2013 (7) TMI 313 - AT - Income Tax

Deduction under section 10A - foreign exchange gain - to be treated as Income from Other sources or Profits and Gains of Business - Held that - The revenue authorities did not look into the account of the assessee, which were placed before them as it is noted that in the year under consideration only two items have been shown as income in the Profit & Loss Account (besides nominal amount of Rs. 283/- as interest), which are export proceeds and exchange difference. It is not the case of the revenue authorities that the conception of exchange difference is not from export proceeds, but from some other source. It could also not be inferred from the Balance Sheet and Profit & Loss Account of the assessee, that exchange gain emanated from any other source or any other funds parked else where. DR, also, could not apprise as to how the exchange gain was detached from export proceeds or how the decision of Changepond Technologies (P) Limited. Vs ACIT 2008 (2) TMI 486 - ITAT MADRAS-A could not be relied upon. It has also not been shown by the revenue authorities that the export proceeds were not received within the stipulated period, i.e. the last day of the previous year. Thus the gain recorded by the assessee on receipts of foreign exchange as export proceeds are extricably linked and are, therefore, eligible for exemption under section 10A of the Income Tax Act. In favour of assessee.

Summary

Issues:
Treatment of foreign exchange gain as income from other sources instead of business income.

Analysis:
The appeal was filed against the order of CIT(A) 22, Mumbai, where the assessee contested the treatment of foreign exchange gain as income from other sources instead of business income. The assessee claimed the gain was directly linked to exports and should be considered as gains derived from the export of computer software eligible for deduction under section 10A of the Income Tax Act, 1961.

The assessee, engaged in Engineering Software Development and Consultancy, declared income of Rs. 4,67,849/- as gain on exchange fluctuation/difference in its accounts. However, the AO, relying on a previous decision, considered the gain as a mere book entry and notional, thus reducing it from the exemption under section 10A.

The CIT(A) upheld the AO's decision, leading the assessee to appeal before the ITAT. The assessee argued that the gain was directly linked to export activities and should be included in the total turnover for computing the deduction under section 10A, citing a relevant case law.

During the hearing, the AR reiterated the company's export activities and compliance with relevant rules. The AR emphasized that the gain was related to export proceeds and should not be denied exemption under section 10A.

After considering the arguments from both sides, the ITAT found that the revenue authorities did not prove the gain was detached from export proceeds or received outside the stipulated period. The ITAT concluded that the gain on foreign exchange linked to export proceeds was eligible for exemption under section 10A, distinguishing the case relied upon by the revenue authorities.

Therefore, the ITAT allowed the grounds raised by the assessee, ruling in favor of the appellant and granting the exemption under section 10A.