2015 (2) TMI 108 - AT - Income Tax

Deduction u/s 10A of the Act was reduced on account of adjustment of unabsorbed business loss and depreciation - Held that - Deduction u/s 10A of the Act is to be calculated before reducing the unabsorbed loss and depreciation from the profits of the undertaking. - Decided in favour of assessee Exchange variation on share application money received from abroad excluded from profits and gains of business - Held that - While considering this ground, it was observed, the CIT (A) had neither adjudicated nor disposed off the issue as to whether the exchange variation of ₹ 7,85,820/- should be excluded from the assessee's income or not?. Since this issue was considered neither by the AO nor by the CIT (A), we deem it appropriate to restore this matter to the AO for denovo consideration. - Decided in favour of assessee for staistical purposes.

Summary

Issues Involved:
1. Deduction under Section 10A of the Income Tax Act and its adjustment with unabsorbed business loss and depreciation.
2. Exclusion of exchange variation on share application money from profits and gains of business.

Issue-wise Detailed Analysis:

1. Deduction under Section 10A of the Income Tax Act and its adjustment with unabsorbed business loss and depreciation:

Facts and Background:
The assessee claimed a deduction under Section 10A amounting to Rs. 93,38,312/- for the AY 2005-06. The Assessing Officer (AO) reduced this deduction to Rs. 81,55,777/- by adjusting unabsorbed business loss and depreciation of Rs. 16,49,809/- from AY 2004-05.

CIT (A) Decision:
The CIT (A) upheld the AO's decision, relying on the Delhi Tribunal's findings in the case of Global Vantedge Pvt. Ltd v. DCIT.

Assessee's Argument:
The assessee contended that the issue was covered by various judicial pronouncements, including:
- CIT v. TEI Technologies Pvt. Ltd. (361 ITR 36)
- CIT v. Black and Veatch Consulting Pvt. Ltd (348 ITR 72)
- CIT v. Yokogawa India Ltd (341 ITR 385)
- CIT v. Tata Elxsi Ltd (349 ITR 98)
- CIT v. ACE Software Exports Ltd.
- Valueprocess Technologies (I) (P) Ltd v. ITO (141 ITD 447)
- Enercon Wind Farms (Krishna) Ltd v. ACIT (21 SOT 29)
- KPIT Cummins Insosystems (Bangalore) (P) Ltd v. ACIT (120 TTJ 956)

Tribunal's Decision:
The Tribunal analyzed the rival submissions and various judicial pronouncements. It noted that the Hon'ble jurisdictional High Court in TEI Technologies Pvt. Ltd. held that Section 10A is essentially an exemption provision, meaning the exempted income does not enter the field of taxation and is not subject to any computation. The Bombay High Court in Black and Veatch Consulting Pvt. Ltd. ruled that deduction under Section 10A must be given at the stage when profits and gains are computed initially. The Karnataka High Court in Yokogawa India Ltd. and Tata Elxsi Ltd. supported the view that Section 10A income must be excluded at source before arriving at the gross total income.

The Tribunal distinguished the judgments relied upon by the CIT (A) and AO, noting that subsequent higher court rulings had overruled or distinguished these cases. It also referenced the Supreme Court's principle that if two views are possible, the one favoring the assessee should be adopted.

Conclusion:
The Tribunal held that the deduction under Section 10A should be calculated before reducing unabsorbed loss and depreciation from the profits of the undertaking. The assessee's appeal for AY 2005-06 was allowed.

2. Exclusion of exchange variation on share application money from profits and gains of business:

Facts and Background:
For AY 2007-08, the assessee showed a receipt from exchange variation amounting to Rs. 22,49,963/-, out of which Rs. 7,85,820/- was on share application money. The AO included this amount in the income from 'other sources' and denied deduction under Section 10A on this amount.

CIT (A) Decision:
The CIT (A) dismissed the assessee's appeal, referencing the Tribunal's decision in Convergys India Services Pvt Ltd. v. DCIT, which held that gain on exchange fluctuation in respect of share application money is not eligible for deduction under Section 10A.

Assessee's Argument:
The assessee argued that the exchange variation on share application money should be excluded from taxable income, citing the Delhi High Court's judgment in CIT v. Jagatjit Industries Ltd., which held that gains on account of foreign exchange fluctuations in share capital are capital receipts.

Tribunal's Decision:
The Tribunal noted that the CIT (A) did not adjudicate or dispose of the issue of whether the exchange variation of Rs. 7,85,820/- should be excluded from the assessee's income. The Tribunal referenced the Delhi High Court's ruling in Jagatjit Industries Ltd., which was upheld by the Supreme Court, to support the assessee's position.

Conclusion:
The Tribunal restored the matter to the AO for reconsideration, directing the AO to consider the Delhi High Court's ruling and provide the assessee with an opportunity to be heard. The appeal for AY 2007-08 was treated as allowed for statistical purposes.

Final Outcome:
The assessee's appeal for AY 2005-06 was allowed, and the appeal for AY 2007-08 was treated as allowed for statistical purposes.