2019 (9) TMI 155 - HC - Income Tax

Deduction u/s 10A - whether foreign exchange gains should form part of the profits for the purpose of deduction ? - HELD THAT - Issue covered in favour of the assessee and against the Revenue in the assessee s own case for the assessment year 2001-02 2010 (7) TMI 75 - MADRAS HIGH COURT wherein a Division Bench of this Court held that gain due to fluctuation in foreign exchange rate is directly related to the export sales of the assessee and cannot be treated as other than part of profit from export. Income from training activity, sale of hardware and software and 39.33% of miscellaneous income are part and parcel of income for exemption under Section 10A - HELD THAT - We find that there is inconsistency in the order in the sense that the Tribunal, considered the issue relating to net income from training activity, which was held to be part and parcel of the assessee s income entitled to exemption under Section 10A of the Act. The Tribunal, after taking note of its decision in the assessee s group companies case remanded the matter back to the file of the Assessing Officer for deciding the issue afresh after examining the true nature of the training activities and character of income earned by the assessee out of such activity. Tribunal dismissed the Revenue s appeal and upheld the order passed by the CIT(A) with regard to the miscellaneous income namely 39.33%, which was, according to the assessee, derived from its own training centres. The Tribunal could have followed its earlier order in the assessee s group companies case and remanded the issue and could not have rejected the Revenue s appeal and affirmed the finding with regard to the miscellaneous income. Therefore paragraph 10 of the impugned order passed by the Tribunal requires to be set aside. As assessee points out that the Central Board of Direct Taxes issued a circular in Circular No.717 dated 14.8.1995, which gives explanatory notes on the provisions of the Finance Act, 1995. It is pointed out in paragraphs 21.3 and 21.4 of the said Circular with regard to the benefits provided to units in free trade zones. Hence, it is submitted that de hors the findings of the CIT(A) with regard to the Third Proviso to Section 10A of the Act, the assessee has got a strong case based on the substantive provision such as Section 10A of the Act prior to its substitution by the Finance Act, 2000 with effect from 01.4.2001 - as matter has been remanded to the Assessing Officer for verification and for a fresh consideration, we give liberty to the assessee to raise this contention before the Assessing Officer Disallowance of depreciation - Tribunal confirming the order of the CIT (Appeals) by merely observing that there was no merit in the ground raised by the Revenue on the issue of deletion of depreciation - HELD THAT - the order passed by the Tribunal does not contain elaborate reasons. But, the Tribunal affirmed the order passed by the CIT(A). Therefore, we are required to see as to whether the order passed by the CIT(A) contains sufficient reasons, which prompted the Tribunal to confirm the same. On a reading, it is evidently clear that the CIT(A) has done a thorough and elaborate exercise and arrived at a finding.

Summary

Issues:
1. Whether foreign exchange gains should form part of profits for deduction under Section 10A?
2. Whether income from training activity, sale of hardware and software, and miscellaneous income are eligible for exemption under Section 10A?
3. Whether the deletion of depreciation amounting to a specific sum is justified?

Analysis:

Issue 1:
The first substantial question of law revolves around whether foreign exchange gains should be considered as part of profits for deduction under Section 10A. The appellant argued that the Tribunal and CIT(A) failed to establish the nexus for expenses incurred for export turnover. However, the respondent contended that the gain from foreign exchange rate fluctuation is directly related to export sales and should be treated as part of export profit. The Court held in favor of the respondent, citing a previous case where it was established that such gains are integral to export profits.

Issue 2:
Regarding the second substantial question, the focus was on the application of the Third Proviso to Section 10A, which was substituted by the Finance Act, 2000. The appellant argued that this Proviso was not applicable to the assessment year in question (2000-01). However, the respondent pointed out the benefit of the substantive provision under Section 10A(2)(ia) before the substitution. The Court noted inconsistencies in the Tribunal's order and remanded the matter for fresh consideration, allowing the respondent to raise relevant contentions before the Assessing Officer.

Issue 3:
The third substantial question involved the deletion of a specific amount of depreciation. The appellant contended that the Tribunal did not provide sufficient reasoning for rejecting the appeal. However, the Court found that the CIT(A) had conducted a thorough examination, leading to a valid finding. As the Tribunal affirmed the CIT(A)'s order, the Court concluded that there was no substantial question of law on this ground, deciding against the appellant.

In conclusion, the Court disposed of the tax case appeal, answering substantial questions of law 1 and 3 against the Revenue. The second substantial question was left open for further consideration by the Assessing Officer, with the respondent permitted to present all relevant points during the remand process.