Convergys India Services (P) Ltd., New Delhi V. ACIT, New Delhi

ITA 4021/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3891 (ITAT-DELHI)
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 19-05-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 30-08-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JAYANT MISHRA
• Assessee Lawyers: C S AGGARWAL; R P MALL
• Keywords: Business income; Opportunity of being heard
• Section: 143(3); 263

Judgement Text

ITA NO. 4021/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 4021/DEL/2010 A.Y. : 2004-05 CONVERGYS INDIA SERVICES PRIVATE LIMITED, DLF ATRIA, JACARANDA MARG, DLF CITY PHASE-II, GURGAON (PAN/GIR NO. : AABCC5056G) VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1), CR BUILDING, NEW DELHI (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSEESSEE BY : SH. C.S. AGGARWAL, SR. ADV., & SH. R.P. MALL, ADV. . DEPARTMENT BY : SH. JAYANT MISHRA, C.I.T. (D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DATED 09.6.2 010 PERTAINING TO ASSESSMENT YEAR 2004-05. 2. THE MAIN ISSUE RAISED IS THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED BOTH ON FACTS AND IN LAW IN UP HOLDING THE DISALLOWANCE OF CLAIM OF DEDUCTION UNDER SECTION 10A OF THE INCOME TAX ACT OF ` 3,52,90,374/- MADE BY THE ASSTT. COMMISS IONER OF INCOME TAX. ITA NO. 4021/DEL/2010 2 3. THE ASSESSEE HAS ALSO RAISED AN ADDITIONAL GROU ND WHICH READS AS UNDER:- THAT THE LD. ASSESSING OFFICER HAS ERRED BOTH IN LAW AND ON FACTS IN COMPUTING THE INCOME AT ` 3,52,90,374/- AND FURTHER ERRED CONSEQUENTIALLY IN DENYING THE CLAIM O F DEDUCTION U/S 10A OF THE ACT ON THE SAID SUM. THOUGH THIS GROUND HAS BEEN FILED IN WRITING AND P ERMISSION SOUGHT TO RAISE THE SAME, LD. COUNSEL OF THE ASSESS EE CLAIMED THAT THIS IS NOT AN ADDITIONAL GROUND, IT IS AN ADDITIONAL PL EA. 4. IN THIS CASE, RETURN OF INCOME DECLARING NIL INC OME FOR ASSESSMENT YEAR 2004-05 WAS FILED ON 28.10.2004. REGULAR ASSESSMENT U/S 143(3) WAS COMPLETED ON 28.12.2006 A T TAXABLE INCOME OF ` 275830556/-. 5. LD. COMMISSIONER OF INCOME TAX, DELHI-I, NEW DELHI U/S 263 OF THE IT ACT, FOUND THE ASSESSMENT ORDER BOTH ERRONEOUS A ND 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 SH OWN INCOME FROM FOREIGN EXCHANGE FLUCTUATION GAIN OF ` 3 5290374/- UNDER THE HEAD OTHER INCOME AND THIS INCOME IS DI FFERENT FROM INCOME FROM OPERATION. PROVISIONS OF SECTION 10A E NVISAGE DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE. THUS THE GRANT OF DEDUCTION ON FOREIGN EX CHANGE GAIN U/S 10A IS CLEARLY DEVIATION FROM LAW WHICH MAKES T HE ORDER ITA NO. 4021/DEL/2010 3 GRANTING SUCH DEDUCTION BOTH ERRONEOUS AND PREJUDIC IAL TO THE INTEREST OF REVENUE. 