THE COMMISSIONER OF INCOME TAX vs. M/S NOVELL SOFTWARE DEVELOPMENT (I) PVT LTD

The Commissioner of Income Tax, Central Circle, C.R. Building, Queens Road, Bangalore.

The Income Tax Officer, Ward-12(1), C.R. Building, Queens Road, Bangalore. …Appellants

In this appeal the revenue has raised following 2 substantial questions of law as arising for consideration as both questions and the findings recorded by the tribunal is erroneous and warrants interference. “Whether the Appellate Authorities were correct in directing the Assessing Officer not to exclude 90% of gains on foreign exchange fluctuations from the business profits for quantification of deduction admissible u/s 80HHE of the Act?

In the appeal before the tribunal by the revenue, the assessee filed a cross objection against the very order of the commissioner raising the following issues: “Learned CIT(A) has erred in holding that the deduction u/s 80HHE of the Act has to be determined on the basis of business profits as reduced by brought forward losses. He ought to have appreciated that section 80HHE is a code by itself and hence the deduction ought to be allowed without considering the provisions of section 80AB of the Act.

The tribunal had dismissed the appeal of the revenue and had allowed the cross objection of the

The assessee is a company engaged in the business of development of software which it exports in its entirety. The assessment year is 1996-97. The assessee had claimed in its return of income its export profits for the benefit of deduction under Section 80HHC and the export turnover included the amount received due to export and the difference the assessee got due to fluctuation in the foreign exchange rate as exports were invoiced in terms of foreign currency. The assessee had also computed the business profits, without adjusting the brought forward unabsorbed depreciation of the earlier years and carried forward losses of the earlier years and also in the computation of the profits attributable to exports.

The assessing officer held that the difference attributable to the fluctuation in the exchange rate and the amount received is not any part of the value of the

It so happened that the assessee had only export profit and no other business profit and therefore, this aspect did not make any difference in characterising as business profit or profit from export business, both being the same in the assesses case.

The assessee appealed against this order to the CIT (Appeals). The CIT (Appeals) allowed the appeal of the assessee insofar as it related to the deduction of gains from the fluctuation in the foreign currency and the consequent gains from foreign exchange from the export profit or export turnover from the profits of the business, but rejected the other contention of the assessee, affirmed the assessment order in question in the matter of providing for adjustment of carried forward unabsorbed depreciation

Tribunal opined that the difference amount attributable to and termed as gains due to exchange rate fluctuation is very much part of export profit as it is mainly due to the export activity and on the question of deduction of the adjustments to be made of the carried forward unabsorbed depreciation and losses of the earlier years, it opined that first the benefit of deduction under Section 80HHC should be given and thereafter, such adjustments can be made.

Appearing on behalf of revenue, the submission of Sri Aravind, learned standing counsel is that with reference to Section 80HHC(i) now read as Section 80HHC(iv), the assessee is entitled for the benefit of Section 80HHE deduction from the gains that is derived by the assessee from the business of export activity; that

The distinction made between the words ‘derived from’ and ‘attributable to’ is emphasised to submit derived from is a narrow word and therefore, ought to be strictly construed as such.

On the other hand, appearing on behalf of the respondent/assessee, Mr Surayanarayana - learned counsel submits that the second question is no doubt covered against the assessee but not by this judgment but the later judgment of this Court in the case of J K INDUSTRIES LIMITED vs JOINT COMMISSIONER OF INCOME TAX reported in 351 ITR 454 and though it was a case rendered in the context of the benefits to be claimed under Section 80HHC, the ratio is equally applicable to the

However, with regard to the first question regarding the amount attributable to the fluctuation in the foreign exchange rate, Mr Suryanarayana would submit that this amount is not the amount which can be said to be derived from the second degree source as pointed out in the very judgment of the Supreme Court in the case of LIBERTY INDIA LIMITED vs COMMISSIONER OF INCOME TAX, in particular paragraph 14, which is also read upon by the learned counsel for the revenue that as far as the present appeal is concerned, the only activity of the assessee is to produce software and export and assessee has no other business activity or profits and the fluctuation in exchange rate is an incidental aspect but it is the entire amount that is received inclusive of difference attributable to the fluctuation in the foreign exchange rate

In view of the submissions at the bar, we have examined the questions. The 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, in our opinion, 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. In fact the converse of this viz., 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.

The second question whether the tribunal was correct in allowing the cross objection of the assessee and that the business profits should not be reduced by unabsorbed depreciation and unabsorbed losses is answered in the negative against the assessee and in favour of the revenue, as this question is answered and covered by the view of the decision in the case of J.K Industries Ltd V/s Joint Commissioner of Income Tax reported in 351 ITR page 434.