TaxTMI 
TaxTMI 
2011 (5) TMI 575
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....ht to raise the same, Ld. counsel of the assessee claimed that this is not an additional ground, it is an additional plea. 4. In this case, return of income declaring NIL income for assessment year 2004-05 was filed on 28.10.2004. Regular assessment u/s 143(3) was completed on 28.12.2006 at taxable income of Rs. 275830556/-. 5. Ld. Commissioner of Income Tax, Delhi-I, New Delhi u/s 263 of the IT Act, found the assessment order both erroneous and prejudicial to the interest of revenue on the following issue and directed the Assessing Officer to frame a speaking order after giving opportunity of being heard to the assessee in this matter:- "In the assessment year 2004-05 the assessee had shown income from foreign exchange fluctuation gain of Rs. 35290374/- under the head "other income" and this income is different from "income from operation". Provisions of section 10A envisage deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software. Thus the grant of deduction on foreign exchange gain u/s 10A is clearly deviation from law which makes the order granting such deduction both erroneous and pr....
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....orate, Ld. A.R. has relied on the case of Woodward Governor India, 223 CTR 1. However, as mentioned in para 11 of the judgement in that case, the dispute before the Hon'ble Supreme Court in the batch of civil appeals centred around the year(s) in which deduction would be admissible for the increased liability under section 37(1). Ld. Authorised Representative also referred to the decision in the case of Eltek SGS Pvt. Ltd. 300 ITR 6. However, in that case the issue related to the claim of deduction on customer duty drawbacks u/s 80IB. Ld. Authorised Representative has relied on the decision of the Hon'ble Mumbai Tribunal in the case of Living Stones Jewellery Pvt. Ltd. supra. However, in a subsequent decision in the case of Tricom India Ltd. vs ACIT ITA No. 1924/Mum/08 dated 1st December, 2009, Hon'ble Mumbai ITAT has held that the decision of the coordinate Bench in the case of Living Stones Jewellery Pvt. Ltd. is distinguishable because it has not considered the mandatory decision available form Madras High Court in the case of C.I.T. vs. Menon Impex. I further find that the issue of deduction u/s. 10A has been dealt with elaborately by Hon'ble Mumbai ITAT in the case of ....
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.... raised by the assessee. Having heard the contentions on this issue, we find that the issue is purely a legal one and on the anvil of Hon'ble Apex Court decision in the case of National Thermal Corporation vs. C.I.T. 229 ITR 383, we admit the same for adjudication. 9. As regards the merits of the additional plea/ground the assessee's stand is that no income has accrued, as it is a case of merely reflecting the income by mere book entry made. It has been claimed that certain entries have been made in the books of accounts in accordance with the Accounting Standard 11 issued by the Institute of Chartered Accountants of India. It is submitted that the said sum does not represent an income, since it is an amount, which represents the difference between the amount credited to the account of the loan creditor by adopting the rate of exchange in Indian Rupees to the Foreign Currency on the date of raising the loan and, the rate of exchange at the close of the year, which sum alone is the liability to be discharged by the assessee. It has been claimed that there is no gain other than artificial gain, where mere book entry has been made. It has been claimed that at best, it could on....
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....ent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting stands; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation." 11. The fact of the present case before us is also that assessee is following mercantile system of accounting. It has followed the same in respect of fluctuation in rate of foreign exchange. The assessee has made entries in the books on this basis for profits and losses. This is in accordance with the nationally accepted Accounting Standard-11. The Hon'ble Supreme Court, in the case of Woodword Governor India P Ltd. (Supra) has repeatedly mentioned about the profit and loss and no distinction has been made between the profit and the loss. 11.1 In this connection, Rule 115 of the IT Rules, 1962 regarding 'rate of exchange' for conversion into rupees of income expressed in foreign currency is relevant. Sub-clause (c) of clause (2) of the Explanation to the Rule defines "spe....
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.... It be specifically stated that cause of accrual of income reflected is the book entry but the source is the exports activity only whereas in cases of earning of interest, duty drawback, or sale of licences, etc., source is an activity which makes an income accrue or arise. Further as is provided under section 10A(4) of the Act for the purpose of sub-section (1) and (1A), the profits derived from computer software shall be the amount which bears to the profit of the business undertaking. In fact, the purported gain/income has neither been taxed as income from other sources nor it is held to be not an income from business. The other income reflected in the profit and loss account does not mean that the source is other than the profit and gains of the business. It is submitted that nomenclature used may not be decisive or conclusive to determine the character of the income." 15. In this connection, ld. counsel of the assessee has also referred to a catena of case laws mentioned in paper book as under:- (i) Livingstones Jewellery (P) Ltd. v. DCIT (2009) 31 SOT 323 (Mum) (ii) ACIT v Motorola India Electronics (P) Ltd. (2007) 112 TTJ 562 (TBAN) (iii) M/s ....
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....ount 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. 18. We find that the fact before us is that assessee has raised external commercial borrowings form its parent company for meeting its working capital requirements. Now, it is to be considered whether the gain in this regard on account of foreign exchange fluctuation is sourced from the export activity only or not. In this connection, assessee's counsel has referred to the decision of the Mumbai, ITAT Bench in the case of Livingstones Jewellery (P) Ltd. 31 SOT 323 where it has been held that all profits which have direct nexus with the business of the undertaking will qualify for deduction u/s 10A of the IT Act. 19. The Ld. Commissioner of Income Tax (Appeals) has distinguished this decision by mentioning that the tribunal has not considered the decision available from Hon'ble Madras High Court in the case of C.I.T vs. Menon Impex P Ltd. 259 ITR 403 (2003). This observation of the Ld. Commissioner of Income Tax (Appeals) is n....