5.1 PURSUANT TO THE AFORESAID 263 ORDER, ASSESSING O FFICER HAS FRAMED THIS ASSESSMENT ORDER. ASSESSING OFFICER OBS ERVED THAT DURING THE YEAR UNDER CONSIDERATION, ASSESSEE COMPANY HAD R AISED EXTERNAL COMMERCIAL BORROWINGS FORM ITS PARENT COMPANY FOR MEE TING ITS WORKING CAPITAL REQUIREMENTS. THE SAID ECBS WERE R EINSTATED ON 31.3.2004 I.E. AT THE END OF THE YEAR WHICH RESULTE D IN A NOTIONAL FOREIGN EXCHANGE GAIN OF ` 38215000/- TO THE COMPA NY. AFTER ADJUSTING THE LOSS ON EXPORT REMITTANCE, NET INCOME O F ` 35290374/- WAS SHOWN AS OTHER INCOME IN THE PROFIT AND LOSS A CCOUNT FOR THE YEAR ENDED 31.3.2004. ASSESSING OFFICER REJECTED T HE ASSESSEES CONTENTION THAT THE GAIN ARISING ON ECB TAKEN TO RA ISE THE WORKING CAPITAL REQUIREMENT OF THE COMPANY, CONSTITUTES BUSI NESS INCOME OF THE COMPANY AND IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. ACCORDINGLY DEDUCTION CLAIMED BY THE ASSESSEE U/S 1 0A ON FOREIGN EXCHANGE GAIN OF ` 35290374/- WAS DISALLOWED. 6. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (APPEALS) ELABORATELY CONSIDERED THE ISSUE AND HELD AS UNDER:- I HAVE CAREFULLY CONSIDERED THE SUBMISSION BY THE L D. A.R. AND HAVE GONE THROUGH THE ASSESSMENT ORDER. A PERUSAL O F P&L A/C SHOWS THAT THE APPELLANT ITSELF HAS SEGREGATED THE INCOME UNDER TWO HEAD I.E. INCOME FROM OPERATIONS AND OTHER IN COME. IN SCHEDULE J OF THE BALANCE SHEET, OTHER INCOME IS MENTIONED AS EXCHANGE DIFFERENCE (NET) AT ` 35,290,374/-. THE APPELLANTS CONTENTION IS THAT INCOME ON ACCOUNT OF FOREIGN EXC HANGE GAIN IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. ITA NO. 4021/DEL/2010 4 FOR ASCERTAINING THE ALLOWABILITY OF DEDUCTION U/S 10A IN THIS CASE, IT IS RELEVANT TO REFER TO THE PROVISIONS OF SECTION 10A. AS PER THE SPECIFIC PROVISIONS OF SECTION 10A, THE DE DUCTION UNDER THIS SECTION IS AVAILABLE ON SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLE OR THIN GS OR COMPUTER SOFTWARE. IN THE PRESENT CASE, THE INCOM E OF ` 35,290,374/- IS COMPUTED ON ACCOUNT OF THE EXCHANGE DIFFERENCE. THIS INCOME IS NOT DERIVED FROM THE EX PORT OF ARTICLE OR THINGS OR COMPUTER SOFTWARE. IN SUCH CIRCUMSTANCES , THE SAID INCOME WILL NOT BE ELIGIBLE FOR DEDUCTION U/S 10A O F THE ACT. LD. A.R. HAS PLACED RELIANCE ON CERTAIN CASE LAWS. HOWEVER, THESE CASES ARE DISTINGUISHABLE FROM THE PRESENT A PPEAL TO ELABORATE, LD. A.R. HAS RELIED ON THE CASE OF WOODW ARD GOVERNOR INDIA, 223 CTR 1. HOWEVER, AS MENTIONED IN PARA 11 OF THE JUDGEMENT IN THAT CASE, THE DISPUTE BEFORE THE HONBL E SUPREME COURT IN THE BATCH OF CIVIL APPEALS CENTRED AROUND THE YEAR(S) IN WHICH DEDUCTION WOULD BE ADMISSIBLE FOR THE INCREASE D LIABILITY UNDER SECTION 37(1). LD. AUTHORISED REPRESENTATIVE ALSO REFERRED TO THE DECISION IN THE CASE OF ELTEK SGS PVT. LTD. 3 00 ITR 6. HOWEVER, IN THAT