Comstar Automotive Technologies (P) Ltd., CHENNAI V. DCIT, CHENNAI

ITA 829/CHNY/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4778 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 04-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: R SIVARAMAN
• Keywords: Business income; Depreciation; Earning of tax free income; Speculation loss; Unabsorbed depreciation
• Section: 14A; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , , $ BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NOS. 827, 828, 829 & 830/CHNY/2017 / ASSESSMENT YEARS : 2005-06, 2005-06, 2007-08 & 2008-09 M/S. COMSTAR AUTOMOTIVE TECHNOLOGIES (P) LTD., KEELAKARANAI VILLAGE, MALROSAPURAM POST, MARAIMALAI NAGAR, CHENNAI 603 204. [PAN: AAACE 2284P] VS. THE DY. COMMISSIONER OF INCOME TAX/ THE ASST. COMMISSIONER OF INCOME TAX (APPEALS), CORPORATE CIRCLE -1(1), CHENNAI 600 034. ( / APPELLANT) ( / RESPONDENT) /. I.T.A. NOS. 1071 & 1072/CHNY/2017 / ASSESSMENT YEARS :2007-08 & 2008-09 THE DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -1(2), CHENNAI 600 034. VS. M/S. COMSTAR AUTOMOTIVE TECHNOLOGIES (P) LTD., KEELAKARANAI VILLAGE, MALROSAPURAM POST, MARAIMALAI NAGAR, CHENNAI 603 204. [PAN: AAACE 2284P] ( / APPELLANT) ( / RESPONDENT) ASSESSEE BY : SHRI R. SIVARAMAN, ADVOCATE REVENUE BY : SHRI D. PRABHU MUKUN TH ARUN KUMAR, JR. STANDING COUNSEL SHRI S. NATARAJA, JCIT :-2-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 - /DATE OF HEARING : 13.02.2018 - /DATE OF PRONOUNCEMENT : 13.02.2018 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE ASSESSEE AS WELL AS THE REVENUE FILED THESE A PPEALS AGAINST THE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEA LS)-5, CHENNAI IN ITA NO. 77 & 78/CIT(A)-5/2008-09 DATED 06.02.2017 FOR A SSESSMENT YEARS 2005- 06 AND ITA NEW NO. 82 & 85/CIT(A)-1/2011-12 DATED 0 9.02.2017 FOR ASSESSMENT YEAR 2007-08 & 2008-09. 2. M/S. COMSTAR AUTOMOTIVE TECHNOLOGIES (P) LTD., T HE ASSESSEE , IS ENGAGED IN THE MANUFACTURE OF STARTER MOTORS, ALTER NATORS AND COMPUTER SOFTWARE AND A 100% EOU. LET US FIRST TAKE THE ASSE SSEES APPEAL FIRST FOR CONVENIENCE SAKE. THE ISSUES ARE DEALT AS UNDER, ISSUE WISE: 2.1 UNABSORBED DEPRECIATION U/S. 10B: ITA NO: 827, 828, 829 & 830/2017 AYS 2005-06, 2007-08, 2008-09: THE ASSESSEE CLAIMED DEDUCTION U/S 10B BEFORE SETTI NG OFF OF BROUGHT FORWARD UNABSORBED DEPRECIATION ALLOWANCES OF AY 2001-02 & 2001-03. IN THE ASSESSMENTS MADE FOR AYS 2005-06, 2007-08 & 2008-09 , THE AO RELYING ON THE KARNATAKA HIGH COURT DECISION IN THE CASE OF CI T VS HIMATASINGIKE SAIDE :-3-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 LTD IN 286 ITR, FIRST SET OFF BROUGHT FORWARD UNABS ORBED DEPRECIATION OF AYS 2001-02 & 2001-03 AGAINST EACH OF THE CURRENT YEAR PROFITS FROM THE BUSINESS BEFORE COMPUTING THE DEDUCTION U/S 10B AND THEN PR OCEEDED TO DETERMINE THE TOTAL INCOME . AGGRIEVED , THE ASSESSEE