2014 (1) TMI 245 - HC - Income Tax

Whether income on account of foreign exchange fluctuation is income derived from exports u/s 10A - Held that - As per section 10A - The income which is eligible for deduction must be income derived by an undertaking from the exports of articles or things or computer software - Benefit/reduction of liability on account of foreign exchange fluctuation on borrowed funds/loans is not income derived from exports of articles or things or computer software - Section 10A (4), is not applicable to the facts of the present case - The said sub-section is applicable when an assessee has domestic turnover/non-eligible turnover and also eligible export turnover - The entire turnover of the appellant-assessee is eligible for deduction under Section 10A - Decided in favour of assessee.

Summary

Issues:
1. Taxability of foreign exchange fluctuation under Income Tax Act, 1961.
2. Interpretation of Section 10A regarding income derived from exports.
3. Applicability of Section 10A(4) in determining deduction eligibility.

Analysis:
The High Court addressed the first issue of taxability of foreign exchange fluctuation under the Income Tax Act, 1961. The court noted that the Income Tax Appellate Tribunal had held a specific amount, due to foreign exchange fluctuation, as taxable income. However, the court disagreed with this conclusion. It emphasized that the income eligible for deduction under Section 10A must be derived from exports of articles, things, or computer software. The court cited previous judgments to support its stance, highlighting that benefit or reduction in liability due to exchange rate fluctuation on borrowed funds is not considered income derived from exports.

Moving on to the second issue, the court delved into the interpretation of Section 10A concerning income derived from exports. It clarified that the earning in question should directly stem from exports of articles, things, or computer software to qualify for deduction. The court dismissed the argument that exchange rate fluctuation is the cause for earning, emphasizing that the expression "derived from" holds significance. It referenced specific cases to support its interpretation, emphasizing the importance of the source of income in determining eligibility for deduction under Section 10A.

Lastly, the court analyzed the applicability of Section 10A(4) in determining deduction eligibility. It explained that Section 10A(4) comes into play when an assessee has both domestic turnover and eligible export turnover, necessitating apportionment of profits for deduction under Section 10A. However, in the present case, where the entire turnover of the appellant-assessee is eligible for deduction under Section 10A, the court concluded that the benefit or reduction in liability due to exchange rate fluctuation does not qualify as income derived from profits from export of articles or things. The court dismissed the misconceived reliance on Section 10A(4) and upheld its interpretation based on the specific facts and legal provisions discussed.

In conclusion, the High Court dismissed the appeal and provided liberty to the parties to file relevant documents within a specified timeframe. The case was listed under the category of "regular matters" based on seniority for further proceedings.