A proven typographical error in accounts can't be the basis for denying an exemption.

A proven typographical error in accounts can’t be the basis for denying an exemption.

Issue

Can a tax exemption under Section 10A of the Income-tax Act, 1961, be denied based on an incorrect description of income in the financial accounts, if the assessee provides substantial documentary evidence to prove it was a typographical error and that the income was indeed from exports?

Facts

An assessee, a 100% Export Oriented Unit (EOU), claimed an exemption under Section 10A for its software export income.
The Assessing Officer (AO) noticed that a schedule in the financial accounts wrongly described a significant receipt as an “arbitration award.” Based on this label, the AO concluded the amount was not from software sales and denied the Section 10A exemption on it.
The assessee contended that this was a simple typographical error. To prove the true nature of the transaction, the assessee submitted a large volume of evidence, including:
- The Chartered Accountant’s certificate in Form 3CEB.
- The report for claiming the 10A exemption in Form 56F.
- The STPI-approved SOFTEX form.
- The Foreign Inward Remittance Certificate (FIRC) from the bank.
All these documents consistently confirmed that the amount was from the export of software. Additionally, the Transfer Pricing Officer (TPO) had also accepted this amount as export turnover.

Decision

The Tribunal ruled in favour of the assessee.

It upheld the findings of the Commissioner (Appeals), who had deleted the addition after reviewing all the documentary evidence.
It held that the assessee had successfully proven that the incorrect label was a mere clerical error and that the substance of the transaction was undoubtedly the export of software. The revenue had failed to provide any evidence to counter this.

Key Takeways

Substance Over Form: The true nature of a transaction, as supported by primary and corroborative evidence, will always prevail over a simple clerical or typographical error in the presentation of the financial statements.
The Power of Corroborative Evidence: When faced with a discrepancy, providing multiple, consistent pieces of evidence from different sources (CAs, banks, statutory bodies like STPI) is the most effective way to establish the real nature of a transaction.
Consistency Across Proceedings: The fact that the TPO, in a separate but related proceeding, had accepted the amount as export turnover added significant weight to the assessee’s case and demonstrated consistency within the tax department’s own assessment.

A foreign exchange gain on export receivables is eligible for the Section 10A exemption.

Issue

Is the gain arising from foreign exchange rate fluctuations on export sales considered as profit “derived from” the export of software, making it eligible for exemption under Section 10A?

Facts

The assessee earned a gain due to favorable movements in the foreign exchange rate between the time of invoicing its export sales and the time of receiving the payment. The Assessing Officer (AO) disallowed the Section 10A exemption on this gain, arguing that it was not directly “derived from” the export activity but was an ancillary income. It was also an undisputed fact that in the immediately preceding assessment years, the revenue had accepted an identical foreign exchange fluctuation gain as being eligible for the Section 10A exemption in the assessee’s own case.

Decision

The Tribunal ruled in favour of the assessee.

It held that the gain from foreign exchange fluctuations was directly relatable to the export of software and the subsequent receipt of payment in convertible foreign exchange. It is not an independent source of income.
Furthermore, it invoked the principle of consistency, stating that since the revenue had accepted the same claim on identical facts in the assessee’s own case in prior years, there was no valid reason to take a different view in the current year.

Key Takeways

Direct Nexus: Gains that arise from foreign exchange fluctuations on export proceeds have a direct and immediate link to the export activity itself. They are considered part of the export profits and not a separate, incidental income.
The Principle of Consistency: Tax authorities are expected to maintain a consistent view. If a particular type of income has been accepted as eligible for an exemption in prior years on the same set of facts, it should generally be allowed in subsequent years unless there is a material change in the facts or the law.

The disallowance of expenditure under Section 40(a)(i) isn’t attracted for a short deduction of TDS; it only applies to a complete non-deduction of TDS.

Issue

Can a disallowance of expenditure be made under Section 40(a)(i) of the Income-tax Act, 1961, in a case where there has been a “short deduction” of tax at source, as opposed to a complete “non-deduction”?

Facts

The assessee-company made a payment to a non-resident for a share buy-back and deducted tax at source (TDS) at a rate of 10%. The Assessing Officer (AO) believed that the correct applicable rate was 20%. Treating this as a default of non-deduction, the AO invoked Section 40(a)(i) and disallowed a proportionate amount of the payment made to the non-resident.