FILED A PPEALS BEFORE THE CIT(A). THE CIT(A) THOUGH RELIED ON THE DECISION OF THE AP EX COURT IN THE CASE OF CIT VS YOKOGAWA INDIA LTD IN 2016 TIOL 228-SC-IT BUT HE LD THAT THE DEDUCTION U/S. 10B WOULD BE APPLIED ONLY AFTER ADJUSTING THE UNABSORBED DEPRECIATION AND THUS HELD IN FAVOUR OF REVENUE. AGGRIEVED, THE ASSESSEE FILED THESE APPEALS PLEADING THAT THE CIT(A) ERRED IN LAW IN UP HOLDING THE SETTING OFF OF BROUGHT (CARRIED) FORWARD UNABSORBED DEPRECIATION L OSSES PERTAINING TO THE AYS 2001-02 & 2001-03 BEFORE GRANTING THE DEDUCTION U/S 10B. THE ASSESSEE ALSO QUESTIONED THE CORRECTNESS OF THE BROUGHT FORW ARD FIGURES ADOPTED IN THE ASSESSMENT ORDERS. 2.2 IN THIS REGARD, THE AR PLEADED TO ALLOW THE APP EALS ON THE RATIO OF THE DECISION OF THE APEX COURT IN CIT VS YOKOGAWA INDI A LTD , WHICH WAS FOLLOWED BY THIS TRIBUNAL IN THE CASE OF CATERPILL AR INDIA (P) LTD., VS ACIT, CIRCLE-I, VELLORE, [2017] 82 TAXMANN.COM 94 HOLDING THAT THE UNABSORBED DEPRECIATION IS TO BE ADJUSTED ONLY AFTER DEDUCTION U/S. 10B. PER CONTRA, THE DR RELIED ON THE ORDERS OF THE CIT(A). :-4-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 2.3 WE HEARD THE RIVAL SUBMISSIONS. THE RELEVANT PO RTION OF THE TRIBUNAL ORDER, SUPRA, IS EXTRACTED AS UNDER : 36. THE NEXT GROUND FOR OUR CONSIDERATION IS WITH R EGARD TO SETTING OFF BROUGHT FORWARD OF BUSINESS LOSSES AND UNABSORBED DEPRECIATIO N OF EARLIER YEARS BEFORE ALLOWING DEDUCTION U/S. 10A OF THE ACT. 37. THE FACTS OF THE CASE ARE THAT THE AO MENTIONED I N THE ASSESSMENT ORDER THAT SECTION 10A ALLOWS DEDUCTION ONLY FROM TOTAL INCOME O F THE ASSESSEE AND NOT FROM THE INCOME OF THE UNDERTAKING. TOTAL INCOME DEFINED UNDER SECTION 2(45) OF THE ACT WHICH MEANS 'THE TOTAL INCOME REFERRED TO IN SECTION 5, COMPUTED IN THE MANNER LAID DOWN IN THE ACT'. ACCORDING TO AO, THE TOTAL I NCOME OF THE ASSESSEE HAS TO BE WORKED OUT IN THE MANNER LAID DOWN IN THE ACT WHICH WILL BE WORKED AFTER GIVING EFFECT TO PROVISION OF SECTION 71 AND 72 CONTAINED IN CHAPTER VI OF ACT WHICH PROVIDES FOR AGGREGATION OF INCOME AND SET OFF OR CAR RY FORWARD OF LOSSES. THE AO PLACED RELIANCE ON THE FOLLOWING DECISIONS:- (A) INTELLINET TECHNOLOGIES INDIA (P.) LTD. V. ITO [IT APPEAL NO. 1021 (BANG.) OF 2009, DATED 12-3-2010]. (B) CITV. HIMATASINGIKE SEIDE LTD. [2006]286 ITR 255 /156 TAXMAN 151 (KAR.). (C) SWORD GLOBAL (I) (P.) LTD. V. ITO [2010]122 ITD 103 (CHENNAI - TRIB.). 37.1 BEFORE US, THE ID. AR SUBMITTED THAT THE LEGISL ATURE CONTEMPLATES THAT PROFITS AND GAINS OF THE UNDERTAKINGS FROM THE EXPORT OF AR TICLES OR THINGS OR COMPUTER SOFTWARE ARE TO BE DEDUCTED WHILE COMPUTING THE PROFI TS AND GAINS OF BUSINESS OR PROFESSION. THE DEDUCTION UNDER SECTION 10A(1) IS CO MPUTED WITH REFERENCE TO THE SUB-SECTION 10A(4) WHICH REFERS TO THE 'PROFITS OF BU SINESS OF THE UNDERTAKING' AND HARMONIOUS INTERPRETATION OF SECTION 10A(1) ALONG