ACIT, Bangalore V. Sanyo LSI Technology India P.Ltd, Bangalore

ITA 1085/BANG/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5606 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 15-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B ARULAPPA
• Assessee Lawyers: MADHUKAR DHAKAPPA
• Keywords: Depreciation
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.977/BANG/2010 ASSESSMENT YEAR : 2004-05 M/S. SANYO LSI TECHNOLOGY INDIA PRIVATE LTD., UNIT 3, LEVEL 8, DISCOVERER BLOCK, INTERNATIONAL TECHNOLOGY PARK, WHITEFIELD ROAD, BANGALORE 560 066. : APPELLANT VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. : RESPONDENT ITA NO.1085/BANG/2010 ASSESSMENT YEAR : 2004-05 THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. : APPELLANT VS. M/S. SANYO LSI TECHNOLOGY INDIA PRIVATE LTD., UNIT 3, LEVEL 8, DISCOVERER BLOCK, INTERNATIONAL TECHNOLOGY PARK, WHITEFIELD ROAD, BANGALORE 560 066. : RESPONDENT ASSESSEE BY : SHRI MADHUKAR DHAKAPPA, C.A. REVENUE BY : SHRI B. ARULAPPA, ADDL.CIT(DR) O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER 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. ITA NO. 977 & 1085/BANG/10 PAGE 2 OF 13 I. ITA NO: 977/10 [BY THE ASSESSEE COMPANY] 2. THOUGH THE ASSESSEE COMPANY HAS RAISE D 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 GAI N WERE TO BE TREATED AS INCOME FROM OTHER SOURCES, THEN THE FOREIGN EXCHA NGE LOSS OF RS.91.43 LAKHS WAS TO BE TREATED AS LOSS ARISING FROM O.S AN D NOT FROM PROFIT AND GAINS FROM BUSINESS AND THE FOREIGN EXCHANGE SHOUL D BE ALLOWED TO BE SET OFF AGAINST SUCH FOREIGN EXCHANGE LOSS INCURRED DU RING THE SAME YEAR. II. ITA NO: 1085/10 [BY THE REVENUE] 3. EVEN THOUGH, THE REVENUE HAS RAISED F OUR GROUNDS, THE SUBSTANCE OF ITS GRIEVANCE IS CONFINED TO THE EFFEC T THAT - - THE CIT (A) ERRED IN EXCLUDING RS.11.08 LAKHS AND R S.1.76 CRORES BEING TELECOMMUNICATION AND TRAVELING EXPENSES RESP ECTIVELY INCURRED IN FOREIGN CURRENCY FROM THE TOTAL TURNOVE R FOR COMPUTATION OF DEDUCTION U/S 10A OF THE ACT. 4. AS THE ISSUES RAISED IN THESE APPEALS BEING INTER-LINKED PERTAINING TO THE SAME ASSESSEE, THEY WERE HEARD, CONSIDERED T OGETHER AND DISPOSED OFF, FOR THE SAKE OF CLARITY, IN THIS COMMON ORDER. WE SHALL NOW TAKE UP THE ASSESSEE S CASE FOR CONSIDERATION. ITA NO: 977/10 [BY THE ASSESSEE] 5. BRIEFLY STATED, THE ASSESSEE COMPANY [ THE ASSESSEE IN SHORT] WAS IN DEVELOPMENT OF SOFTWARE REGISTERED UNDER THE SOF TWARE TECHNOLOGY PARK OF INDIA. DURING THE YEAR UNDER CHALLENGE, THE ASS ESSEE HAD ADMITTED ITS ITA NO. 977 & 1085/BANG/10 PAGE 3 OF 13 INCOME AT RS.7.74 LAKHS AND CLAIMED DEDUCTION U/S 1 0A OF THE ACT TO THE EXTENT OF RS.3.81 CRORES. 