Foreign exchange gains on SEZ business receipts retain trading character; MAT book profit adjustments must stay within the statutory Explanation.

Foreign exchange gain arising from SEZ business receipts was treated as trading income linked to revenue account, so it remained eligible for exemption under section 10AA. The Assessing Officer's proportionate salary attribution to SEZ units was unsustainable because the salary allocation was already reflected in the audited books and the adjustment exceeded the proper factual and statutory basis, with no applicable transfer pricing threshold on the record. For book profit under section 115JB, only the additions and reductions expressly provided in the statutory Explanation can be made, so the impugned adjustments were impermissible.

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Issues: (i) Whether gain from foreign currency fluctuation arising from SEZ business receipts was assessable as business income and eligible for exemption under section 10AA of the Income-tax Act, 1961. (ii) Whether the proportionate salary attribution made by the Assessing Officer to SEZ units could be sustained, and whether such adjustment was within the Assessing Officer's power in the facts of the case. (iii) Whether the impugned amounts could be added back while computing book profit under section 115JB of the Income-tax Act, 1961.

Issue (i): Whether gain from foreign currency fluctuation arising from SEZ business receipts was assessable as business income and eligible for exemption under section 10AA of the Income-tax Act, 1961.

Analysis: The fluctuation gain arose from revenue receipts linked to the assessee's business operations in SEZ units. The governing principle is that foreign currency gain or loss is ordinarily of trading character when the currency is held on revenue account or as part of circulating capital, and not as a capital asset. The amount had already been offered in the computation, and the character of the receipt was consistent with business income and the exemption framework applicable to SEZ profits.

Conclusion: The addition was rightly deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the proportionate salary attribution made by the Assessing Officer to SEZ units could be sustained, and whether such adjustment was within the Assessing Officer's power in the facts of the case.

Analysis: The factual basis of the adjustment was found to be erroneous because the salary of five of the eight employees had already been debited to the SEZ units. The assessee's books were audited and the bifurcation of salary expenditure was accepted as correct. The adjustment was also treated as beyond the proper scope of unilateral determination, where the matter, if at all, belonged to the transfer pricing framework for specified domestic transactions. In any event, the threshold applicable under section 92BA was not crossed on the facts noted.

Conclusion: The disallowance was unsustainable and the issue was decided in favour of the assessee.

Issue (iii): Whether the impugned amounts could be added back while computing book profit under section 115JB of the Income-tax Act, 1961.

Analysis: The computation of book profit under section 115JB is confined to the specific additions and reductions expressly provided in the statutory Explanation. The Assessing Officer cannot travel beyond those enumerated adjustments and rework the net profit on the basis of items not covered by the provision. The additions made here were outside the permissible adjustments under the MAT scheme.

Conclusion: The book profit adjustment was rightly deleted and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's challenge failed on all surviving grounds, and the assessee's relief granted by the appellate authority was sustained in full.

Ratio Decidendi: Foreign exchange gains arising from business receipts retain trading character when linked to revenue account, and under section 115JB book profit can be adjusted only to the extent specifically authorised by the statutory Explanation.

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