CASE THE ISSUE RELATED TO THE CLAI M OF DEDUCTION ON CUSTOMER DUTY DRAWBACKS U/S 80IB. LD. AUTHORIS ED REPRESENTATIVE HAS RELIED ON THE DECISION OF THE HONBLE MUMBAI TRIBUNAL IN THE CASE OF LIVING STONES JEWELLER Y PVT. LTD. SUPRA. HOWEVER, IN A SUBSEQUENT DECISION IN THE CA SE OF TRICOM INDIA LTD. VS ACIT ITA NO. 1924/MUM/08 DATED 1 ST DECEMBER, 2009, HONBLE MUMBAI ITAT HAS HELD THAT THE DECISION OF THE COORDINATE BENCH IN THE CASE OF LIVING STONES JEWEL LERY PVT. LTD. IS DISTINGUISHABLE BECAUSE IT HAS NOT CONSIDERED TH E MANDATORY ITA NO. 4021/DEL/2010 5 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 HONBLE MUMBAI ITAT IN T HE CASE OF TRICOM INDIA LTD VS. ACIT CL PB 186 196, SUPRA, WH EREIN IT HAS BEEN HELD THAT MERELY BECAUSE THE INCOME HAS BEEN AS SESSEED AS BUSINESS INCOME WILL NOT AUTOMATICALLY CONFER THE BENEFITS OF A PARTICULAR DEDUCTION ONCE THERE IS A RIDER PROVISIO N THAT INCOME SHOULD BE DERIVED FROM A PARTICULAR SOURCE HONBLE TRIBUNAL HAS FOLLOWED THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF INDIA CEMENT INTERNATIONAL V. ITO 304 ITR 322 WHICH WAS THE ONLY DECISION AVAILABLE. FOR THE SAKE OF CONVENIENCE, REL EVANT EXTRACTS OF THE ORDER OF THE HONBLE TRIBUNAL ARE REPRODUCED AS UNDER:- SECTION 10B(4) MERELY GIVES THE FORMULA TO MAKE THE DEDUCTION PROPORTIONATE SAY IF THERE IS EXPORT TURN OVER OF ` 50 AND TOTAL TURNOVER IS ALSO ` 100/- THEN THE TOTA L BUSINESS PROFIT HAS TO BE DIVIDED BY 50/100, BECAUSE THE TOT AL TURNOVER (I.E. EXPORT TURNOVER + DOMESTIC TURNOVER) . BUT THE EXPRESSION DERIVED FROM CANNOT BE IGNORED IN SECT ION 10B(1) BECAUSE THE EXPRESSION INVOLVES ONLY THESE I TEMS OF PROFIT ELIGIBLE FOR DEDUCTION WHICH ARE DERIVED FRO M SUCH UNDERTAKING. WE HAVE ALSO GONE THROUGH THE DECISIONS OF THE CO ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF J.P. MORGAN IND IA PVT., LTD. VS. DCIT (SUPRA) AND LIVING STONES JEWELLERY P LTD. VS. DCIT (SUPRA) AND FIND THAT BOTH THE DECISIONS ARE DISTINGUISHABL E BECAUSE BOTH THE DECISIONS HAVE NOT CONSIDERED MANDATORY DECISION AVAILABLE ITA NO. 4021/DEL/2010 6 FRO THE HONBLE MADRAS HIGH COURT IN THE CASE OF C.I.T. VS. MENON IMEX V C.I.T. (SUPRA). IN ADDITION THE BENEFIT OF TH IRD MEMBER DECISION IN THE CASE OF ITO V BANYAN CHEMICALS LTD. (SUPRA) WAS ALSO NOT AVAILABLE IN THIS CASE. IN ANY CASE THE DECISION IN THE CASE OF MENON IMPEX V. C.I.T. (SUPRA) WAS FOLLOWED BY THE HONBLE MADRAS HI GH COURT IN THE CASE OF INDIA COMNET INTERNATIONAL V. ITO (304 ITR 322). THIS DECISION WAS RENDERED FOR THE ASSESSMENT YEAR 2002- 03 WHEN SUB-SECTION (4) HAD ALREADY BEEN INSERTED ON THE ST ATUTE. LOOKING INTO THE FACTS OF THE CASE, I FIND THAT THE ASSESSING OFFICER WAS JUSTIFIED IN NOT ALLOWING THE DEDUCTIO N U/S 10A ON THE OTHER INCOME WHICH IS DERIVED ON ACCOUNT OF FLUCT UATION OF FOREIGN EXCHANGE AND DOES NOT SATISFY THE MANDATORY CONDITIONS OF SECTION 10A. THESE GROUNDS OF APPEAL ARE, THERE FORE, DISMISSED. 7. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPE AL BEFORE US. 8. FIRST WE SHALL DEAL WITH THE ADDITIONAL PLEA/GRO UND RAISED BY THE ASSESSEE. HAVING HEARD THE CONTENTIONS ON THIS ISS UE, 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 CORPORATIO N VS. C.I.T. 229 ITR 383, WE ADMIT THE SAME FOR ADJUDICATION, 9. AS REGARDS THE MERITS OF THE ADDITIONAL PLEA/GRO UND THE ASSESSEES STAND IS THAT NO INCOME HAS ACCRUED, A S 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 B OOKS OF ACCOUNTS IN ACCORDANCE WITH THE ACCOUNTING STANDARD 11 ISSUE D BY THE INSTITUTE ITA NO. 4021/DEL/2010 7 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 CREDITE D TO THE ACCOUNT OF THE LOAN CREDITOR BY ADOPTING THE RATE OF EXCHA NGE 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 ALON E 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 E NTRY HAS BEEN MADE. IT HAS BEEN CLAIMED THAT AT BEST, IT COULD ONLY BE STATED THAT THERE OCCURRED A NOTIONAL GAIN AND ASSUMING THE SAME TO B E GAIN, THEN SUCH A GAIN WAS FROM ITS OWN SELF AND AS SUCH NO INCOME ACCRUED OR WAS DEEMED TO HAVE ACCRUED OR HAD BEEN RECEIVED BY IT TO ITS CREDIT. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS ON THIS ISSUE. WE FIND THAT THE ISSUE REGARDING TAXABILITY OF GAIN OR DEDUCTION OF LOSS ARISING ON ACCOUNT OF FLUCTUATION IN RATE OF FOREI GN EXCHANGE HAS BEEN THE SUBJECT MATTER OF THE DECISION OF THE HONBLE DELH I HIGH COURT IN THE CASE OF C.I.T. VS. WOODWORD GOVERNOR INDIA P LT D. 294 ITR 451 AND ALSO THE HONBLE APEX COURT IN THE CASE OF WOODWORD GOVERNOR INDIA PVT. LTD. 312 ITR 254. THE HONBLE APEX COURT, AT P AGE 265, MENTIONED THAT IN CASE OF REVENUE ITEM FALLING UNDER SECTION 37(1), PARAGRAPH 9 OF AS-11, WHICH DEALS WITH RECOGNITION OF EXCHANGE DIFFERENCES, NEEDS TO BE CONSIDERED. UNDER THAT P ARAGRAPH, EXCHANGE DIFFERENCES ARISING ON FOREIGN EXCHANGE TRANSACTION S HAVE TO BE RECOGNIZED AS INCOME OR AS EXPENSES IN THE PERIOD IN WHICH THEY ARISE EXCEPT AS STATED IN PARAGRAPH NOS. 10 & 11, WHICH D EAL WITH EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INC URRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH TOPIC FALLS UNDER SECTION 43A OF THE ACT. FURTHER, IT HAS BEEN MENTIONED IN PLACITUM 19 THAT I F THE RATE OF ITA NO. 4021/DEL/2010 8 EXCHANGE ON THE BALANCE SHEET DATE IS DIFFERENT FR OM THE DATE ON WHICH THE LIABILITY WAS INCURRED AND THE DATE ON WH ICH THE LIABILITY WAS PAID, THE EFFECT OF EXCHANGE DIFFERENCE HAS TO BE T AKEN INTO ACCOUNT IN THE PROFIT AND LOSS ACCOUNT. THE HONBLE COURT FINA LLY STATED