2013 (7) TMI 120 - HC - Income Tax

Deduction u/s 80HHE - Exclusion 90% of gains on foreign exchange fluctuations from the business profits - Held that - amount which is sought to be attributed as gain from fluctuation of foreign exchange no-doubt might have been due to some fluctuation but as these are amounts received in Indian currency as the total amount that an exporter receives ultimately for the export of the goods, it should be taken together with the value of the goods itself in which event - Even the amount said to be attributable to the fluctuation in the foreign exchange rate forms part of the value of the export goods and cannot be distinguished there from - If the fluctuation in foreign exchange brought down the value, an assessee cannot claim that this amount should be excluded and the export value maintained at a higher figure - there is no occasion to exclude 90% of the amount attributable to export gains from the foreign exchange rate fluctuation - Decided in favour of assessee. Allowance of cross objection - Reduction in business profits unabsorbed depreciation and unabsorbed losses - Held that - deduction can be claimed only against positive profits and positive profit necessarily implies the adjustments and set off of the depreciation allowance of earlier years and carried forward losses of earlier years and that Judgment having the binding effect on this court, it has to be necessarily ruled that the benefit under section 80HHC of the Act can be claimed only after the unabsorbed depreciation of the earlier years is adjusted against the profits of the current year and then only the benefit extended under section 80HHC of the Act can be given effect to - Following the decision of J.K Industries Ltd V/s Joint Commissioner of Income Tax 2013 (5) TMI 152 - KARNATAKA HIGH COURT , decided against the assesee.

Summary

Issues:
1. Whether gains on foreign exchange fluctuations should be excluded from business profits for deduction u/s 80HHE of the Income Tax Act?
2. Whether business profits should be reduced by unabsorbed depreciation and losses before computing deduction u/s 80HHE of the Income Tax Act?

Analysis:

Issue 1:
The appeal by the revenue challenged the order of the Income Tax Appellate Tribunal directing the Assessing Officer not to exclude 90% of gains on foreign exchange fluctuations from business profits for the deduction under Section 80HHE of the Act. The tribunal held that the gains from exchange rate fluctuation are part of export profits and should not be excluded. The assessee, a software development company, exported software and claimed deduction under Section 80HHC. The assessing officer argued that the fluctuation gains were not part of export value but due to fortuitous circumstances. However, the tribunal disagreed, stating that the gains were directly attributable to export activity. The High Court upheld the tribunal's decision, emphasizing that the fluctuation gains are integral to the export value and should not be excluded.

Issue 2:
The second question revolved around whether business profits should be reduced by unabsorbed depreciation and losses before computing the deduction under Section 80HHE. The tribunal allowed the cross objection of the assessee, stating that deductions should be given before adjusting for losses. The revenue contended that the total income should be calculated after adjusting for unabsorbed depreciation and losses, citing a previous judgment. The High Court ruled in favor of the revenue on this issue, stating that the deductions should be made after adjusting for losses, as per the relevant provisions.

In conclusion, the High Court partially allowed the appeal, affirming the tribunal's decision on excluding gains from foreign exchange fluctuations from business profits for deduction u/s 80HHE, but ruling in favor of the revenue regarding the reduction of business profits by unabsorbed depreciation and losses before computing the deduction.