Relief to Tech Mahindra: ITAT directs AO to allow Income Tax Deduction on Foreign Exchange Gain [Read Order]

Tech Mahindra - ITAT - AO - deduction on foreign exchange gain - Taxscan

In a major relief to Tech Mahindra, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench directed the Assessing Officer to allow deduction on foreign exchange gain.

The assessee, Tech Mahindra Business Services Ltd. has included interest earned on bank guarantee and fixed deposit amounting to Rs.1,44,03,437/- in the profits of the business and has claimed deduction under section 10A of the Act thereon. The AO being of the view that interest income being assessable under the head ‘Income from other sources; hence, cannot be treated as business income and further, observing that it has no connection with the business income, the assessing officer disallowed the deduction claimed under section 10A of the Act on the interest income.

Further, he noticed that the assessee has included an amount of Rs.4,86,061/- towards foreign exchange gain for the purpose of computing deduction under section 10A of the Act. Being of the view that gain derived from fluctuation in the rate of foreign exchange deposit in EEFC account arises after completion of the export activity and does not have any direct nexus with the export transaction, disallowed assessee’s claim of deduction under section 10A of the Act. Though, the assessee contested the aforesaid decision of the assessing officer before DRP, however, the assessee was unsuccessful.

J. D. Mistri, senior counsel appearing for the assessee submitted, the assessee has earned the interest income from the deposit made towards bank guarantee and temporarily parking of surplus funds in fixed deposit. He submitted, since the assessee has earned such interest income in course of business, it is eligible for deduction under section 10A of the Act.

As regards deduction claimed in respect of foreign exchange gain, the learned counsel submitted, since the assessee derives income only from its 10A unit which is engaged in export activity, it has outstanding overseas creditors as on the last day of the financial year. He submitted the assessee operates an EEFC account with a bank in India wherein the assessee is permitted to maintain balance and undertake transactions in foreign currency. He submitted such an account to facilitate receipt of export proceeds and payments of import payable in foreign currency, without there being any need to convert the same into Indian currency. He submitted, as per accounting standard-11, it is mandatory for a company to re-instate its foreign currency mandatory items such as debtors, creditors, cash and bank balances, etc., to the rate of exchange prevailing as of 31st March of each year.

The coram headed by Vice President Pramod Kumar and Saktijit Dey observed that the deposits on which the assessee had earned interest income were on account of its business activity. There cannot be any doubt that deposits made towards bank guarantees are purely in connection with its business activity. As far as the interest on fixed deposit is concerned, it is an accepted factual position that the surplus fund available with the assessee and not immediately required for business was temporarily invested in fixed deposit. Thus, this activity of parking surplus funds in the fixed deposit has to be construed to be in the course of its regular business activity.

The ITAT held that the assessee is eligible to claim deduction under section 10A of the Act in respect of the interest income.

Subscribe Taxscan Premium to view the Judgment

Support our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.

taxscan-loader