THE DECISION AS UNDER:- .WE MAY STATED THAT IN ORDER TO FIND OUT IF AN EX PENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCO UNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS THE MERCANTILE SYSTEM, WHICH BRINGS INTO DEBIT THE EXPEN DITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS D UE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; ( II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER TH E CHANGE WAS BONAFIDE; (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE BEEN ACCRUED AN D TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSES SEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) WHETHER T HE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE B OOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY AC CEPTED ACCOUNTING STANDS; (VI) WHETHER THE SYSTEM ADOPTED B Y 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 F OLLOWED THE SAME IN RESPECT OF FLUCTUATION IN RATE OF FOREIGN EXCHAN GE. THE ASSESSEE HAS ITA NO. 4021/DEL/2010 9 MADE ENTRIES IN THE BOOKS ON THIS BASIS FOR PROFITS AND LOSSES. THIS IS IN ACCORDANCE WITH THE NATIONALLY ACCEPTED ACCOUN TING STANDARD-11. THE HONBLE SUPREME COURT, IN THE CASE OF WOODWORD GOVERNOR INDIA P LTD. (SUPRA) HAS REPEATEDLY MENTIONED ABOUT THE PROF IT AND LOSS AND NO DISTINCTION HAS BEEN MADE BETWEEN THE PROFIT AND TH E LOSS. 11.1 IN THIS CONNECTION, RULE 115 OF THE IT RULES, 1962 REGARDING RATE OF EXCHANGE FOR CONVERSION INTO RUPEES OF INCOME E XPRESSED IN FOREIGN CURRENCY IS RELEVANT. SUB-CLAUSE (C) OF CLAUSE (2) OF THE EXPLANATION TO THE RULE DEFINES SPECIFIED DATE, IN CASE OF BUSINESS PROFITS TO B E THE LAST DATE OF THE PREVIOUS YEAR. IN SUB-RULE (1), IT IS PROVIDE D THAT THE RATE OF EXCHANGE FOR CALCULATION OF THE VALUE IN RUPEES OF AN INCOME ACCRUING OR ARISING ARE DEEMED TO ACCRUE OR ARISE TO THE ASSESSEE IN FOREIGN CURRENCY OR RECEIVED OR DEEMED TO BE RE CEIVED BY HIM IN FOREIGN CURRENCY SHALL BE TELEGRAPHIC TRANSFER B UYING RATE OF SUCH CURRENCY ON THE SPECIFIED DATE. THUS, DE HORS AS-11, THIS RULE REQUIRES THAT REDUCTION IN LIABILITY ON REVENU E ACCOUNT ON ACCOUNT OF RATE OF FOREIGN EXCHANGE SHALL BE RECKON ED ON THE LAST DATE OF THE PREVIOUS YEAR AS PER TELEGRAPHIC TRANSF ER BUYING RATE. THIS MEANS THAT ANY REDUCTION IN LIABILITY, LEADING TO REVENUE GAIN WILL HAVE TO BE ACCOUNTED AS PROFITS IN CASE OF BUS INESS INCOME. THUS, THIS RULE INDEPENDENTLY REINFORCES THE CONTEN TS OF AS-11 FOR RECOGNITION OF INCOME AS WELL AS LOSS ARISING ON REV ENUE ACCOUNT. 