Decision

The Tribunal ruled in favour of the assessee.

It held that the provisions of Section 40(a)(i) are attracted only in a case of complete failure to deduct any TDS whatsoever.
The section does not apply to cases where there has been a short deduction of tax (i.e., tax was deducted, but at a rate lower than what the AO thinks is correct).
For cases of short deduction, the remedy for the department lies in recovering the shortfall of tax from the assessee under other provisions (like Section 201), but a disallowance of the underlying business expenditure itself cannot be made under Section 40(a)(i).

Key Takeways

A Clear Distinction: There is a critical legal difference between “non-deduction” of tax (deducting zero) and “short deduction” of tax (deducting some, but less than the required amount).
The Scope of Section 40(a)(i): The harsh penalty of disallowing the entire expenditure under Section 40(a)(i) is a deterrent meant to be used against taxpayers who completely fail to comply with their TDS obligations. It is not intended for situations where the assessee has complied, even if there is a dispute about the correct rate of tax.
Alternative Remedy for Revenue: In cases of short deduction, the department is not left without a remedy. They can initiate proceedings under Section 201 to recover the short-deducted tax along with interest from the person who was responsible for deducting it.

IN THE ITAT DELHI BENCH ‘E’

ACIT

Nuwave E Solutions (P.) Ltd.

Sudhir Kumar, Judicial Member
and Manish Agarwal, Accountant Member

IT Appeal No.3676 (Delhi) of 2011
[Assessment year 2007-08]

SEPTEMBER 12, 2025

Pravin Rawal, CIT DR for the Appellant. Somil Agarwal, Deepesh Garg, Dr. Rakesh Gutpa, Advs. and Saksham Agarwal, CA for the Respondent.

ORDER

Manish Agarwal, Accountant Member.- The captioned appeal is filed by the Revenue against the order dated 15.03.2011 passed by Ld. Commissioner of Income Tax (Appeal)-XVI, New Delhi [“CIT(A)”, in short] passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 31.12.2010 passed u/s 143(3) of the Act pertaining to Assessment Year 2007-08.

2. Brief facts of the case are that assessee is a company and efiled its return of income on 30.08.2007, declaring total income of INR 1,45,48,453/-. The said return was revised on 20.08.2008, declaring the same income as was declared the return of income filed u/s 139(1). The case of the assessee was selected for scrutiny and various queries were raised which were replied by the assessee. The assessee is engaged in the business of development and export of software and 100% EOU registered with Director Software Technology Park of India in terms of registration certificate dated 31.03.1999. The major shareholder in the assessee company is Shri Anil Gutpa who is having 99% shareholding and is taking substantial interest in day-to-day affairs of the assessee and also in its Associate Enterprises (“AE”) at US who is the sole buyer of the software developed by the assessee.

3. During the year under appeal, assessee has shown net profit @ 80% and claimed deduction u/s 10A of the Act. The AO based on the Schedule 12 to the financial accounts wherein INR 49,33,50,421/- was shown as “Arbitration Award” held that this award is not the software sales and excluded the same from the claim of exemption u/s 10A of the Act and further, denied the exemption u/s 10A of the Act on the gain on account of currency fluctuation of INR 1,23,33,934/- by holding the same being not earned from the eligible business.

4. Besides this, AO made the disallowance of INR 3,55,47,260/-by invoking the provision of section 40(a)(ia) of the Act as the assessee has deducted 10% TDS on buy back of shares which as per AO should be 20%. Thus, he made the disallowance of the proportionate payment without TDS. Accordingly, the total income of the assessee was assessed at INR 49,74,14,740/-.

5. Against the said order, assessee preferred appeal before Ld.CIT(A) who vide impugned order dated 15.03.2011, after providing the opportunities to the assessee and to the AO on his request, had allowed the appeal of the assessee wherein the additions made as well as disallowance made were deleted.

