Tribunal dismisses assessee's appeal, partly allows Revenue's appeal for statistical purposes. Judgment issued on 17th June 2016.

The Tribunal dismissed the appeal of the assessee and partly allowed the appeal of the Revenue for statistical purposes. The judgment was pronounced in the open court on 17th June 2016, at Chennai.

---

---

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Treatment of unabsorbed depreciation.
3. Marked to Market (MTM) losses on forward contracts.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The first issue pertains to the disallowance under Section 14A of the Income Tax Act. The assessee had investments in tax-free territories and claimed no expenditure towards operating and maintaining these investments. The Assessing Officer (AO) invoked Rule 8D and disallowed Rs. 15,23,543/-. The CIT(A) upheld the AO's decision, stating that the assessee did not provide sufficient details to demonstrate that no expenditure was incurred to earn exempt income. The CIT(A) also directed that current liabilities should not be eliminated when computing disallowance under Rule 8D(2)(ii). The Tribunal concluded that Rule 8D is applicable since the assessee could not convincingly demonstrate the use of own funds for investments yielding exempt income. It was clarified that total assets should include fixed assets after depreciation plus net current assets, considering the balance sheet prepared in the Straight Line Method. Thus, the assessee's ground was dismissed, and the Revenue's ground was partly allowed.

2. Treatment of Unabsorbed Depreciation:
The next issue involved the priority for deduction under Section 10B over the set-off of brought forward unabsorbed depreciation. The AO set off the brought forward losses first and then granted deduction under Section 10B, leading to the exhaustion of unabsorbed depreciation in preceding years. The Tribunal referenced the Supreme Court's judgment in the case of Himatsingka Seide, which held that unabsorbed depreciation must be adjusted against income for exemption under Section 10B. The Tribunal upheld the lower authorities' view and rejected the assessee's ground.

3. MTM Losses on Forward Contracts:
The third issue concerned the MTM losses on forward contracts, which the AO categorized as speculative and contingent, thus not allowable. The CIT(A) agreed with the AO, referencing CBDT Instruction No.3/2010, which categorized MTM losses as notional and speculative. The Tribunal, however, referenced the ITAT Bangalore's decision in Quality Engineering and Software Technologies Pvt. Ltd., which allowed MTM losses as business losses if they were linked to revenue items and not speculative in nature. The Tribunal emphasized that forward contracts for hedging against foreign exchange fluctuations are not speculative if they are linked to export proceeds. The Tribunal directed the AO to consider the transactions equivalent to export turnover and exclude prematurely canceled contracts. Consequently, the issue was remitted to the AO for fresh consideration.

Conclusion:
The Tribunal dismissed the appeal of the assessee and partly allowed the appeal of the Revenue for statistical purposes. The judgment was pronounced in the open court on 17th June 2016, at Chennai.

---