12. IN THE BACKGROUND OF THE AFORESAID DISCUSSION A ND PRECEDENT, WE ARE INCLINED TO DISMISS THE ADDITIONAL GROUND TAKEN BY THE ASSESSEE. HENCE, THE ADDITIONAL GROUND STANDS DISMISSED. ITA NO. 4021/DEL/2010 10 13. NOW WE COME TO THE MAIN SUBSTANTIVE ISSUE, VIZ ., WHETHER THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED B OTH ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF CLAIM OF DE DUCTION UNDER SECTION 10A OF THE INCOME TAX ACT. 14. THE ASSESSEES SUBMISSIONS IN THIS REGARD ARE SU MMARIZED AS UNDER:- EVEN, IF IT IS HELD (ASSUMING TO BE AN INCOME AND I S TAXABLE), THEN TOO, SINCE THE LIABILITY AS DEBITED AGAINST IT S CREDITOR STOOD REDUCED FROM THE LIABILITY AS WAS CREDITED ON THE D ATE OF MAKING AN ENTRY AND THE LIABILITY SINCE STOOD REDUCED (WHI CH LIABILITY AS WAS ORIGINALLY DEBITED WAS NOT CLAIMED OR ALLOWED AS A DEDUCTION), THEN TOO THE SOURCE OF INCOME REMAINS THE SAME I.E. SUCH AN INCOME IS DERIVED FROM EXPORT AND CANNOT BE D IFFERENT AS THERE IS NO OTHER SOURCE OF EARNING AN INCOME LIKE IN THE CASE OF SALE LICENCES, DUTY DRAW BACK, INTEREST INCOME AND OTHER INCOME ETC., THOUGH THE CAUSE FOR SUCH A REDUCTION OF THE LIABILITY BY WAY OF BOOK ENTRY MAY BE DIFFERENT, (I.E. BY VIRTUE OF F LUCTUATION OF RATE OF EXCHANGE), NONE THE LESS SOURCE OF ALLEGED INCOME WOULD REMAIN FROM THE ONLY BUSINESS ACTIVITY CARRIED ON BY THE ASSESSEE I.E. EXPORTS AND AS SUCH, THE INCOME ALLEGED TO HAVE ACCRUED COULD NOT BE REGARDED AS NOT AN INCOME DERIVED FROM E XPORTS. IT BE SPECIFICALLY STATED THAT CAUSE OF ACCRUAL OF INC OME REFLECTED IS THE BOOK ENTRY BUT THE SOURCE IS THE EXPORTS ACTI VITY ONLY WHEREAS IN CASES OF EARNING OF INTEREST, DUTY DRAWB ACK, OR SALE OF LICENCES, ETC., SOURCE IS AN ACTIVITY WHICH MAKES AN INCOME ACCRUE OR ARISE. FURTHER AS IS PROVIDED UNDER SECTI ON 10A(4) OF THE ACT FOR THE PURPOSE OF SUB-SECTION (1) AND (1A), TH E PROFITS ITA NO. 4021/DEL/2010 11 DERIVED FROM COMPUTER SOFTWARE SHALL BE THE AMOUNT W HICH BEARS TO THE PROFIT OF THE BUSINESS UNDERTAKING. I N FACT, THE PURPORTED GAIN/INCOME HAS NEITHER BEEN TAXED AS INC OME FROM OTHER SOURCES NOR IT IS HELD TO BE NOT AN INCOME FR OM BUSINESS. THE OTHER INCOME REFLECTED IN THE PROFIT AND LOSS ACCOUNT DOES NOT MEAN THAT THE SOURCE IS OTHER THAN THE PROFIT AN D 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 UN DER:- (I) LIVINGSTONES JEWELLERY (P) LTD. V. DCIT (2009) 3 1 SOT 323 (MUM) (II) ACIT V MOTOROLA INDIA ELECTRONICS (P) LTD. (200 7) 112 TTJ 562 (TBAN) (III) M/S RAJESH EXPORTS LTD. VS. ACIT (2008)- TIOL- 457-ITAT- BANG (IV) HINDUSTAN GUM AND CHEMICALS LTD. V. ITO (2008) 23 SOT 143 (TKOL) (V) M/S CHEVIOT COMPANY LTD. V ACIT (2007) 12 ITAT IN DIA 308 (TKOL) (VI) M/S METAL RECYCLING INDUSTRY V ITO (2010) TIOL-2 47-ITAT- MUM. (VII) ROYAL EXPORTS VS ACIT ITA NO. 730/2010 (DEL) (VIII) C.I.T. VS PRODUCIN (P) LTD. (2010) 191 TAXMAN 79 (SC) ITA NO. 4021/DEL/2010 12 (IX) C.I.T. VS. BOKARO STTEL LTD. 91999) 236 315 (S