5.1. DURING THE COURSE OF RE-ASSESSMENT PR OCEEDINGS U/S 143(3) R.W.S 147 OF THE ACT, THE AO, AFTER DUE CONSIDERATION OF THE ASSESSEES EXPLANATION, DETERMINED ITS TOTAL INCOME AT RS.85.6 1 LAKHS BY EXCLUDING THE TELECOMMUNICATION CHARGES AND TRAVEL EXPENSES OF RS .11.08 LAKHS AND RS.1.76 CRORES RESPECTIVELY AND FOREIGN EXCHANGE GA IN OF RS.4.94 LAKHS FROM THE EXPORT TURNOVER WHILE COMPUTING THE DEDUCT ION U/S 10A OF THE ACT. 6. AGGRIEVED, THE ASSESSEE CARRIED THE I SSUES TO THE LD. CIT (A) FOR RELIEF. AFTER GIVING DUE WEIGHT-AGE TO THE CONTENT IONS PUT-FORTH BY THE ASSESSEE, THE LD. CIT (A) HAD CONCEDED TO THE ASSES SEES REQUEST IN SO FAR AS EXPENSES INCURRED TOWARDS (I) TELECOMMUNICATION AND (II) TRAVEL EXPENSES WERE CONCERNED. HOWEVER, WITH REGARD TO THE FOREIGN EXCHANGE GAIN OF RS.4.94 LAKHS, THE LD. CIT (A), BY BRUSHING ASIDE THE ASSESSEES FORCEFUL CONTENTIONS, TOOK A DIVERGENT VIEW THAT 10.0. IF THE FOREIGN EXCHANGE GAIN ON REALIZATIO N OF SALE PROCEEDS HAS NO NEXUS WITH THE BUSINESS OF THE APPELLANT, IT HAS TO BE ASSESSED NOT UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION BU T UNDER THE HEAD INCOME FROM OTHER SOURCES. ON THE OTHER HAND, IF THE FOR EIGN EXCHANGE GAIN HAS NEXUS AND CONNECTION WITH THE BUSINESS OF THE APPEL LANT, IT HAS TO BE INCLUDED UNDER THE HEAD PROFIT & GAINS FROM BUSINE SS AND PROFESSION. BUT IT STILL HAS TO BE EXCLUDED IN COMPUTING THE DEDUCT ION U/S 10A SINCE IT IS NOT DERIVED BY THE EXPORT BUSINESS OF THE INDUSTRIAL UN DERTAKING. THE LAW ON THIS ISSUE IS SETTLED BY THE APEX COURT IN THE CASE OF C IT V. STERLING FOODS LTD. 237 ITR 571 (SC). 10.1. THE APEX COURT AGAIN CONSIDERED THE LEGISLAT IVE INTENT BEHIND THE USE OF THE WORD DERIVED FROM IN THE CASE OF PANDIAN C HEMICALS LTD. V. CIT - 262 ITR 278 (SC) AND REAFFIRMED ITS EARLIER DECISIO N IN STERLING FOODS LTD. (SUPRA). IN THAT CASE THE ASSESSEE MADE DEPOSIT WI TH STATE ELECTRICITY BOARD FOR THE PURPOSE OF POWER CONNECTION TO THE INDUSTRI AL UNDERTAKING. THE APEX COURT HELD THAT THE INTEREST ON THE DEPOSIT MADE WI TH ELECTRICITY BOARD ITA NO. 977 & 1085/BANG/10 PAGE 4 OF 13 CANNOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UNDERTAKING ITSELF, ALTHOUGH ELECTRICITY MAY BE REQUIRED FOR THE PURPOS E OF THE INDUSTRIAL UNDERTAKING. HENCE, ANY CONTROVERSY REGARDING THE USE OF THE WORD DERIVED IN THE ACT SHOULD BE TREATED AS SETTLED. WHAT IS ELIGIBLE FOR THE DEDUCTION IS STRICTLY THE INCOME DERIVED BY THE UND ERTAKING AND NOT ON ANY OTHER INCOME THAT MAY BE INCIDENTAL OR ATTRIBUTABLE TO, EVEN THOUGH SUCH INCOME IS COMPUTED UNDER THE HEAD BUSINESS. HENCE , FOLLOWING THE ABOVE DECISION OF THE S.C, I AM OF A CONSIDERED VIEW THAT , AO ACTION IS JUSTIFIED AND, HENCE, THIS GROUND OF APPEAL IS DISMISSED. 