W ITH SECTION 10A(4) INDICATES THAT DEDUCTION UNDER SECTION 10A OF THE ACT SHALL BE COMPUTED ON THE INCOME OF THE UNDERTAKING ONLY. FURTHER, ID. AR SUBMITTED THA T EVEN THOUGH IT IS A DEDUCTION TO BE GIVEN, IT IS TO BE DEDUCTED WHILE ARRIVING AT THE PROFITS OF BUSINESS AND NOT FROM THE GROSS TOTAL INCOME AS ENVISAGED UNDER CHAPT ER VI-A OF THE ACT. A DEDUCTION UNDER CHAPTER III OF THE ACT IS TO BE GRAN TED FIRST WHILE COMPUTING THE PROFITS AND GAINS OF BUSINESS ITSELF AND NOT FROM TH E GROSS TOTAL INCOME. THE ASSESSEE CASE INVOLVES SET OFF OF UNABSORBED DEPRECIAT ION AND LOSSES FROM OTHER BUSINESS OR UNDERTAKINGS I. E. NON 10A UNIT, AGAINS T THE PROFIT OF THE 10A UNIT. THE ID. AR FURTHER SUBMITTED THAT THE INTELLINET TECHNOL OGIES INDIA CASE UPON IS BASED ON THE KAMATAKA HIGH COURT RULING IN THE CASE OF HI MATASINGIKE SEIDE LTD. CASE :-5-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 (SUPRA). THE HIMATASINGIKE SEIDE LTD. CASE (SUPRA) I S DISTINGUISHABLE ON FACTS SINCE IT WAS ON THE SET OFF OF UNABSORBED DEPRECIATION OF T HE SAME EOU UNIT. HOWEVER THE FACTS IN THIS CASE RELATE TO SET OFF OF UNABSORBED DEPRECIATION OF NON- EOU UNIT, WHICH WAS DECIDED BY THE LD. CIT (A) IN FAVOUR OF THE ASSESSEE FOR ASSESSMENT YEAR 2005-06. 38. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THIS ISSUE IS SQUARELY COVERED BY THE JUDG EMENT OF SUPREME COURT IN THE CASE OF EIT V. YOKOGAWA INDIA LTD. [2007] 391 ITR 2 74177 TAXMANN.COM 411244 TAXMAN 273 WHEREIN HELD THAT:- '16. FROM A READING OF THE RELEVANT PROVISIONS OF SE CTION 1 OA IT IS MORE THAN CLEAR TO US THAT THE DEDUCTIONS CONTEMPLATED T HEREIN IS QUA THE ELIGIBLE UNDERTAKING OF AN ASSESSEE STANDING ON ITS OWN AND WITHOUT REFERENCE TO THE OTHER ELIGIBLE OR NON-ELIGIBLE UNITS OR UNDERTA KINGS OF THE ASSESSEE. THE BENEFIT OF DEDUCTION IS GIVEN BY THE ACT TO THE INDI VIDUAL UNDERTAKING AND RESULTANTLY FLOWS TO THE ASSESSEE. THIS IS ALSO MOR E THAN CLEAR FROM THE CONTEMPORANEOUS CIRCULAR NO. 794 DATED 9.8.2000 WHI CH STATES IN PARAGRAPH 15.6 THAT, 'THE EXPORT TURNOVER AND THE T OTAL TURNOVER FOR THE PURPOSES OF SECTIONS 10A AND 10B SHALL BE OF THE UND ERTAKING LOCATED IN SPECIFIED ZONES OR 100% EXPORT ORIENTED UNDERTAKINGS , AS THE CASE MAY BE, AND THIS SHALL NOT HAVE ANY MATERIAL RELATIONSH IP WITH THE OTHER BUSINESS OF THE ASSESSEE OUTSIDE THESE ZONES OR UNITS FOR THE PURPOSES OF THIS PROVISION.' 17. IF THE SPECIFIC PROVISIONS OF THE ACT PROVIDE [F IRST PROVISO TO SECTIONS 10A(I);10A (1A) AND 10A (4)] THAT THE UNIT THAT IS CONTEMPLATED FOR GRANT OF BENEFIT OF DEDUCTION IS THE ELIGIBLE UNDERTAKING AND THAT IS ALSO HOW THE CONTEMPORANEOUS CIRCULAR OF THE DEPARTMENT (NO. 794 DATED 09.08.2000) UNDERSTOOD THE SITUATION, IT IS ONLY LOGICAL AND NA TURAL THAT THE STAGE OF DEDUCTION OF THE PROFITS AND GAINS OF THE BUSINESS O F AN ELIGIBLE UNDERTAKING HAS TO BE MADE INDEPENDENTLY