Madras H.C : Gains on account of foreign exchange fluctuation held to have direct nexus with the export sales of the assessee and, hence, is eligible for deduction under section 10A of the Income-tax Act, 1961

High Court Of Madras

CIT vs. Pentasoft Technologies Ltd.

Section : 10A

F.M. Ibrahim Kalifulla And M.M. Sundresh, JJ.

Tax Case (Appeal) No.599 Of 2010

July 13, 2010

JUDGMENT

F.M. Ibrahim Kalifulla J. – The Revenue has come forward with this appeal and the question of law raised reads as under :

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that gains on account of foreign exchange fluctuation held to have direct nexus with the export sales of the assessee and, hence, is eligible for deduction under section 10A of the Income-tax Act, 1961, is valid in law ?”

2. The short question that arises for consideration is “whether due to diminish in rupee value, the respondent-assessee gained a higher sum in rupee value while earning foreign exchange and the said difference in rupee value was allowable as a deduction under section 10A of the Income-tax Act, 1961.

3. Though the Assessing Officer as well as the Commissioner of Income-tax (Appeals) disallowed the said claim, the Tribunal dealt with the said issue as under in paragraph 10 :

“10. . . . Having regard to the facts of the case and the above-mentioned judgments, we are also of the opinion that the gain due to fluctuation in foreign exchange rate is directly related to the export sales of the assessee and, therefore, it cannot be treated as other than part of profit from export. The assessee need not do anything to earn this gain, but it is directly related to the export activity and sales and, therefore, it has a close and direct nexus with the export sales of the assessee. Accordingly, we allow this issue in favour of the assessee and the order of the Commissioner (Appeals) is set aside.”

4. In order to allow a claim under section 10A of the Act, what all is to be seen is whether such benefit earned by the assessee was derived by virtue of export made by the assessee. The exchange value based on upward or downward of the rupee value is not in the hands of the assessee. In other words, the assessee does not determine the exchange value of the Indian rupee. It has to be remembered but for the fact that the assessee is an export house, there was no question of earning any foreign exchange. Therefore, when the fluctuation in foreign exchange rate was solely relatable to the export business of the assessee and the higher rupee value was earned by virtue of such exports carried out by the assessee, there is no reason why the benefit of section 10A should not be allowed to the assessee.

5. Viewed in that respect, the conclusion of the Tribunal, as held above, cannot be held to be illegal. We, therefore, do not find any question of law, much less substantial question of law, to be considered in this appeal. The appeal, therefore, fails and the same is rejected. Consequently, connected M. P. No. 1 of 2010 is also dismissed.

[Citation : 347 ITR 578]

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