10.2. FURTHER, THE APEX COURT HAS CONSIDERED THE LE GISLATIVE INTENT BEHIND THE USE OF THE WORD DERIVED FROM IN THE CASE OF L IBERTY INDIA AND ORS. V. CIT 317 ITR 218 (SC) AND REAFFIRMED THE WORDS DE RIVED FROM ARE NARROWER IN CONNOTATION AS COMPARED TO THE WORDS A TTRIBUTABLE TO. IN OTHER WORDS, BY USING THE EXPRESSION DERIVED FROM PARLIAMENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. 7. DISMAYED WITH THE FINDINGS OF THE FIRST A PPELLATE AUTHORITY, THE ASSESSEE HAS COME UP WITH THE PRESENT APPEAL. IT W AS ARGUED BY THE LD.AR SHRI MADHUKAR DHAKAPPA, THAT - S.10A(1) OF THE ACT PROVIDES THAT SUBJECT TO THE PR OVISIONS OF THE SAID SECTION, A DEDUCTION OF SUCH PROFITS AND GAINS AS A RE DERIVED BY AN UNDER-TAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE; - DURING THE F.Y 2003-04, THE ASSESSEE HAD CREDITED R S.4.94 LAKHS TO THE P & L A/C AS FOREIGN EXCHANGE (FE) GAIN AND DEB ITED RS.91.43 LAKHS AS FE LOSS. THE SAID EXCHANGE GAIN AND LOSS R EPRESENTS EXCESS/DEFICIT AMOUNT ARISING ON ACCOUNT OF EXCHANG E FLUCTUATION RELATING TO EXPORT SALES MADE OUT OF THE STPI UNDER TAKING OR EXCHANGE FLUCTUATION RELATING TO DEBIT NOTES FOR RE IMBURSEMENT OF EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS AND, ACCORDINGLY, WAS CONSIDERED AS PART OF PROFITS OF STPI UNDERTAKING F OR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A OF THE ACT; - THAT IN THE CASE OF EXPORT SALES, EXPORT INVOICES W AS DRAWN IN FOREIGN CURRENCY. ALSO, IN CASE OF REIMBURSEMENT OF EXPENSE S, THE DEBIT NOTES WERE RAISED IN FOREIGN CURRENCY. THE VALUE OF SUCH INVOICES WAS RECORDED IN THE BOOKS OF THE ASSESSEE ON THE BASIS OF THE RATE OF EXCHANGE OF FOREIGN CURRENCY IN TERMS OF INDIAN RUP EES ON THE DATE OF RAISING THE INVOICE. THE ACTUAL AMOUNT OF SUCH EXP ORT INVOICE/ DEBIT NOTE WAS REALIZED WHEN SUCH FOREIGN CURRENCY INVOIC ES WERE RETIRED BY THE FOREIGN BUYER, THAT THE ASSESSEE RECEIVED WA S EQUIVALENT OF THE ITA NO. 977 & 1085/BANG/10 PAGE 5 OF 13 AMOUNT OF FOREIGN CURRENCY FOR WHICH THE EXPORT INV OICES/ DEBIT NOTES WERE ISSUED, THAT DUE TO THE DAY-TO-DAY CHANGE IN C ONVERSION RATE BETWEEN THE INDIAN AND FOREIGN CURRENCIES, AN ASSES SEE MIGHT BE RECEIVING HIGHER OR LOWER AMOUNT AT A PARTICULAR PO INT OF TIME IN RESPECT OF SAME AMOUNT OF EXPORT SALES BILLS AND TH E DIFFERENCE WAS RECOGNIZED AS EXCHANGE GAIN OR LOSS AS THE CASE MAY BE; FURTHER THAT THE ASSESSEE WAS REQUIRED TO REINSTATE THE OUTSTAND ING AMOUNTS BASED ON THE EXCHANGE RATES AS ON THE CLOSE OF THE YEAR I N ACCORDANCE WITH THE PROVISIONS OF AS 11; - THAT THE ASSESSEE HAD MADE THE ABOVE MENTIONED EXCH ANGE GAIN IN RELATION TO THE EXPORT SALES MADE AND REIMBURSEMENT OF EXPENSES