6. Aggrieved by the said order of Ld.CIT(A), Revenue is in appeal before the Tribunal wherein Revenue has taken following grounds of appeal :-

“That on the facts and circumstances and in law, the Ld. CIT(A) erred in accepting the assessee’s explanation that arbitration award of Rs. 43.49 crores was in the nature of sale of source code of software and not arbitration award without any evidence. The Ld. CIT(A) accepted the assessee’s explanation that there was a “Typographical Error” in the accounts. The CIT(A) failed to note that in “Notes to Accounts” of the Balance Sheet for the period pertaining to A.Y. 2007-08 and also earlier A.Y. 2006-07, this was specifically disclosed by the Auditor of the firm.

The Ld. CIT(A) failed to appreciate that arbitration award was not eligible income for claiming exemption u/s. 10A of the I.T. Act.

Without prejudice to the fact that Rs. 43.49 crores was in the nature of arbitration award and hence, not eligible for deduction u/s/10A, the Ld. CIT(A) even while holding Rs. 43.49 crores was sale of source code erred in allowing exemption on receipts arising on account of sale of source code of software developed over a period of time, ignoring the fact that sale of source code represents parting of long-term capital gains and as such, not entitled for exemption u/s. 10A.

Alternate Plea

(a)

That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that extraordinary percentage of NP ratio of 87% was on account of sale of source code of software developed over a period of time despite there being no evidence.

(b)

The Ld. CIT(A) has grossly erred in accepting an extraordinarily high NP ratio of 87% (particularly where 100% profits are claimed exempt) against the provisions of Sub-section 10 of Section 801A when the assessee had failed to prove by adducing necessary evidence that the sale proceeds of alleged source code and the income therefrom were eligible for deduction u/s. 10A.

(c)

That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that invoking of Section 10A(7), for allocating the cost of services rendered by Dr. Anil Gupta was without sufficient evidence despite there being extraordinary percentage of NP ratio of 87%. Dr. Anil Gupta happens to be major shareholder of the company (99%) and proprietor of CAE Solution, USA to which entire sales are being made.

(d)

Was the Ld. CIT(A) justified in allowing extraordinary amount of deduct ion of Rs. 43.49 crores without the assessee discharging the onus that the profit so claimed were genuine and not extraordinary giving assessee all the benefits of doubt. when the onus was fully & squared on the assessee to prove that the extraordinary profits were genuine & eligible for deduction u/s. 10A.

That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that foreign exchange fluctuation gain is a business receipts and eligible for exemption u/s. 10A.

That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by the AO on the basis of the TDS deducted by the assessee on buy back of shares from Dr. Anil Gupta @10% instead of applicable TDS rate on long-term capital gain @20% under Section 40(a) (i) read with Section 195 of the Act and not appreciating that the nature of income in the hands of Dr. Anil Gupta, NRI.

The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.”

7. Ground of appeal Nos.1 to 4 raised by the Revenue are with respect to the addition of INR 43.49 crores by denying the exemption claimed u/s 10A of the Act on this amount by alleging that the assessee itself had shown the same as “Arbitration Award” in the final accounts and thus it is not the sale of software. Further in Ground of appeal No.4 assessee challenged the observations that the assessee has shown extra ordinary profit rate of 87% to claim higher amount as exempt and consequent profits in the hands of the AEs were shown at a lower rate.

8. Since all these grounds are inter-linked and inter-related, they are taken together for consideration.

9. Before us, Ld.CIT DR for the Revenue submits that the assessee has shown an amount of INR 43.49 crores as “Arbitration Award” in Schedule 12 of the Financial Statements which is reproduced by AO at page 6 of assessment order wherein under the title “transaction with related party,” sale of software was shown at INR 12,86,24,629/- and “Arbitration Award” at INR 43,49,83,092/-. Ld. CIT DR submits that claim of the assessee that it is a “typographical error” cannot be accepted as no evidences were filed in support of the claim. Further, if the amount of “Arbitration Award” is reduced from the amount of net profit, the resultant net profit reduced to 12.59% only as against 87% shown by including the same as part of the gross receipts and net profits. Ld. CIT DR further submits that the assessee is making 100% export to only one concern namely M/s CAE Solutions Corp., USA whose proprietor is Shri Anil Gupta who is having 99% shareholding in the assessee’s company and thus such entity is Associate Enterprises of the assessee. He submits that assessee has not paid any remuneration whatsoever with respect to the services rendered by Shri Anil Gupta which clearly proved that by not recording any expenses on account of services rendered by Shri Anil Gupta, the assessee had tried to inflate its profits. Ld.CIT DR further submits that during the year under appeal, assessee company has buy back its 471 equity shares and paid a sum of INR 7,10,94,521/- which incidentally were bought from Shri Anil Gupta thus, by doing so, assessee has transferred its tax free income in the hands of Shri Anil Gupta which further proves that it is a device developed to transfer the profits on which exemption was claimed in the hands of the assessee company to Shri Anil Gupta. Ld.CIT DR further placed reliance on the submissions made in this regard which reads as under:-