C) (X) INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED VS. ITO (2009) 315 ITR 255 (DEL) (XI) C.I.T. VS MENON IMPEX (P) LTD. (2003) 180 CTR 4 0 (MAD) (XII) ITO VS. BANYAN CHEMICALS LTD. (2009) 121 TTJ 7 51 (TAHM) (XIII) INDIA COMNET INTERNATIONAL VS ITO (2008) 304 ITR 322 (MAD) (XIV) M/S TRICOM INDIA LTD. VS. ACIT (2010) 36 SOT 3 02(MUM) (XV) LIBERTY INDIA V. C.I.T. (2009) 317 ITR 218(SC) (XVI) MOTOR INDUSTRIES CO. LTD. V JCIT (2007) 164 T AXMAN 279 (KAR) (XVII) PANDIAN CHEMICALS LTD. VS. C.I.T. (2003) 262 I TR 278 (SC) XVIII) RENAISSANCE JEWELLERY P LTD. VS. ITO (2006) 1 01 ITD 380 (MUM) XIX) HINDUSTAN AIRCRAFT LTD. VS. C.I.T. (1962) 49 I TR 471 (MYS) XX) C.I.T. V STERLING FOODS (1999) 237 ITR 579 (SC) XXI) C.I.T. VS. WOODWARD GOVERNOR INDIA P. LTD. (200 9) 312 ITR 254 (SC) XXII) DCIT VS. MARUTI UDYOG LTD. (2006) 99 ITD 666 (DE L) XXIII) SNAM PROGETTI SPA VS. ACIT 132 ITR 70 (DEL) 16. LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND THE CASE LA WS REFERRED THEREIN. ITA NO. 4021/DEL/2010 13 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS IN LIGHT OF THE MATERIALS PRODUCED AND PRECEDENTS RELIED UPON. WE CAN GAINFULLY REFER HERE THE PROVISIONS OF SECTION 10A(1) AND 10 A(4) OF THE IT ACT. 10A(1) SUBJECT TO THE PROVISIONS OF THIS SECTION, A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE FOR A PERIOD TEN CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAK ING BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, SHA LL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE 10A(4) FOR THE PURPOSES OF SUB SECTIONS (1) AND (1A) , THE PROFITS DERIVED FROM EXPORTS OF ARTICLES OR THINGS O R COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, TH E SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT O F SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS T O THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. 18. WE FIND THAT THE FACT BEFORE US IS THAT ASSESS EE HAS RAISED EXTERNAL COMMERCIAL BORROWINGS FORM ITS PARENT COMPA NY FOR MEETING ITS WORKING CAPITAL REQUIREMENTS. NOW, IT IS TO BE CONSIDERED WHETHER THE GAIN IN THIS REGARD ON ACCOUNT OF FOREIGN EXCH ANGE FLUCTUATION IS SOURCED FROM THE EXPORT ACTIVITY ONLY OR NOT. IN T HIS CONNECTION, ASSESSEES COUNSEL HAS REFERRED TO THE DECISION O F THE MUMBAI, ITAT BENCH IN THE CASE OF LIVINGSTONES JEWELLERY (P) LTD . 31 SOT 323 WHERE ITA NO. 4021/DEL/2010 14 IT HAS BEEN HELD THAT ALL PROFITS WHICH HAVE DIRECT NEXUS WITH THE BUSINESS OF THE UNDERTAKING WILL QUALIFY FOR DEDUCT ION 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 NO T CONSIDERED THE DECISION AVAILABLE FROM HONBLE MADRAS HIGH COURT IN THE CASE OF C.I.T VS. MENON IMPEX P LTD. 259 ITR 403 (2003). THIS OBSE RVATION OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IS NOT FOUND TO BE INCORRECT. 