INCURRED IN THE COURSE OF THE BUSINESS CARRIED ON B Y THE ASSESSEE FROM ITS STPI UNDER-TAKING; THAT THE ASSESSEE HAD, ACCOR DINGLY, INCLUDED THE SAME AS PART OF STPI UNDERTAKINGS PROFIT WHILE COMPUTING THE TAX DEDUCTION U/S 10A OF THE ACT AS THE SAME AROSE IN T HE COURSE OF BUSINESS UNDERTAKEN BY THE UNDERTAKING; AND THAT TH E ASSESSEE HAD CORRESPONDINGLY ALSO REDUCED THE FE FLUCTUATION LOS S 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 THAT THE FE GAIN DOE S NOT HAVE A DIRECT NEXUS WITH THE BUSINESS OF THE ASSESSEE AND THEREFO RE IT HAS TO BE ASSESSEE UNDER THE HEAD INCOME FROM OS, THE ASSES SEE RELIES ON THE RULING OF THE HONBLE SC IN THE CASE OF PANDIAN CHE MICALS (2003) 262 ITR 278 (SC); THAT ELABORATING THE SAID RULING, TH E ASSESSEE SUBMITTED THAT THE FACTS OF THE CASE OF PANDIAN CHEMICALS WERE QUI TE DISTINCT FROM THAT OF THE ASSESSEE; THAT THE ASSESSEES CASE WAS THAT THE FE GAIN HAD ARISEN ON ACCOUNT OF EXPORT SALES MADE BY THE STPI U/T THAT IN OTHER WORDS, THE SOURCE OF THE FE GAIN IS THE EXPORT SALE S MADE BY THE ASSESSEE, UNLIKE THE FACTS IN THE CASE OF PANDIAN C HEMICALS AND, THUS, THE RULING OF THE SC DOES NOT SQUARELY APPLICABLE T O THE CASE OF THE ASSESSEE; - DISTINGUISHING THE CASES LAWS [CIT V. STERLING FOOD S LTD. (237 ITR 579 SC) & LIBERTY INDIA AND ORS V. CIT (317 ITR 2 18 SC)] RELIED ON BY THE LD. CIT (A) TO THAT OF THE ASSESSEES CAS E, IT WAS CONTENDED THAT NONETHELESS, THE PRINCIPLE LAID DOWN BY THE APEX CO URT THAT THE WORDS DERIVED FROM MUST BE UNDERSTOOD AS SOMETHIN G WHICH HAS A DIRECT OR IMMEDIATE NEXUS WITH THE ASSESSEES INDUS TRIAL U/T IS WORTH NOTING AND ACTUALLY SUPPORTS THE CASE OF THE ASSESS EE; - RELIES ON THE CASE LAW OF CIT V. SUN ENGINEERING WO RKS (P) LTD. 198 ITR 297 (SC); ITA NO. 977 & 1085/BANG/10 PAGE 6 OF 13 FOREIGN EXCHANGE FLUCTUATION IS PART OF PROFITS FR OM BUSINESS AND PROFESSION: - RELIES ON (I) CIT V. WOODWARD GOVERNOR INDIA (P) LTD (2009) 223 C TR 1 (SC); (II) SUTLEJ COTTON MILLS LTD. V. CIT (1979) 116 ITR 1 (S C) (III) HINDUSTAN TRADING CORPORATION V. CIT 160 ITR 15 (GU J) (IV) SAP LABS INDIA PVT. LTD. V. ACIT (2010-TII-44-ITAT- BANG- TP) (V) DCIT V. M/S.LAZARD INDIA PVT. LTD. 2010 41 SOT 72 ( MUM) FOREIGN EXCHANGE GAIN IS ELIGIBLE FOR DE DUCTION U/S 10A OF THE ACT: - COUNTERING THE LD. CIT(A)S FINDING THAT EVEN IF FE GAIN HAS A NEXUS AND WAS EARNED IN CONNECTION WITH THE BUSINESS OF T HE ASSESSEE, THE SAME WOULD HAVE TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS FROM THE COMPUTATION OF DEDUCTION U/S 10A OF THE ACT AS SUCH GAIN IS NOT DERIVED BY THE EXPORT BUSINESS OF THE UNDER-TAKIN G, IT WAS CONTENDED THAT FOREIGN EXCHANGE FLUCTUATION IN THE ASSESSEES CASE HAD DIRECT AND IMMEDIATE NEXUS WITH THE EXPORT ACTIVITIES OF THE S TPI U/T OF THE ASSESSEE AND AS SUCH HAS TO BE CONSIDERED AS PART O F PROFITS OF THE U/T FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/ S 10A OF THE ACT; RELIES ON THE CASE LAWS: (I) CIT V. M/S. PENTASOFT TECHNOLOGIES LTD. [2010- TIOL0525- HC-MAD-IT]; (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 2 48 (BOMBAY HC) - WITHOUT PREJUDICE, IF THE FOREIGN EXCHANGE GAIN WAS TREATED AS INCOME FROM OTHER SOURCES THEN THE FE LOSS OF RS.91,43,5 86/- SHOULD ALSO BE TREATED AS LOSS ARISING FROM OS AND NOT FROM PR OFIT AND GAINS FROM BUSINESS AND PROFESSION AND THE FE GAIN SHOUL D 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 VEHEME NT IN HIS URGE THAT THE AUTHORITIES BELOW HAVE TAKEN A STAND AFTER CAREFUL CONSIDERATION OF THE ITA NO. 977 & 1085/BANG/10 PAGE 7 OF 13 ISSUES AND, THEREFORE, IT WAS PLEADED THAT THE FIND ING OF THE LD. CIT (A) REQUIRES NO INTERVENTION AT THIS STAGE. 8. WE HAVE SCRUPULOUSLY CONSIDERED THE RIVA L SUBMISSIONS, DILIGENTLY PERUSED THE RELEVANT CASE RECORDS AND ALSO THE VARI OUS 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 ON REALIZATION OF SALE PROCEEDS HAS NO NEXUS W ITH THE BUSINESS OF THE APPELLANT, IT HAS TO BE ASSESSED NOT UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION BUT INCOME FROM OTHER SOUR CES. HOWEVER, HE CONCEDED THAT IF THE FOREIGN EXCHANGE GAIN HAS NEXUS WITH THE BUSIN ESS OF THE ASSESSEE, IT HAS TO BE INCLUDED UNDER THE HEAD PROFIT AND GAINS FROM BUSINESS AND PROFESSION, BUT, WITH A RIDER THAT IT STILL HAS TO BE EXCLUDED IN COMPUTING THE DEDUCTION U/S 10A OF THE ACT BY PLACING STRONG RELIANCE ON THE RULING OF THE HONBLE APEX COURT IN THE CASES O F (I) CIT V. STERLING FOODS LTD AND (II) PANDIAN CHEMICALS LTD. V. CIT C ITED SUPRA. 8.1.1. IN THE CASE OF PANDIAN CHEMICALS, TH E ISSUE BEFORE THE HONBLE SUPREME COURT WAS THAT INTEREST EARNED ON THE DEPOS IT MADE WITH THE ELECTRICITY BOARD FOR SUPPLY OF ELECTRICITY TO THE ASSESSEES INDUSTRIAL U/T SHOULD BE TREATED AS INCOME DERIVED FROM THE INDUST RIAL U/T WITHIN THE MEANING OF S.80HH. IT WAS CONTENDED BY THAT ASSESS EE THAT WITHOUT THE SUPPLY OF ELECTRICITY, THE INDUSTRIAL U/T COULD NOT RUN AND THAT ELECTRICITY WAS AN ESSENTIAL INPUT FOR THE U/T AND THAT FOR THE PUR POSE OF GETTING ELECTRICITY, THE ASSESSEE WAS REQUIRED TO MEET THE STATUTORY REQ UIREMENT OF MAKING DEPOSITS FOR SUPPLY OF ELECTRICITY. IT WAS, THEREF ORE, CONTENDED BY THE ITA NO. 977 & 1085/BANG/10 PAGE 8 OF 13 ASSESSEE THAT THE INTEREST ACCRUED ON SUCH DEPOSITS SHOULD HAVE BEEN TREATED AS INCOME FROM THE INDUSTRIAL U/T WITHIN TH E MEANING OF S.80HH. BASED ON THE SAID SUBMISSION, THE HONBLE APEX COUR