Chronology of events

•

Assessment order u/ s 143(3) was passed on 31.12.2010.

•

CIT(A) deleted all the additions made by AO vide his order dt. 15.03.2011.

•

Revenue filed appeal on 29.07.2011 before ITAT and assessee filed cross-objections on 11.09.2011.

•

In the meantime, notice u/s 147/148 dt.29.03.2012 was issued to assessee for AY 2007-08 and against this, assessee filed writ petition dt.29.10.2013 and in turn, Hon’ble HC quashed the re-assessment notice.

•

CIT passed order dt. 28.03.2013 u/s 263, setting aside the original assessment order u/s 143(3), directing for fresh assessment.

•

Thereafter, the assessment was completed u/s 263/143(3) vide order dt.31.03.2014, withdrawing the exemption of Rs.5,79,07,329/- claimed u/s 10A which was earlier allowed in original assessment order, holding that assessee failed to discharge its onus of proving its claim for deduction u/s 10A.

•

However, ITAT Delhi Bench set aside the said order passed u/s 263 vide order dt 27.12.2018.

•

Further, Delhi HC vide order 27.02.2024 dismissed the appeal of revenue (ITA 171/2022)against above-mentioned order of ITAT Delhi on the ground that there is no substantial question of law raised.

Additions made by A.O. and findings thereof:

1. Exemption claimed u/s 10A for arbitration award i.e. Rs.43,49,83,092/-withdrawn

•

Assessee submitted that it has passed on source code of software so developed over a period of time during last 7 to 8 years to its clients. No supportive document/agreement was provided. (Para 4.12, Pg 5)

•

As disclosed in para 10 of schedule 12 of financial statements under transactions with related party i.e. CAE Solution Inc., sale of software amounts to Rs. 12,86,24,629/- & Arbitration Award amounts to Rs.43,49,83,092/-(Para 4.14, Pg 5-6)

•

Computing NP ratio after deducting amount of arbitration award (which is not sale/export of software and thus, would not qualify for exemption u/s 10A) from declared NP of Rs.50.59 crore, NP ratio comes at 12.59% which is very much comparable with NP ratio declared in preceding years. It shows that the assessee has deliberately tried to present incorrect facts of export turnover to avoid tax liability. (Para 4.15 & 4.16, Pg 6)

•

Assessee did not file the balance sheet and P&L A/c of CAE Solutions Inc., USA. Looking at the close connection between the 2 entities, it appeared that assessee was showing entire profit in Indian company and claiming it to be exempt.(Para 4.11, Pg 4-5)

•

It was also observed that Mr. Anil Gupta does all the marketing at USA and gives his entire inputs for development of software without any consideration. (Pg 5)

•

In view of the foregoing, exemption claimed u/s 10A for arbitration award of Rs.43,49,83,092/- was withdrawn by AO. (Pg 6).

Findings of CIT(A)

•

AO has accepted NP of 80% in immediately preceding year i.e. AY 06-07 without any adverse finding. (Pg 23)

•

No transfer pricing adjustment was made by TPO. (Pg 23)

•

No defect in the valuation report of sharesdt.01.12.06 was pointed out by AO. (Pg 24) “Arbitration Award” as mentioned in notes to accounts is on account of “typographical error” which is also proved by perusal of all the documents filed by assessee, report of TPO and report u/s 10A from auditors filed along with the return of assessee. (Pg 31)

•

Arbitration award represents value of source code supplied by company to its associate enterprise and source code is nothing but part and parcel of computer software as defined in Sec 10A. (Pg 32)

•

AO disallowed the deduction without any corroborative evidence. (Pg 33)

Conclusion:

Decision of CIT(A),deleting the disallowance of deduction claimed u/s 10A of Rs. 43,49,83,092/-, is perverse since:

•

The said amount represents “arbitration award” which the assessee has disclosed itself in the notes to accounts and as such, the same cannot be interpreted as a mere “typographical error” in the accounts.

