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2014 (1) TMI 1257 - AT - Income TaxWhether profit on foreign exchange be included in export turnover - Held that - Decision in Sutlej Cotton Mills Ltd. v. CIT 1978 (9) TMI 1 - SUPREME Court followed - Where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit 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 business - If the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature - The foreign exchange gain was income derived by export business of the assessee, and, eligible for deduction u/s 10A of the Act - Decided in favour of assessee. Whether telecommunication and traveling expenses be included in total turnover for deduction u/s 10A - Held that - Decision in ITO v. M/s. Sak Soft Ltd 2009 (3) TMI 243 - ITAT MADRAS-D followed - 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 - Decided in favour of assessee.
Issues Involved:
1. Treatment of foreign exchange gain for the purpose of deduction under Section 10A of the Income Tax Act. 2. Exclusion of telecommunication and travel expenses incurred in foreign currency from the total turnover for computation of deduction under Section 10A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Treatment of Foreign Exchange Gain for Deduction under Section 10A: The assessee company contested the treatment of a foreign exchange gain of Rs.4.94 lakhs as 'income from Other Sources' by the CIT (A), arguing it should be included in the computation of deduction under Section 10A of the Income Tax Act. The CIT (A) had dismissed the assessee's claim, stating that the foreign exchange gain did not have a direct nexus with the business of the assessee and thus should be excluded from the profits eligible for deduction under Section 10A. The CIT (A) relied on the Supreme Court rulings in CIT v. Sterling Foods Ltd. and Pandian Chemicals Ltd. v. CIT, which emphasized that only income directly derived from the industrial undertaking is eligible for deduction. The assessee argued that the foreign exchange gain arose from export sales and should be considered part of the profits of the STPI undertaking for the purpose of Section 10A. They distinguished their case from Pandian Chemicals, stating that the foreign exchange gain was directly related to the export activities. The assessee cited several case laws, including CIT v. Woodward Governor India (P) Ltd. and CIT v. Gem Plus Jewellery India Ltd., to support their claim that foreign exchange fluctuation gains should be considered as part of 'profits from business and profession' and eligible for deduction under Section 10A. The Tribunal agreed with the assessee, stating that the foreign exchange gain was directly related to the export activity and had a direct nexus with the STPI undertaking. The Tribunal concluded that the foreign exchange gain should be included in the profits for the purpose of deduction under Section 10A and should be taxed under 'income from business and profession'. Consequently, the assessee's appeal was allowed. 2. Exclusion of Telecommunication and Travel Expenses from Total Turnover: The Revenue challenged the CIT (A)'s decision to exclude telecommunication expenses of Rs.11.08 lakhs and travel expenses of Rs.1.76 crores incurred in foreign currency from the total turnover for the computation of deduction under Section 10A. The Tribunal noted that this issue had been previously deliberated in the assessee's case for the assessment year 2005-06, where it was concluded that such expenses should be excluded from both export turnover and total turnover for the purposes of Section 10A deduction. The Tribunal cited several decisions, including ITO v. M/s. Sak Soft Ltd. and CIT v. Lakshmi Machine Works, to support this conclusion. The Tribunal upheld the CIT (A)'s decision, stating that excluding these expenses from the total turnover was justified and required no intervention. Consequently, the Revenue's appeal was dismissed. Conclusion: The Tribunal allowed the assessee's appeal regarding the inclusion of foreign exchange gain in the computation of deduction under Section 10A and dismissed the Revenue's appeal concerning the exclusion of telecommunication and travel expenses from the total turnover for the same deduction.
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