T TOOK A VIEW THAT THE WORD DERIVED FROM IN S.80 HH MUST BE UNDERSTOOD A S SOMETHING WHICH HAS DIRECT OR IMMEDIATE NEXUS WITH THE ASSESSEES U /T. IN THIS CONTEXT, IT WAS HELD THAT ALTHOUGH ELECTRICITY WAS REQUIRED FOR THE PURPOSES OF INDUSTRIAL U/T, THE DEPOSIT REQUIRED FOR ITS SUPPLY WAS A STEP REMOVED FROM THE BUSINESS OF THE INDUSTRIAL U/T AND, THUS, DERIVATIO N OF PROFITS ON THE DEPOSIT MADE WITH THE EB CANNOT BE SAID TO FLOW DIRECTLY FR OM THE INDUSTRIAL U/T ITSELF. 8.1.2. WITH HIGHEST REGARDS, WE WOULD LIK E TO POINT OUT THAT THE ISSUE ON HAND IS QUITE ON A DIFFERENT SPHERE IN THE SENSE THAT THE FOREIGN EXCHANGE GAIN HAD ARISEN ON ACCOUNT OF EXPORT SALES MADE BY ITS STPI U/T AND, THUS, THE SOURCE OF THE FOREIGN EXCHANGE GAIN WAS THE EXPORT SALES BY THE ASSESSEE WHICH IS DISSIMILAR TO THE FACTS OF PA NDIAN CHEMICALS CASE REFERRED ABOVE. WE ARE, THEREFORE, OF THE FIRM VIEW THAT THE ISSUE OF PANDIAN CHEMICALS QUOTED ABOVE CANNOT BE EQUATED WITH THAT OF THE ISSUE ON HAND. 8.1.3. AT THIS JUNCTURE, IT WOULD BE MO RE APPROPRIATE TO RECALL THE OBSERVATIONS OF THE HONBLE HIGHEST JUDICIARY OF TH E LAND IN THE CASE OF CIT V. SUN ENGINEERING WORKS (P) LTD REPORTED IN 198 IT R 297 (SC) WHEREIN IT WAS HELD THAT IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OU T 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 ITA NO. 977 & 1085/BANG/10 PAGE 9 OF 13 BEFORE THIS COURT. A DECISION OF THIS COURT TAKES I TS COLOUR FROM THE QUESTIONS INVOLVED IN THE CASE IN WHICH IT IS RENDERED AND, W HILE APPLYING THE DECISION TO A LATER CASE, THE COURTS MUST CAREFULLY TRY TO A SCERTAIN 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 CONT EXT OF THE QUESTIONS UNDER CONSIDERATION BY THIS COURT, TO SUPPORT THEIR REASONING. IN MADHAV RAO JIVAJI RAO SCINDIA BAHADUR V. UNION OF INDIA [1 971] 3 SCR 9; AIR 1971 SC 530, THIS COURT CAUTIONED (AT PAGE 578 OF A IR 1971 SC) 'IT IS NOT PROPER TO REGARD A WORD, A CLAUSE OR A S ENTENCE OCCURRING IN A JUDGMENT OF THE SUPREME COURT, DIVORCED FROM ITS CO NTEXT, AS CONTAINING A FULL EXPOSITION OF THE LAW ON A QUESTION WHEN THE Q UESTION DID NOT EVEN FALL TO BE ANSWERED IN THAT JUDGMENT. ' 8.1.4. REVERTING BACK TO THE ISSUE UNDER CONS IDERATION, ON THE FACTS AND CIRCUMSTANCES OF THE ISSUE, WE ARE OF THE CONSIDERE D VIEW THAT THE FOREIGN EXCHANGE FLUCTUATION GAIN WAS DIRECTLY RELATED TO T HE EXPORT ACTIVITY OF THE ASSESSEE. ASSUMING THAT THE ASSESSEE HAD NOT VENTU RED TO DO ANY EXPORT SALES, THE QUESTION OF FOREIGN EXCHANGE GAIN DIDNT ARISE. AS SUCH, THE FOREIGN EXCHANGE FLUCTUATION HAD DIRECT NEXUS WITH THE STPI U/T OF THE ASSESSEE WHICH HAS BEEN RIGHTLY INCLUDED BY THE ASS ESSEE AS PART OF PROFITS OF THE U/T FOR THE