•

No amount against item “arbitration award” is shown in immediately preceding year i.e. AY 2006-07 and thus, contention of CIT(A) that NP ratio of 80% was admitted by AO in AY 2006-07 without any adverse finding lacks the similarity of the facts in both the years and thus, equating the year under consideration i.e. AY 2007-08 with AY 2006-07 is not tenable.

•

Further, even if the arbitration award is treated as sale of source code of software developed over a period of time, the same should not be allowed as deduction u/s 10A as sale of source code represents parting of long-term capital gains and as such, not entitled for exemption u/s 10A.

10. On the other hand, Ld.AR for the assessee vehemently supported the order of Ld.CIT(A) and submits that during the course of assessment proceedings, AO has never asked any questions about the “Arbitration Award” shown in Profit & Loss Account. He further submits that during the course of appellate proceedings on the request of the AO, the opportunity of hearing was provided by Ld.CIT(A) to the AO and a detailed submission was made by the AO on the submissions filed by the assessee. Ld. Ar further submits that assessee had filed rebuttal to the AO’s observations made during the appellate proceedings. All these submissions are reproduced in para 3. 7 of the appellate order. He further submits that Ld. CIT(A) after considering these facts, deleted the additions and further allowed the exemption u/s 10A on the entire profits declared by the assessee. He further placed reliance on the submissions made before us which reads as under:-

10.1. In the last, it is prayed by ld. AR that Ld. CIT(A) has rightly deleted the additions which order deserves to be uphold.

11. Heard the contentions of both the parties and perused the material available on record. From the series of events submitted by Ld. CIT DR, it is seen that in the instant case, issue of exemption u/s 10A was raised by Ld. Pr.CIT in the order passed u/s 263 dated 28.03.2013 which was quashed by the Co-ordinate Bench of Tribunal and further appeal of the Revenue against the said order was dismissed by the Jurisdictional High Court vide its order dated 27.02.2024 in Pr. CIT v. Nuwave E Solutions (P.) Ltd. [ITA No.171 of 2022].

12. Further the assessment for preceding assessment years were completed u/s 143(3) where in AY 2005-06, the assessee has shown net profit margin of 12% and in AY 2006-07, the net profit margin of 80% was declared by the assessee. The revenue had accepted such a sharp increase in the profit margin in the order passed u/s 143(3) of the Act and never doubted the claim of exemption u/s 10A by the assessee. Once the substantial increase in profits from 12% to 80% stood accepted without raising any doubts about the net profit margin achieved by assessee and claimed of exemption u/s 10A on such profits, in the instant year when there were no change in the circumstances neither the nature of business was changed nor the customer is changed and 100% export is made to the same party then increase in net profit from 80% to 87% cannot be questioned solely for the reason that buyer is a controlled party which fact as discussed above, was existed in preceding year also. It is further seen that a reference was made to TPO for determination of ALP of the transactions with AE however, neither in preceding years nor in the year under appeal, TPO has proposed any adjustments and the sales price declared was accepted. These facts were admitted by the AO in his order.

13. Shri Anil Gupta is the largest shareholder of the assessee company and also the proprietor of buyer company. This fcat does not make any difference with respect to sale price charged and development of software at the end of the assessee company where the development was done with the team of experts to whom sufficient salaries as per their job profile were paid and were never doubted by the Revenue. Merely because Shri Anil Gupta had not been compensated for the services rendered, it cannot be said that such arrangement was made to disclose higher profits by the assessee company to claim higher exemption. It is further observed by us that AO has not placed any material on record to hold that sum of INR 25 crores is reasonable compensation to Shri Anil Gupta towards the services rendered by him. It appears that such observations are solely made on conjectures and surmises. Moreover, this observation had not been applied to the computation of income and simply an alternate remarks was given by the AO which are directed to be excluded as have no impact when these observations were made without any supporting material.

