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TMI Blog2014 (1) TMI 1257X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of Rs.91.43 lakhs was to be treated as loss arising from O.S and not from 'profit and gains from business' and the foreign exchange should be allowed to be set off against such foreign exchange loss incurred during the same year. II. ITA No: 1085/10 - [By the Revenue] 3. Even though, the Revenue has raised four grounds, the substance of its grievance is confined to the effect that- -the CIT (A) erred in excluding Rs.11.08 lakhs and Rs.1.76 crores being telecommunication and traveling expenses respectively incurred in foreign currency from the total turnover for computation of deduction u/s 10A of the Act. 4. As the issues raised in these appeals being inter-linked pertaining to the same assessee, they were heard, considered together and disposed off, for the sake of clarity, in this common order. We shall now take up the assessee's case for consideration. ITA No. 977/10- [By the assessee] 5. Briefly stated, the assessee company ['the assessee' in short] was in development of software registered under the Software Technology Park of India. During the year under challenge, the assessee had admitted its income at Rs.7.74 lakhs and claimed deduction u/s 10A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for the deduction is strictly the income derived by the undertaking and not on any other income that may be incidental or attributable to, even though such income is computed under the head 'business. Hence, following the above decision of the S.C, I am of a considered view that, AO action is justified and, hence, this ground of appeal is dismissed. 10.2. Further, the Apex Court has considered the Legislative intent behind the use of the word 'derived from' in the case of Liberty India and Ors. V. CIT - 317 ITR 218 (SC) and reaffirmed the words 'derived from' are narrower in connotation as compared to the words 'attributable to'. In other words, by using the expression 'derived from' Parliament intended to cover sources not beyond the first degree." 7. Dismayed with the findings of the first appellate authority, the assessee has come up with the present appeal. It was argued by the Ld.AR Shri Madhukar Dhakappa, that- - S.10A(1) of the Act provides that subject to the provisions of the said section, a deduction of such profits and gains as are derived by an under-taking from the export of articles or things or computer software shall be allowed from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; - Rebutting the CIT (A)'s theory that the FE gain does not have a direct nexus with the business of the assessee and therefore it has to be assessee under the head 'income from OS', the assessee relies on the ruling of the Hon'ble SC in the case of Pandian chemicals (2003) 262 ITR 278 (SC) ; THAT elaborating the said ruling, the assessee submitted that- The facts of the case of Pandian chemicals were quite distinct from that of the assessee; that the assessee's case was that the FE gain had arisen on account of export sales made by the STPI U/T that in other words, the source of the FE gain is the export sales made by the assessee, unlike the facts in the case of Pandian chemicals and, thus, the ruling of the SC does not squarely applicable to the case of the assessee; - distinguishing the cases laws [CIT v. Sterling Foods Ltd. (237 ITR 579 - SC) and Liberty India and Ors v. CIT (317 ITR 218 - SC) relied on by the Ld. CIT (A) to that of the assessee's case, it was contended that 'Nonetheless, the principle laid down by the Apex Court that the words 'derived from' must be understood as something which has a direct or immediate nexus with the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions, diligently perused the relevant case records and also the various case laws on which the assessee had placed unstinted faith. 8.1. It was the stand of the Ld. CIT (A) that if the foreign exchange gain on realization of sale proceeds has no nexus with the business of the appellant, it has to be assessed NOT under the head 'profits and gains of business or profession' but 'income from Other Sources. However, he conceded that if the foreign exchange gain has nexus with the business of the assessee, it has to be included under the head 'profit and gains from business and profession', but, with a rider that it still has to be excluded in computing the deduction u/s 10A of the Act by placing strong reliance on the ruling of the Hon'ble Apex Court in the cases of (i) CIT V. Sterling Foods Ltd and (ii) Pandian Chemicals Ltd. v. CIT cited supra. 8.1.1. In the case of Pandian Chemicals, the issue before the Hon'ble Supreme Court was that interest earned on the deposit made with the Electricity Board for supply of electricity to the assessee's industrial U/T should be treated as income derived from the industrial U/T within the meaning of s.80HH. It was contended by that assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasoning. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9; AIR 1971 SC 530, this Court cautioned (at page 578 of AIR 1971 SC) "It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment. " 8.1.4. Reverting back to the issue under consideration, on the facts and circumstances of the issue, we are of the considered view that the foreign exchange fluctuation gain was directly related to the export activity of the assessee. Assuming that the assessee had not ventured to do any export sales, the question of foreign exchange gain didn't arise. As such, the foreign exchange fluctuation had direct nexus with the STPI U/T of the assessee which has been rightly included by the assessee as part of profits of the U/T for the purpose of computation of deduction u/s 10A of the Act. Our finding is in consonance with vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act. 8.1.5. Taking into account the facts of the issue and also in conformity with the legal position of various judiciaries referred in the fore-going paragraphs, we observe that- (i) the foreign exchange gain was income derived by export business of the assessee, and, hence, eligible for deduction u/s 10A of the Act; and (ii) the foreign exchange gains has to be taxed under the head 'income from business and profession'. It is ordered accordingly. 8.2. We have since conceded to the assessee's request to treat the foreign exchange gain of Rs.4.94 lakhs earned was in the course of business and in the nature of 'profits and gains from business and profession', the assessee's other plea - without prejudice, if the foreign exchange gain were to be treated as 'income from Other Sources', then the foreign exchange loss of Rs.91.43 lakhs was to be treated as loss arising from O.S etc.," has become obsolete and, thus, it has not been addressed to. ITA No: 1085/10 - [By the Revenue] 9. Let us now turn our attention to address to the Revenue's grievance that "the CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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