PURPOSE OF COMPUTATION OF DEDUCT ION U/S 10A OF THE ACT. OUR FINDING IS IN CONSONANCE WITH VARIOUS JUDICIAL PRECEDENTS, A FEW OF WHICH ARE DISCUSSED, IN BRIEF, HERE-BELOW: (I) THE HONBLE MADRAS HIGH COUR T IN THE CASE OF CIT V. M/S. PENTASOFT TECHNOLOGIES LTD. REPORTED IN 2010-TIOL-5 25-HC-MAD-IT, HAD HELD THAT - THE EXCHANGE VALUE BASED ON UPWARD OR DOWNWARD OF THE RUPEE VALUE IS NOT IN THE HANDS OF THE ASSESSEE. THE ASSESSE E DOES NOT DETERMINE THE EXCHANGE VALUE OF THE INDIAN RUPEE; THAT WHEN THE F LUCTUATION IN FOREIGN EXCHANGE RATE WAS SOLELY RELATABLE TO THE EXPORT BU SINESS OF THE ASSESSEE AND THE HIGHER RUPEE VALUE WAS EARNED BY VIRTUE OF SUCH EXPORTS CARRIED OUT BY THE ASSESSEE, THERE WAS NO REASON WHY THE BENEFIT O F S.10A SHOULD NOT BE ALLOWED TO THE ASSESSEE. ITA NO. 977 & 1085/BANG/10 PAGE 10 OF 13 (II) IN THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. REPORTED IN (2010) 233 CTR (BOM) 248, THE HONBLE HIGH COURT OF BOMBAY HAS RULED THAT GAIN FROM FLUCTUATION OF FOREIGN EXCHANGE IS DIREC TLY RELATED WITH THE EXPORT ACTIVITIES AND SHOULD BE CONSIDERED AS INCOM E DERIVED FROM EXPORT IN THE YEAR IN WHICH THE EXPORT TOOK PLACE FOR THE PUR POSE OF DEDUCTION U/S 10A OF THE ACT. (III) WITH REGARD TO THE FOREIGN EXCHANGE FLUCTUATION IS A PART OF PROFITS FROM BUSINESS AND PROFESSION, THE HONBLE APEX COURT IN ITS RULING IN THE CASE OF SUTLEJ COTTON MILLS LTD. V. CIT CITED S UPRA, HAD HELD THUS THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SE TTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATI ON OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE TRADING PRO FIT 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 BUSI NESS. BUT, IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASS ET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOULD BE OF CAPITAL NATURE. IN CONSONANCE WITH THE ABOV E RULING, THE HONBLE SUPREME COURT IN ITS SUBSEQUENT VERDICT IN THE CASES OF (I ) CIT V. WOODWARD GOVERNOR INDIA (P) LIMITED AND (II) IN CIT V. HON DA SIEL POWER PRODUCTS LIMITED REPORTED IN (2009) 312 ITR 254 (SC) OBSERV ED THUS - 15. FOR THE REASONS GIVEN HEREINABOVE, WE HOLD THA T, IN THE PRESENT CASE, THE 'LOSS' SUFFERED BY THE ASSESSEE ON ACCOUNT OF T HE EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPE NDITURE 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 REFE RRED IN THE FORE-GOING PARAGRAPHS, WE OBSERVE THAT ITA NO. 977 & 1085/BANG/10 PAGE 11 OF 13 (I) THE FOREIGN EXCHANGE GAIN WAS INCOME DERIVED BY EXP ORT BUSINESS OF THE ASSESSEE , AND, HENCE, ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT; & (II) THE FOREIGN EXCHANGE GAINS HAS TO BE TAXED UNDER TH E HEAD INCOME FROM BUSINESS AND PROFESSION. IT IS ORDERED ACCORDINGLY . 