14. It is further seen that all the objections raised by the AO have duly been rebutted by the assessee and were appreciated by Ld.CIT(A) in its order. As observed above, it is further seen that the assessee has claimed that there was a “typographical error” due to which sale of software was wrongly classified as “Arbitration Award” in the final accounts and assessee has been successfully demonstrated that it was a typographical error by filing necessary details such as CA certificate in Form 3CEB certifying export turnover, Form 56F i.e. report for claiming exemption u/s 10A of the Act confirming the export turnover of INR 56,36,07,721/-, copy of SOFTEX form filed and accepted by STPI confirming the sale of software, copy of FIRC duly confirming the advance received against the export sales and most important fact that in the order passed by TPO u/s 92CA, export turnover of software of INR 56,36,07,721/- was accepted by the TPO thus now raising doubts by the AO is contrary to the accepted fact by TPO.

15. All these facts, leads to believe that there was a typographical error wherein sale of software was inadvertently stated as “Arbitration Award”. It is also a matter of fact that on one hand, AO has alleged the higher profit when he tried to establish that assessee has claimed excess exemption u/s 10A where AO himself computed the margin of net profits by taking the export turnover at INR 56,36,07,721/-and further in para 4.15 while computing the net profit after reducing the profit of “Arbitration Award”, the AO has not reduced the amount of “Arbitration Award” from the gross export turnover. This clearly shows the bias and contrary approach taken by the AO who at one place too the gross export turnover at INR 56,36,07,721/- and at a later stage himself has treated the part of such turnover as “Arbitration Award” not eligible for exemption u/s 10A of the Act.

16. In view of the above facts and discussion made and further looking to the facts that Revenue has failed to controvert the findings given by Ld. CIT(A) who after appreciating all these facts has deleted the addition made by AO, thus we find no reason to infirmity in the order of Ld. CIT(A). Accordingly, order of Ld. CIT(A) on this issue is upheld. The grounds of appeal Nos. 1 to 4 raised by the Revenue are dismissed.

17. Ground of appeal No.5 is with respect to the deletion of action of the AO in holding the foreign exchange fluctuation as non business receipt and denied the exemption u/s 10A of the Act.

18. Before us, Ld.CIT DR vehemently supported the orders of the AO and submits that foreign exchange fluctuation gain is postexport funds and should not be clubbed with export turnover. He further submits that it is not a profit earned from the export and therefore, cannot be treated as part of export turnover. He thus, prayed for exclusion of the same from the eligible profit for claiming exemption u/s 10A of the Act.

19. On the other hand, Ld. AR vehemently supports the order of Ld. CIT(A) and submits that assessee has gained from foreign exchange fluctuation which is in the regular course of business of export software. Ld.AR further submits that in preceding assessment years, the gain on foreign exchange fluctuation was treated by AO himself as income from export of software eligible for exemption u/s 10A of the Act. Thus, by following the principle of consistency, the same deserves to be held as income from export of turnover in the year under appeal also. He further placed reliance on the submissions made before Ld.CIT(A) in this regard as reproduced in para 4.2 of Ld. CIT(A)’s order which is reproduced herein below for sake of clarity:-

4.2. “The AR of the appellant during the course of appellate proceedings further filed written submissions, the same are reproduced below:-“Ld. AO disallowed the exemption w/s 10A to the extent of Rs. 1,23,33,934/- in respect of foreign exchange fluctuation gain on the ground that gain on account of forex rate fluctuation cannot be considered as profit derived from export as these being the result of post export events or scenario. Further the Ld. A.O. relying upon the decision of Supreme Court Pandian Chemicals v/s. CIT (2003) ITR 278 has alleged that the same cannot be said to have been derived from basic and core activity of export.

It is respectfully submitted that the appellant company is in the business of export of software and is eligible to claim exemption u/s 10A which has been accepted by Ld. AO also in the year under appeal and in earlier years.

During the year under review, the appellant company earned foreign exchange gain amounting to Rs. 1,23,33,934/- on realization of various export invoices as per detail annexed at (PB 330). The appellant company through oversight while filing its original I.T. Return did not include this figure into gross sales credited to Profit & Loss Account. However, while finalizing the balance sheet for the subsequent financial year ended on 31.03.2008, the appellant company realized its mistake and accordingly revised the return alongwith letter dated 23.08.2008 copy at (PB 26) treating the same as part and parcel of net profit derived from export of computer software and claimed deduction u/s 10A of the Act. It goes without saying that the revised return of income stood accepted by Ld. AO and that being so, there was no occasion for Ld. AO to deny the benefit of impugned foreign exchange gain.

