2016 (1) TMI 648 - AT - Income Tax

Tribunal denies deduction under Section 10B, allows alternate claim under Section 10A, directs reassessment of forex losses.

The Tribunal upheld the denial of deduction under Section 10B of the Income Tax Act, 1961, due to non-compliance with statutory requirements. However, it ... Revision u/s 263 - claim of the assessee under section 10B wrongly allowed by AO - Held that:- In the absence of approval letter for 100% export oriented undertaking from the Board appointed on this behalf by Central Government in exercise of powers conferred by section 14 of Industries (Development and Regulation) Act, 1951 as specified under explanation (i) to section 10B of the Act, we are of the opinion that the ld. PCIT has rightly invoked provisions of section 263 of the Act and held that the assessee is not entitled to claim deduction under section 10B of the Act since the assessee has not fulfilled the requirement under section 10B of the Act. - Decided against assessee Eligibility to claim deduction under section 10A - Held that:- since the assessee company derives its income from export of software and received income in convertibles foreign exchange, the assessee is eligible to claim deduction under section 10A of the Act. The ld. PCIT has accepted the claim of the assessee and directed the Assessing Officer to consider the claim of the assessee for deduction under section 10A in the light of evidences as may be filed by the assessee. In view of the above findings of the ld. PCIT, the assessee is required to file the evidences to claim deduction under section 10A of the Act before Assessing Officer for verification and to decide the issue in accordance with law. - Decided in favour of assessee for statistical purposes. Addition under the head of 'exchange fluctuations (net)' with respect to forward exchange contracts - Held that:- The assessee is engaged in typesetting services for Scientific, Technical and Medical (STM Publishers) who has entered into forex forward contracts through its bankers with a view to effectively hedge its foreign currency risk. Therefore, these forex forward contracts have a close proximity or rather incidental to the export business of the assessee, which cannot be considered as speculative. Section-43(5) of the Act is applicable to transactions in commodity or stocks and shares. If currency is treated as commodity, then according to section 43(5)(a) of the Act, such transaction shall not be deemed to be speculative transaction. Further, the currency cannot be treated as stock or shares because inherently they have different characteristic. Further, in the case of the assessee, the foreign exchange exposure for the relevant period specified by RBI regulations is quiet substantial in order to justify the forex transactions made by the assessee through Government recognized channel, otherwise the RBI would not have entertained these transactions and would have restrained the banks from entering into such transaction with its clients. Thus, considering the totality of the facts and circumstance of the case, we are of the opinion that the Assessing Officer has to consider the foreign exchange derivative in proportion to export turnover as regular business transaction of the assessee. If the derivative transaction undertaken by the assessee is in excess of export turnover then that loss suffered in respect of that portion of excess transaction has to be considered as speculative loss only and that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. Further, the Assessing Officer has to see whether there is any premature cancellation of forward contract of foreign exchange and that transaction should be taken out for the purpose of considering the business loss and only the transactions which are completed to be considered for the purpose of determining the business loss from the foreign exchange forward contract. With this observation, we remand this issue to the file of the Assessing Officer for fresh consideration. Issues Involved:1. Deduction under Section 10B of the Income Tax Act, 1961.2. Alternate claim for deduction under Section 10A of the Income Tax Act, 1961.3. Treatment of loss on foreign exchange forward contracts.Issue-wise Detailed Analysis:1. Deduction under Section 10B of the Income Tax Act, 1961:The assessee challenged the order of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, which denied the deduction claimed under Section 10B. The assessee had claimed deduction for its units approved as 100% Export Oriented Units (EOUs) under the Software Technology Park (STP) scheme. The PCIT observed that the Assessing Officer (AO) allowed the deduction without proper verification, specifically noting the absence of an approval letter from the Board appointed by the Central Government under Section 14 of the Industries (Development and Regulation) Act, 1951. The Tribunal upheld the PCIT's invocation of Section 263, agreeing that the assessee did not meet the requirements under Section 10B, thus dismissing the assessee's claim for this deduction.2. Alternate Claim for Deduction under Section 10A of the Income Tax Act, 1961:The assessee argued that if the deduction under Section 10B was disallowed, it should be eligible for deduction under Section 10A, as the income was derived from the export of software and received in convertible foreign exchange. The PCIT accepted this alternate claim and directed the AO to consider the deduction under Section 10A, provided the assessee submitted the necessary evidence. The Tribunal agreed with this direction, allowing the assessee's claim for statistical purposes, and instructed the AO to verify the evidence and decide the issue according to the law.3. Treatment of Loss on Foreign Exchange Forward Contracts:The assessee reported a loss of Rs. 2,40,29,650/- under 'exchange fluctuations (net)' due to forward exchange contracts in Euro, USD, and GBP. The PCIT treated this loss as speculative, asserting that the transactions did not satisfy the conditions under provisos (a) and (d) to Section 43(5) of the Act. The assessee contended that these were hedging transactions to mitigate foreign exchange risks, thus should be treated as business losses. The Tribunal examined various judicial precedents and the nature of the transactions, concluding that such losses, if proportionate to the export turnover and not prematurely canceled, should be considered business losses. The Tribunal remanded the issue to the AO for fresh consideration, directing that only transactions directly related to the export turnover be treated as business losses, while any excess transactions be treated as speculative.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, upholding the PCIT's order on the disallowance of deduction under Section 10B but allowing the alternate claim under Section 10A subject to verification. It also directed a fresh assessment of the foreign exchange loss, distinguishing between business and speculative losses based on the nature and extent of the transactions.