8.2. WE HAVE SINCE CONCEDED TO THE ASSESS EES REQUEST TO TREAT THE FOREIGN EXCHANGE GAIN OF RS.4.94 LAKHS EARNED WAS I N THE COURSE OF BUSINESS AND IN THE NATURE OF PROFITS AND GAINS FR OM BUSINESS AND PROFESSION, THE ASSESSEES OTHER PLEA - WITHOUT PREJUDICE, IF THE FOREIGN EXCHANGE GAIN WERE TO BE TREATED AS INCOME FROM OT HER SOURCES, THEN THE FOREIGN EXCHANGE LOSS OF RS.91.43 LAKHS WAS TO BE T REATED AS LOSS ARISING FROM O.S ETC., HAS BECOME OBSOLETE AND, THUS, IT HAS NOT BEEN ADDR ESSED TO. ITA NO: 1085/10 [BY THE REVENUE] 9. LET US NOW TURN OUR ATTENTION TO AD DRESS TO THE REVENUES GRIEVANCE THAT THE CIT (A) ERRED IN EXCLUDING RS.11.08 LAKHS AND RS.1.76 CRORES BEING TELECOMMUNICATION AND TRAVELING EXP ENSES RESPECTIVELY INCURRED IN FOREIGN CURRENCY FROM TOTAL TURNOVER FOR COMPUTING DEDUCTION U/S 10A OF THE ACT. 9.1. WE HAVE DULY TAKEN COGNIZANCE OF THE RIVAL SUBMISSIONS ON THE ISSUE AND ALSO GLANCED AT THE RELEVANT RECORDS. 9.1.1. AT THE OUT-SET, WE WOULD LIKE TO POI NT OUT THAT THIS BENCH IN ITS EARLIER FINDING IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06 (IN ITA NO: 786/BANG/2009 DATED: 23.12.2009 ) HAD DELIBERATED THE IDENTICAL ISSUES TELECOMMUNICATION CHARGES, TRAVEL EXPENSES ETC., - AT ITA NO. 977 & 1085/BANG/10 PAGE 12 OF 13 A GREATER LENGTH, ALSO QUOTING EXTENSIVELY THE VARI OUS DECISIONS OF THE HONBLE TRIBUNALS INCLUDING IN THE CASES OF (I) ITO V. M/S. SAK SOFT LTD - (2009) 313 ITR (AT) 353 (CHENNAI SB); (II) M/S. T ATA ELEXSI LIMITED V. ACIT - ITA NO:315/BANG/2006; (III) CIT V. BHARAT E ARTH MOVERS LTD. - 268 ITR 232 (KAR), (IV) CIT V. LAKSHMI MACHINE WORKS - 290 ITR 667 (SC) ETC., AND ARRIVED AT A CONCLUSION THAT 9. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF SPECIAL BENCH CITED SUPRA AND THE DECISION OF THE CO-ORDINATE BENCH DEC ISION OF BANGALORE TRIBUNAL IN THE CASE OF M/S. TATA ELEXI LTD. V. CIT (ITA NO.315/BANG/06), WE HOLD THAT THE CIT (A) IS JUSTIFIED IN EXCLUDING THE EXPENDITURE 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. 9.1.2. IN CONFORMITY WITH THE ABOVE FINDIN G WHICH HAS BEEN, AMONG OTHERS, DULY FOLLOWED BY THE LD. CIT (A) IN HIS IMP UGNED ORDER UNDER CHALLENGE, WE ARE OF THE FIRM VIEW THAT THE LD. CIT (A) WAS FULLY JUSTIFIED IN HIS ENDEAVOUR WHICH REQUIRES NO INTERVENTION OF THI S BENCH AT THIS STAGE. IT IS ORDERED ACCORDINGLY. 10. IN THE RESULT: (I) THE ASSESSEES APPEAL IS ALLOWED; & (II) THE REVENUES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 13 TH DAY OF MAY, 2011. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 13 TH MAY, 2011. DS/- ITA NO. 977 & 1085/BANG/10 PAGE 13 OF 13 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.