As per provisions of sub-section (4) of section 10A which reads as under-

(4) For the purposes of sub-sections (1) and (1A) the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the under taking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking” Therefore, u/s 10A deduction of profit & gain derived by an undertaking from export of articles or things or computer software is admissible. The Hon’ble Supreme Court in the case of Pandian Chemicals (supra) has define the word “derived from” in section 80 HH of the 1.T. Act must be understood as something which has direct or immediate nexus with assessee’s industrial undertaking. The Hon’ble ITAT Mumbai Bench in the case of Renaissance Jewellery P. Ltd. v. ITO [2007] 289 ITR (AT) 65 (Mum) has held that the crucial words “derived from” there is hardly any material difference between the legal requirements of section 80HH and section 10A.

During the year under review, the appellant booked export sales on the basis of a prevailing rate of exchange on the date of invoices. However, later on it realized a different sum in Indian rupees as sale proceeds as per detail at (PB 330), the net excess or the shortfall is booked as foreign exchange gain as it is does not have a different character from the export turnover and it is also part of export profits.

In the case of C IT v/s. Sony India Pvt. Ltd. [2009] 315 ITR (A.T.) 0150-[ITAT-Delhi] relying upon DCIT v/s. K. K. Doshi and Co. [2000] 245 ITR 849 (Bom) held Any profit or loss as a result of foreign exchange fluctuation ultimately goes to increase or reduce the figure of export turnover recorded initially by the assessee in its books of account. The basic character of receipt on account of foreign exchange thus remains the same. Therefore income from foreign currency fluctuation is part of export turnover and is a sort of additional sales price. Therefore foreign exchange gain is includible in the profits eligible for deduction under section 104/10B of the Act. Further reliance can be placed on the following judicial pronouncements:-

(a) Smt. Sujatha Grover v. Deputy CIT (2002) 74 TTJ 347 (Delhi)

(b) Priyanka Gems v. Asst. CIT [2005] 94 TTJ 557 (And)

(c) CIT v. Rane (Madras) Ltd. [1999] 238 ITR 377 (Mad), where even a forward contract in foreign exchange, which had nexus with the export of goods could be treated as relating to the activity eligible for deduction in the context of sections 80E and 80-I.

In fact, the case of the appellant is also covered by the decision of Hon’ble Supreme Court in the case of CIT v/s. Woodward Governor P Ltd312 ITR 254 (SC).

It is pertinent to mention here that gain on account of foreign exchange during A.Y. 2006-07 has been accepted as export profit u/s 143(3) of the Act. Copy of I.T. Assessment for the A.Y. 2006-07 and profit & loss account as on 31.03.2006 are enclosed at (PB 101-113 & 99) respectively.

Therefore, it is prayed that deduction w/s 104 on account of foreign exchange gain as claimed by the assessee in the revised return may please be allowed.”

20. Heard the contentions of both the parties and perused the material available on record. From the perusal of the order of Ld.CIT(A), it is seen that Ld.CIT(A) based his findings that foreign exchange fluctuation gain is income from software export and eligible for exemption u/s 10A by placing reliance on various judgements including the judgements of Hon’ble Supreme Court in the case of CIT v. Woodward Governor (P.) Ltd. 312 ITR 254 (SC) and further ton he decision of coordinate bench of Tribunal in the case of CIT v. Sony India Pvt. Ltd. [2009] 315 ITR (A.T.) 0150-[ITAT-Delhi). The relevant observations of Ld. CIT(A) in para 4.3 are as under:-

4.3. “I have considered the assessment order, written submissions filed by the counsel and judicial pronouncements as relied upon. Admittedly, the appellant being in the business of export of software is eligible to claim exemption u/s 10A. Whenever, the exports are made, the invoices are raised in USD and booked into the financial books in INR at the rate prevailing as on date of invoice. However, as the export invoices are realized subsequently at a different price due to change in exchange rate of USD, net excess or short fall has been booked by the assessee as foreign exchange gain. The assessee has filed detailed calculation of foreign exchange gain realized by it. The A.O. in the assessment order has observed that any gain or loss on account of fluctuation in foreign exchange rate is post export event and not out of the core activity of export. The contention of the A.O. is not sustainable under the law as the profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee.