19A. IN MENON IMPEX (SUPRA), THE HONBLE MADRAS HIGH COURT HAS HELD AS UNDER:- THE INTEREST RECEIVED BY THE ASSESSEE WAS ON DEPOS ITS MADE BY IT IN THE BANKS. IT IS THAT DEPOSIT WHICH IS THE SOURCE OF INCOME. THE MERE FACT THAT THE DEPOSIT WAS FOR THE PURPOSE OF OBTAINING LETTER OF CREDIT WHICH LET TER OF CREDIT IN TURN USED FOR THE PURPOSE OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING DOES NOT ESTABLISH A DIRECT NEXUS BETWEEN THE INTEREST AND THE INDUSTRIAL UNDERTAKING . THE TRIBUNAL, THEREFORE, WAS IN ERROR IN HOLDING THAT T HERE WAS DIRECT NEXUS BETWEEN THE TWO. THE INTEREST INCOME DERIVED BY THE ASSESSEE FROM FUNDS IN CONNECTION WITH LETT ER OF CREDIT IS NOT INCOME DERIVED FROM THE PROFITS OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING SO AS TO BE ENTITL ED TO GET THE BENEFIT OF S. 10A CAMBAY ELECTRIC SUPPLY INDUSTRI AL CO. ITA NO. 4021/DEL/2010 15 LTD. VS. C.I.T. 1978 CTR (SC) 50 : (1978) 113 ITR 8 4 (SC) AND C.I.T. VS. STERLING FOODS (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC) APPLIED. 20. UPON CAREFUL CONSIDERATION, WE FIND THAT SECTIO N 10A(1) PROVIDES FOR CONNOTATION OF SUCH PROFIT OR GAIN AS ARE DERI VED FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. 20.1 AS REITERATED BY THE HONBLE APEX COURT IN LIB ERTY INDIA (SUPRA) THE CONTENTION OF THE WORDS DERIVED FROM IS NARROW ER AS COMPARED TO THAT OF WORDS ATTRIBUTABLE. BY USING THE EXPRESS ION DERIVED FROM IN S. 10A(1), THE PARLIAMENT INTENDED TO COVER SOURCES N OT BEYOND THE FIRST DEGREE. 20.2 IN THE PRESENT CASE, WE NOTE THAT GAIN IS NOT ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE RELATING TO ASSESSE ES EXPORT ACTIVITIES. THE SAME IS WITH RESPECT TO THE EXTERNAL COMMERCIAL B ORROWINGS. THIS CANNOT BE TERMED AS DERIVED FROM THE EXPORT ACTIVITY OF THE ASSESSEE. THE ASSESSEES RELIANCE IN THIS REGARD ON SECTION 10A(4) DOES NOT COME TO ITS RESCUE, AS THE SAID SUB-SECTION ONLY P ROVIDES THE FORMULA FOR COMPUTING PROFITS DERIVED FROM THE EXPORT ACTIVIT Y. FIRST, THE INCOME OR GAIN HAS TO BE DERIVED FROM EXPORT ACTIV ITY, ONLY THEN THE COMPUTATION FORMULA CAN BE APPLIED. ITA NO. 4021/DEL/2010 16 21. IN THE BACKGROUND OF THE AFORESAID DISCUSSION A ND PRECEDENTS FROM HONBLE HIGH COURT AND HONBLE APEX COURT, WE DO NOT FIND ANY INFIRMITY OR ILLEGALITY IN THE ORDER OF THE LD. COMMI SSIONER OF INCOME TAX (APPEALS). ACCORDINGLY, WE UPHOLD THE SAME. 22. IN THE RESULT, APPEAL FILED BY THE ASSESSEE S TANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27/5/2011. SD/- SD/- [ [[ [A.D. JAIN A.D. JAIN A.D. JAIN A.D. JAIN] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 27/5/2011 SRB COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES