Whether income derived from foreign exchange fluctuation gain can be classified as 'any other receipts of similar nature' so as to justify exclusion while computing deduction u/s 80HHF - NO: ITAT

THE issue before the Bench is - Whether income derived from foreign exchange fluctuation gain can be classified as 'any other receipts of similar nature' so as to justify exclusion while computing deduction u/s 80HHF. NO is the answer.

Facts of the case

The assessee-company is engaged in the business of producing customize software/programs for broadcasters like Star TV, BBC, Vijay Television etc. It had filed its return of income declaring total income at Rs.14,41,49,689/-. In this return deduction u/s 80HHF of Rs 12,01,29,653/- was claimed by the assessee. The case was selected for scrutiny and the assessment order u/s. 143(3) was completed on 28.02.2006, assessing the total income at Rs.26,55,52,542/-. In his order of assessment deduction u/s 80HHF was re-computed by the AO at Rs 12,06,49,803/-. Subsequently, AO reopened the assessment of assessee u/s. 147 by issuing notice u/s. 148 after recording reasons for the same. Assessee objected to the validity of initiation of proceedings u/s 147 vide written objections which were disposed of by the AO. Thereafter, vide reassessment order dated 24th December, 2010 AO reassessed the total income of the assessee at Rs.14,94,40,960/- after restricting the claim for deduction u/s 80HHF to Rs.11,48,38,379/- as against claim of Rs.12,01,29,653/- made by assessee in its return of income. AO held that the sales were credited to the profit and loss account as per the invoice amounts and the foreign exchange fluctuation gain was not a part of the sales. AO observed that as per Explanation (f) to sub-section (6) of section 80HHF, profit of the business was worked out after reducing 90% of any receipt by way of brokerage, commission, interest, rent, charges or any other receipts of the similar nature included in the profits and the foreign exchange fluctuation gain comes under "any other receipts of the similar nature" mentioned in the section itself. Hence, foreign exchange fluctuation gain will not form part of the export turnover and total turnover. AO thus, found that the assessee had wrongly computed the adjusted profit because the foreign exchange fluctuation gain was not included in other income and also the adjusted profit were wrongly calculated by not excluding 90% of foreign exchange fluctuation gains. AO, therefore, held that the assessee had failed to disclose fully and truly all material facts necessary for his assessment for the relevant AY. Therefore, AO formed the reason to believe that the income liable to tax has escaped assessment because of the excess deduction claimed by assessee and allowed by AO u/s. 80HHF in the original assessment proceedings u/s. 143(3). AO further reduced 90% of income derived from foreign exchange fluctuation gain from the figure of "profits of business" eligible for claiming benefit of deduction u/s 80HHF. Thus, AO worked out excess claim of deduction u/s. 80HHF amounting to Rs.52,91,274/- (Rs.12,01,29,653 – 11,48,38,379) and added the same back to the total income of the assessee vide reassessment order dated 24.12.2010 passed u/s. 147/143(3).

On appeal, CIT(A) dismissed the assessee's pleas raised on validity of re-assessment proceedings. It was observed that section 80HHF clearly provides that the deduction shall be allowed to the extent of profits referred to in sub-sec 1A derived by the assessee from the business of export or transfer of film software, television software, music software etc. Therefore, profits have to be derived from the eligible business of export of software. Thus, due regard must be had to the intendment of Parliament as evidenced by the language used in subsection (1) of section 80HHF. The statute contemplates a deduction where an assessee, being an Indian Company or a person resident in India, is engaged in the business of export out of India of any software to which the section applies. In such a case, the assessee is allowed, in computing the total income, a deduction to the extent of profits derived by the assessee from the export of eligible items. CIT(A) held that the foreign exchange fluctuation gain cannot be regarded as profits derived by the assessee from the export of eligible software items. It had, therefore, confirmed the reassessment order.