Such profits are, therefore, in the same nature as the sale proceeds and there is no reason why deduction under section 10A should not be allowed in respect of such exchange gain. Reliance is placed on the following judicial pronouncements:-

•

CIT v/s. Woodward Governor P Ltd.312 ITR 254 (SC). (SC)

•

CIT v/s. Sony India Pvt. Ltd. [2009] 315 ITR (A. T.) 0150- [ITAT-Delhi)

•

Renaissance Jewellery P. Ltd. v. ITO [2007] 289 ITR (AT) 65 (Mum)

•

Priyanka Gems v. Asst. CIT [2005] 94 TTJ 557 (Ahd)

•

Smt. Sujatha Grover v. Deputy CIT [2002] 74 TTJ 347 (Delhi)

•

DCIT v/s. K. K. Doshi and Co. [2000] 245 ITR 849 (Bom)

•

CIT v. Rane (Madras) Ltd. [1999] 238 ITR 377 (Mad).

The

appellant succeeds on these grounds of appeal.”

21. From the perusal of the order of Ld.CIT(A), it is seen that Ld.CIT(A) observed that gains from foreign exchange fluctuations is directly relatable to the article and things exported by the assessee where the payments were received in convertible foreign exchange and due to timing difference, fluctuation gains earned by the assessee. It is also seen that in preceding assessment years, revenue has accepted foreign exchange fluctuation gain of identical nature as profit derived from the business eligible for exemption u/s 10A od the Act thus, by following the principle of consistency also, we find no error in the order of Ld.CIT(A) who has rightly held the foreign exchange fluctuation gain as income derived from export of software.

22. In view of the above facts and discussion made, we uphold the order of Ld.CIT(A) on this issue. Accordingly, Ground of appeal No. 5 raised by the Revenue is dismissed.

23. Ground of appeal No.6 raised by the Revenue is with respect to the deletion of addition of INR 3,55,47,260/- by invoking the provision of section 40(a)(ia) of the Act.

24. Heard the contentions of both the parties and perused the material available on record. At the outset, admittedly assessee has deducted tax at source @ 10% on the payments made to Shri Anil Gupta on the payment made at the time of buy back of his shares. The AO’s allegation is that as per section 195 of the Act, 20% TDS was to be made and accordingly, he made the proportionate disallowance of 50% of the amount paid on buy back of the shares. We find that Ld.CIT(A) while deleting the disallowance, has observed that provision of section 40(a)(ia) of the Act are applicable only when the amount on which tax is to be deducted is claimed as expenditure in the Profit & Loss Account. Admittedly, assessee has never claimed any such expenditure for the amount paid on buy back of its shares and the amount paid was reduced from the Reserves and Surplus therefore, provision of section 40(a)(ia) of the Act is not applicable to the facts of the present case. Moreover, once the assessee has deducted the tax at source though at a lower rate, the due compliances has been made to satisfy the condition of section 40(a)(ia) which provide TDS should be made at the time of any payment of expenditure. Therefore, the provision of section 40(a)(ia) could not be invoked for making disallowances where even short deduction is made. This view is supported by the judgement of Hon’ble Rajasthan High Court in the case of CIT v. M.C.Sharma Associates wherein the Hon’ble High Court has confirmed the order of the Co-ordinate bench of ITAT under identical circumstances.

25. As in the instant case, the assessee has deducted the tax @ 10% therefore, the compliance has been made. The Hon’ble Kolkata High Court in the case of CIT v. S. K. Tekriwal 361 ITR 432 (Calcutta) held that in case of lower deduction, provision of section n 40(a)(ia) are not attracted. In view of above facts and by respectfully following the judgement of Hon’ble Rajasthan High Court and Hon’ble Kolkata High Court in the cases referred herein above, we are not inclined to interfere in the order of ld. CIT(A) which is hereby upheld. Accordingly, Ground of appeal No.6 raised by the Revenue is dismissed.

26. In the result, appeal of the Revenue is dismissed.