2018 (2) TMI 1998 - AT - Income Tax

Tribunal Partially Allows Appeals: Affirms Deductions, Upholds Interest Levy, Dismisses Revenue's Appeals on Business Losses.

The tribunal allowed the assessee's appeals in part for assessment years 2005-06, 2007-08, and 2008-09, affirming the deduction under section 10B before ... Unabsorbed Depreciation u/s. 10B - assessee claimed deduction u/s 10B before setting off of brought forward unabsorbed depreciation allowances - HELD THAT:- This issue is squarely covered by the judgement of Supreme Court in the case of Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. Though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. - Decided in favour of assessee. Deduction of gains arising out of foreign exchange fluctuations u/s. 10B - AO excluded foreign exchange fluctuations from the business profits holding that the gains on transfer of funds between two accounts ie EEFC & PCFC in India is not on account of export receivables and hence it is to be treated as income from other sources - HELD THAT:- Assessing Officer has to see whether there is any premature cancellation of forward contract of foreign exchange and that transaction should be taken out for the purpose of considering the business loss and only the transactions which are completed to be considered for the purpose of determining the business loss from this foreign exchange forward contract and remitted the matter to Assessing Officer for fresh consideration. We are in agree with the proposition that the MTM loss on forward contracts is not contingent loss and it is a business loss to set off against the business income of assessee. However, the AO has to consider the transaction equivalent to the export turnover to determine the MTM loss and also if there is any premature cancellation of forward contract of foreign exchange, it shall be excluded to consider the business loss and these transactions are speculative transaction. With this observation, we remit the issue to the file of AO for fresh consideration. Levy of interest u/s 234B is mandatory. See ANJUM MH GHASWALA AND OTHERS [2001 (10) TMI 4 - SUPREME COURT]. Disallowance u/s. 14A r.w.r. 8D - CIT(A) held that invoking of Rule 8D by the AO is in order and directed the AO to examine whether the interest payment is for the loan obtained for specific purpose and not for investments - HELD THAT:- CIT(A) has applied the ratio in the case of Godrej Boyce Manufacturing Co. Ltd.[2010 (8) TMI 77 - BOMBAY HIGH COURT]. Further, his direction to the AO to verify whether the interest expenditure is related to the impugned investments being a fact finding exercise for applying the correct law, we do not find any infirmity in his order, supra. Thus, the assessee’s appeal grounds are dismissed. So also the grounds of appeal filed by the Revenue. Expenditure incurred in foreign currency - deduction u/s. 10B - CIT-A directed the AO to exclude them from both the export turnover as well as from the total turnover for computing the deduction u/s. 10B - HELD THAT:- the decisions rendered by the CIT(A) are based on the decisions of M/S. GEM PLUS JEWELLERY INDIA LTD. [2010 (6) TMI 65 - BOMBAY HIGH COURT] and Sak Soft Ltd [2009 (3) TMI 243 - ITAT MADRAS-D] they do not require any interference, so we do not find merit in the Revenue’s grounds and dismiss them. Disallowance of Mark-to-Market ‘MTM’ loss on forward contracts - AO held that the assessee failed to add back the provision for MTM losses on forward contracts which are contingent in nature and a provision created on such notional loss cannot be allowed and the profits of business should not include speculation loss - CIT(A) following his decision taken in order for AY 2009-10 [2016 (7) TMI 1051 - ITAT CHENNAI] remitted this issue to the AO holding that “MTM loss on forward contracts is not contingent loss and it is a business loss to set off against the business income of assessee - HELD THAT:- Since, the CIT(A) has applied the ratio laid by this tribunal in the assessee’s own case, we do not find any infirmity in the order of the CIT(A) and hence the corresponding grounds of the Revenue are dismissed. Issues Involved:1. Unabsorbed Depreciation u/s 10B2. Deduction of gains arising out of foreign exchange fluctuations u/s 10B3. Levy of interest u/s 234B4. Disallowance u/s 14A5. Expenditure incurred in foreign currency: deduction u/s 10B6. Disallowance of Mark-to-Market (MTM) loss on forward contractsIssue-wise Detailed Analysis:1. Unabsorbed Depreciation u/s 10B:The assessee claimed deduction under section 10B before setting off brought forward unabsorbed depreciation allowances for assessment years 2001-02 and 2001-03. The Assessing Officer (AO) set off the unabsorbed depreciation against current year profits before computing the deduction under section 10B, relying on the Karnataka High Court decision in CIT Vs Himatasingike Saide Ltd. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, despite referencing the Supreme Court decision in CIT vs Yokogawa India Ltd, which the assessee argued should allow the deduction under section 10B before adjusting unabsorbed depreciation. The tribunal, following the Supreme Court's decision in CIT v. Yokogawa India Ltd, held that the deduction under section 10B should be computed prior to setting off unabsorbed depreciation, thus allowing the assessee's appeal.2. Deduction of Gains Arising Out of Foreign Exchange Fluctuations u/s 10B:The AO excluded gains from foreign exchange fluctuations from business profits, treating them as income from other sources. The CIT(A) upheld this decision, citing no nexus between the income and the undertaking. The assessee argued that such gains should be considered as derived from export business. The tribunal, referencing decisions from the Karnataka High Court and ITAT Delhi, remitted the issue to the AO for fresh consideration, directing that gains from foreign exchange fluctuations should be included in export turnover and total turnover for the purposes of section 10B deduction.3. Levy of Interest u/s 234B:The AO levied interest under section 234B for assessment years 2005-06 and 2007-08. The CIT(A), following the Supreme Court decision in CIT vs Anjum M.H. Ghaswala, held that the levy of interest is mandatory. The tribunal found no infirmity in the CIT(A)'s orders and dismissed the assessee's appeals on this ground.4. Disallowance u/s 14A:The AO disallowed interest under Rule 8D, finding that the assessee had investments in tax-free territories. The CIT(A) upheld the AO's application of Rule 8D but directed the AO to verify if the interest payment was for loans obtained for specific purposes and not for investments. The tribunal found no infirmity in the CIT(A)'s order, which applied the ratio in Godrej Boyce Manufacturing Co. Ltd., and dismissed both the assessee's and the Revenue's appeals.5. Expenditure Incurred in Foreign Currency: Deduction u/s 10B:The AO excluded expenditure incurred for freight/telecom charges in foreign currency from export turnover and included it in total turnover for computing section 10B deduction. The CIT(A), following decisions from the Mumbai High Court and ITAT Special Bench, directed the AO to exclude such expenditure from both export turnover and total turnover. The tribunal upheld the CIT(A)'s decisions, dismissing the Revenue's appeals.6. Disallowance of Mark-to-Market (MTM) Loss on Forward Contracts:The AO disallowed MTM losses on forward contracts, considering them contingent and speculative. The CIT(A), following his decision for the previous assessment year upheld by the tribunal, remitted the issue to the AO, directing that MTM loss on forward contracts be treated as business loss, subject to verification. The tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal.Conclusion:The assessee's appeals for assessment years 2005-06, 2007-08, and 2008-09 were partly allowed, while the Revenue's appeals for assessment years 2007-08 and 2008-09 were dismissed. The order was pronounced on February 13, 2018, in Chennai.