2021 (3) TMI 18 - AT - Income Tax

Deduction u/s 10A - Disallowing Foreign Exchange Fluctuation for the purpose of calculating deduction - net foreign exchange gain reduced from the net profit of the undertaking for the reason that the same was capital in nature - HELD THAT - There is no dispute that the said income is capital in nature as the Ld. CIT (A) has given a categorical finding on the same. The Department has not disputed it and neither is the assessee challenging it. The only prayer of the assessee is that if the same is not included in the net profit of the undertaking for the purposes of computation of claim of deduction u/s 10A of the Act, the same should also be excluded from the computation of business income. In this regard, we are in complete agreement with the submissions of the Ld. Authorized Representative. If the net foreign exchange of gain of ₹ 4,80,613/- is excluded from the computation of claim of deduction u/s 10A of the Act for the reason that it is on capital account, the same should also not be included while computing the net profit of the assessee. The same is directed to be excluded from the computation of business income as well. Accordingly, the additional ground raised by the assessee stands allowed.

Summary

Issues:
1. Disallowance of Foreign Exchange Fluctuation for calculating deduction u/s. 10A
2. Admission of additional ground regarding taxability of foreign exchange gain
3. Interpretation of foreign exchange fluctuation gain as capital or revenue

Analysis:
1. The assessee, engaged in software development, challenged the order of the CIT(A) restricting the deduction u/s. 10A in the Assessment Year 2010-11. The AO disallowed a net foreign exchange gain of ?4,80,613 as capital in nature. The CIT(A) upheld this exclusion, leading to the appeal before the Tribunal.

2. The assessee sought to add an additional ground challenging the taxability of the foreign exchange gain. The Tribunal admitted this ground as it related to the original appeal memo without introducing a new issue, following the principle that assessment proceedings aim to determine the correct tax liability.

3. The Authorized Representative argued that the foreign exchange gain of ?4,80,613 was on capital account, not revenue, citing notional entries and actual losses on capital account. The CIT(A) found these adjustments unrelated to asset acquisition, hence section 43A(1) was inapplicable. The AO's reliance on section 43A was disputed, emphasizing the nature of the entries and the actual loss incurred.

4. The Departmental Representative supported the lower authorities' findings, asserting the issue had been adequately considered. The Tribunal reviewed the contentions and evidence, acknowledging the capital nature of the gain per the CIT(A)'s finding. As the gain was excluded from deduction u/s. 10A, it should also be excluded from business income computation, aligning with the Authorized Representative's arguments.

5. Consequently, the Tribunal allowed the additional ground raised by the assessee, directing the exclusion of the foreign exchange gain from the computation of business income. The appeal was upheld in favor of the assessee, with the order pronounced on 25th February 2021.