admitted a foreign exchange gain of ₹ 92,14,741 which is claimed as deduction u/s 10A of the Act. The assessee explained that the same was derived out of forward contracts. Observing that these gains are not derived from the business of export of software, the AO treated this income as income from other sources and disallowed the claim of deduction u/s 10A. Aggrieved, the assessee preferred an appeal before the CIT (A) .....

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of the business income eligible for deduction u/s 10A of the Act. Copy of the said order is filed before us. 12. The learned DR, however, supported the orders of the authorities below. 13. Having regard to the rival contentions and the material on record, we find that the nature of the forward contract and the character of the gain on account of such contract has been considered at length by the Coordinate Bench of this Tribunal at Chennai in the case of Majestic Exports (cited Supra) at Para N .....

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this transaction is speculative in nature as such the loss incurred on this transaction cannot be set off against business income of the assessee. According to the ld. Authorised Representative for assessee, the derivative transaction cannot fall under sec.73. Explanation to sec.73 creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of share and suffer loss, such loss should be treated to be speculative trans .....

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on as defined in the said section. Therefore, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as sec.43(5) of the Act is concerned. Again, in view of the fact that both delivery transactions and derivative transactions are nonspeculative as far as sec.43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to sec.73 is concerned. Therefore, aggregation of the share trading .....

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the non-speculative profits; either it is from share delivery or from share derivative. 8. From the above, it is concluded that both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of speculative transaction exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) is concerned go .....

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15, wherein they followed the judgment of the Calcutta High Court in the case of M/s. Baljit Securities Pvt. Ltd. (88 CCH 313) wherein held as under:- Clause (d) of Section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks and shares was periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip was a specula .....

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re delivery was in fact taken and also in shares where delivery was not ultimately taken. In other words, the assessee has been dealing in actual selling and buying of shares as also dealing in shares only for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transaction in which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the inco .....

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nsists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase. In order to resolve the issue before us, the section has to be read in the manner as follows: Explanation : Where any part of the business of a company (… … … … … … … … … … … … … & .....

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purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is a .....

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Tribunal has done. 9. From the above decision of the Calcutta High Court in the case of Baljit Securities Pvt. Ltd. cited supra, the issue stands covered in favour of the assessee. However, we make it clear that total transaction considered for determining this business loss from derivative transactions cannot be more than the total export turnover of the assessee for the assessment year under consideration and if the derivative transaction is in excess of export turnover, then that loss suffere .....

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ursement of the expenditure. The AO observed that the assessee company has not included this amount in the P&L A/c on the ground that the same is only reimbursement of actual expenditure incurred and therefore, has no bearing on the computation of profit/income of the company. The AO was not convinced with the said contention and held that the expenses were incurred for its AE and reimbursed by the AE and therefore, they have to be passed through the P&L A/c and for the correct picture o .....

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he authorities have disputed the genuineness of the transaction but have made the disallowance only on the ground that it has not been routed through the P&L a/c. Since the transaction did not have any impact on the income of the assessee, according to him the disallowance ought not to be made. 17. The learned DR however, supported the orders of the authorities below. 18. Having regard to the rival contentions and the material on record, we find that the reimbursement of the expenditure by t .....

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