Invocation of revisionary powers u/s 263

The CIT, invoking his revisionary powers u/s 263 issued a show cause notice requiring the assessee to explain as to why the re-assessment order dated 24.12.2010 passed by AO may not be revised u/s. 263 and the claim of deduction u/s. 80HHF allowed may not be withdrawn, in as much as the AO failed to examine /verify the admissibility of deduction u/s. 80HHF amounting to Rs.11,48,38,379/-. CIT observed that AO failed to examine these issues which were very crucial for determination of the eligibility of deduction u/s. 80HHF. CIT, after going through clause 17 of the agreement dated 21.02.1997, further opined that since NTVI Pvt. Ltd. which was an Indian Company, was solely responsible for uplinking, transmission and distribution of the 24 hours news channel programme and that US $ 8.5 million had been received from NTVI Pvt. Ltd., the supply of programmes to NTVI Pvt. Ltd. or any other entity on their instructions by the assessee cannot be treated as export for the purposes of section 80HHF. It had further stated that there was difference of Rs.10,73,74,270/- between the declared export receipts from STAR TV and the amount received as per Bank certificates and therefore, if the excess export turnover receipts from STAR were excluded then the deduction u/s. 80HHF would work out to Rs.10,21,88,579/- instead of Rs.11,48,38,379/- as assessed by AO u/s. 147. CIT, therefore, observed that excess claim of Rs.1,26,49,799/- was allowed by the AO in the reassessment order only on this count. CIT after relying on various decisions finally held that AO had also erroneously allowed deduction u/s. 80HHF to the assessee. The matter was, therefore, set aside to the file of the AO for examination and verification afresh, holding the reassessment order as erroneous and prejudicial to the interest of Revenue.

Having heard the matter, the Tribunal held that,

Reassessment u/s 147

++ in the instant case, proceedings u/s 147 were initiated by the AO after expiry of four years from the end of relevant assessment year. The return of income itself the assessee had furnished sufficient material adequately disclosing the fact that it had claimed deduction u/s 80HHF on foreign exchange fluctuation gain of Rs.1,19,64,641/-. It is also matter of fact that during the course of original assessment proceedings the then AO himself recomputed the deduction u/s 80HHF to Rs.12,06,49,803/- as against the claim of Rs.12,01,29,653/- made by the Appellant in his return of income. This increase in deduction was allowed by the then AO owing to certain addition / disallowances made to the business income in his order under section 143(3). It is thus hard to comprehend that the AO framing the original assessment did not apply his mind to the computation of income and Form 10CCAI furnished along with the return of income. It is an established principle of law that if conscious application of mind is made to the relevant facts and material available while making the assessment and again a different or divergent view is taken, it would amount to nothing but change of opinion. In the instant case, the subsequent AO appears to have initiated reassessment proceedings on account of mere change of opinion. Moreover, we concur with the submissions of the AR that no new facts have come to the knowledge of the AO justifying assumption of jurisdiction after four years. Moreover, a bare reading of first proviso to section 147, shows that the law merely casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment. The duty of the assessee does not extend beyond the disclosure of all material facts necessary for his assessment. It is thereafter the duty of AO to properly apply the law thereto. Even if one presumes for a moment that in proceedings u/s 143(3) of the Act, the then AO did not properly appreciate the law that income from foreign exchange fluctuation is not derived from the activities of export then assumption of jurisdiction u/s 147 is unsustainable in the instant case in view of the decision of Delhi High Court in the case of Purolator India Ltd. 2011-TIOL-848-HC-DEL-IT;

++ as far as the objection as to the factum of export and issue relating to copyright being not disclosed by the assessee fully and truly, again we find no merit in the case of AO. During the course of proceedings u/s 143(3), the assessee had clearly declared the nature of business and items being exported by it. Since the above order of ITAT was passed on 31stMarch, 2008, the AO while recording of reasons on 31st March, 2010 could not have reasons to believe doubting factum of export. Law relating to change of opinion being not permissible for invoking proceedings u/s 147 is now well settled. Support in this regard can be derived from the decisions of SC in the case of CIT vs. Kelvinator of India 2010-TIOL-06-SC-IT-LB and the judgment of Delhi High Court in the case of Usha International Ltd. 2012-TIOL-764-HC-DEL-IT-LB. Moreover after initiating reassessment proceedings doubting factum of export the AO thereafter in the reassessment order has accepted the submission of assessee on this issue in para 3.4 and restricted his findings only on the issue of foreign exchange fluctuation gain. In view of the aforesaid discussion, we are of the considered opinion that the initiation of proceedings u/s 147 is bad in law and deserves to be quashed. The consequential addition made by AO, thus, has to be deleted on this count only. Accordingly, grounds Nos.1 to 2.2 are decided in favour of the appellant. Adverting to grounds Nos. 3 and 3.1 agitating the merits of addition, although no separate adjudication is required since the issue of validity of reassessment proceedings being without jurisdiction has been decided in favour of the appellant, however, since both the parties have advanced detailed submissions in this regard, we are inclined to answer the same also. It is now well settled principle that income derived from foreign exchange fluctuation gain is nothing but an accretion to the turnover of the appellant and, as such, forms part of export turnover and total turnover while computing deduction u/s 80HHF. Moreover, said income cannot be classified as "any other receipts of similar nature" so as to justify exclusion under explanation to the said section as done by the authorities below. Respectfully following the above precedents, we do not concur with the findings recorded by the authorities below on this issue. Per contra, the decisions relied upon by the CIT(A), being distinguishable on facts, are not found applicable to the case in hand. Accordingly, ground Nos. 3 & 3.1 are decided in favour of the assessee. In Ground No.4, the assessee has challenged the levy of interest u/s 234B & 234D of the Act. To this we direct the AO to allow consequential relief. As a result the appeal of the assessee deserves to be allowed;

