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 setting off unabsorbed depreciation and remitting the issue of foreign exchange gains for fresh consideration. It upheld the CIT(A)'s decisions on interest levy under section 234B, disallowance under section 14A, and treatment of foreign currency expenditure under section 10B. The tribunal dismissed the Revenue's appeals for assessment years 2007-08 and 2008-09, confirming the treatment of Mark-to-Market losses as business losses. The decision was rendered in Chennai on February 13, 2018.

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Issues Involved:
1. Unabsorbed Depreciation u/s 10B
2. Deduction of gains arising out of foreign exchange fluctuations u/s 10B
3. Levy of interest u/s 234B
4. Disallowance u/s 14A
5. Expenditure incurred in foreign currency: deduction u/s 10B
6. Disallowance of Mark-to-Market (MTM) loss on forward contracts

Issue-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.

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