Invocation of revisionary powers u/s 263

++ since in ITA No.1023/D/2013 we have held above that initiation of proceedings u/s 147 itself stood vitiated being without jurisdiction, in our view the CIT thus cannot invoke jurisdiction u/s 263 against such void or non-est order. Support in this regard is derived from the decision of ITAT, Lucknow Bench in the case of Inder Kumar Bachani (HUF) reported in 99 ITD 621 (Lucknow).This appeal therefore merits to be disposed of on this aspect itself. However, since elaborate arguments have been advanced before us we are inclined to render our opinion on merits of the appeal as well. Action u/s 263 has been initiated by the CIT in the instant case vide show cause notices dated 21st July, 2011 and 10th August, 2011. We find that on an identical issue action u/s 263 was initiated by the CIT in appellant's own case for A.Y. 2002-03 which was subject matter of dispute before this Court in ITA No. 2481/Del/2007. The ITAT vide order dated 31st March 2008 - 2008-TIOL-147-ITAT-DEL quashed the order of CIT holding that assumption of jurisdiction was bad in law. This order has now subsequently been approved by the Delhi High Court in judgment reported in 360 ITR 44(Del). The factual position as was prevalent in AY 2002-03, stands pari materia in the year under consideration also and an exhaustive enquiry into the claim for deduction u/s 80HHF was made by the AO during the course of original assessment proceedings u/s 143(3) and also during the course of proceedings u/s 143(3)/147;

++ this is clearly evident from submissions dated 20th January 2005 and 22nd February 2006 filed before AO during the course of proceedings u/s 143(3) and from submissions dated 12th November 2010 filed before AO during the course of proceedings u/s 147/143(3). The ratio propounded by Delhi High Court will thus apply with equal force to the year under consideration. From a perusal of the impugned order passed by CIT u/s 263 we find that all the allegations raised by the CIT, barring one, are similar to those levied by him in case of appellant for AY 2002-03. In the impugned order in para 9, the CIT has alleged that assessee has inflated export turnover by Rs 10.73 crores equivalent to USD 30,00,000. CIT also held that assessee has not furnished FIRC's to this extend. In our considered opinion assumption of jurisdiction u/s 263 cannot be sustained for the simple reason that no show cause notice was issued by CIT on this issue. We find that the show cause notices dated 21stJuly, 2011 and 10th August, 2011 issued by the CIT in the instant case do not put the assessee to show cause on this issue. Moreover we also find that in years 1997 and 1999 appellant had received advances from Star TV Hong Kong to the tune of USD 85,00,000. During the course of original assessment proceedings u/s 143(3) vide submissions dated 22nd February 2006, assessee had filed details as to how this advance was offered to tax going forward. Relevant details are also filed before us, which are placed at page 78 of the paper book. From a perusal of this it is seen that advance to the extent of USD 30,00,000 was offered to tax this year. Since adequate enquiries were conducted by the AO in original assessment proceedings hence even on merits also we find that the order of assessment u/s 147/143(3) cannot be termed as erroneous or prejudicial to the interest of revenue. In view of this discussion and respectfully following the decision of co-ordinate Bench and the decision of jurisdictional High Court in the case of assessee itself, we are of the considered view that the impugned order of CIT does not stand on sound footings. Accordingly, this appeal of the assessee also deserves to be allowed. In the result, both the appeals of the assessee are allowed.