AND, THEREFORE, IMMEDIA TELY AFTER THE STAGE OF DETERMINATION OF ITS PROFITS AND GAINS. AT THAT STA GE THE AGGREGATE OF THE INCOMES UNDER OTHER HEADS AND THE PROVISIONS FOR SET OFF AND CARRY FORWARD CONTAINED IN SECTIONS 70, 72 AND 74 OF THE ACT WOULD BE PREMATURE FOR APPLICATION. THE DEDUCTIONS UNDER SECTION 10A THEREFO RE WOULD BE PRIOR TO THE COMMENCEMENT OF THE EXERCISE TO BE UNDERTAKEN U NDER CHAPTER VI OF THE ACT FOR ARRIVING AT THE TOTAL INCOME OF THE ASSE SSEE FROM THE GROSS TOTAL INCOME. THE SOMEWHAT DISCORDANT USE OF THE EXPRESSI ON 'TOTAL INCOME OF :-6-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 THE ASSESSEE' IN SECTION 10A HAS ALREADY BEEN DEALT WITH EARLIER AND IN THE OVERALL SCENARIO UNFOLDED BY THE PROVISIONS OF SECTI ON 10A THE AFORESAID DISCORD CAN BE RECONCILED BY UNDERSTANDING THE EXPR ESSION 'TOTAL INCOME OF THE ASSESSEE' IN SECTION 10A AS 'TOTAL INCOME OF THE UNDERTAKING'. 18. FOR THE AFORESAID REASONS WE ANSWER THE APPEALS AND THE QUESTIONS ARISING THEREIN, AS FORMULATED AT THE OUTSET OF THIS ORDER, BY HOLDING THAT THOUGH SECTION 10A, AS AMENDED, IS A PROVISION FOR D EDUCTION, 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 T HE STAGE OF COMPUTATION OF THE TOTAL INCOME UNDER CHAPTER VI.' IN VIEW OF THE ABOVE JUDGEMENT OF APEX COURT, WE AR E INCLINED TO ALLOW THE GROUND TAKEN BY THE ASSESSEE. FOLLOWING THE ABOVE ORDER, WE ALLOW THE ASSESSEES APPEALS. 3. DEDUCTION OF GAINS ARISING OUT OF FOREIGN EXCHANGE FLUCTUATIONS U/S. 10B: ITA NO. 830/2017 FOR AY 2008-09 WHILE MAKING THE ASSESSMENT FOR AY 2008-09, THE AO EXCLUDED RS. 19,61,35,076 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. THE AO RELIED ON THE DECISION OF THE BOMBAY HIGH CO URT IN CIT VS SHAH ORIGINALS 327 ITR 19. AGGRIEVED , THE ASSESSEE FIL ED AN APPEAL BEFORE THE CIT(A). THE CIT (A) UPHELD THE AOS FINDING AS WEL L AS HIS RELIANCE ON THE BOMBAY HIGH COURT DECISION , SUPRA, AND HELD THAT T HERE IS NO NEXUS BETWEEN THE INCOME AND THE UNDERTAKING WITH RESPECT TO GAIN S ARISING OUT OF FOREIGN :-7-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 EXCHANGE FLUCTUATIONS. AGGRIEVED , THE ASSESSEE FI LED THIS APPEAL PLEADING THAT THE GAINS ARISING ON ACCOUNT OF FOREIGN EXCH ANGE FLUCTUATIONS SHOULD BE CONSIDERED AS HAVING BEEN DERIVED FROM THE EXPORT B USINESS AND IT SHOULD BE TREATED AS INTEGRAL PART OF PROFITS FOR THE PURPOSE S OF DEDUCTION U/S 10B.THE ASSESSEE PLEADED THAT THE CIT(A) ERRED IN LAW HOLDI NG THAT THE FOREIGN EXCHANGE GAIN ON TRANSACTIONS CARRIED OUT OF EXCHA NGE EARNERS FOREIGN CURRENCY ACCOUNT BE TREATED AS INCOME FROM OTHER SO URCES AND NOT CONSIDERED AS ELIGIBLE PROFITS FOR DEDUCTION U/S 1 0B. 3.1 IN THIS REGARD, THE AR PLACED RELIANCE ON THE D ECISION OF THE KARNATAKA HIGH COURT IN CIT VS MOTOROLA INDIA ELECTRONICS P. LTD ITA NO. 428/2007 AS WELL AS THE DECISION OF THE ITAT DELHI IN UNIVERSAL PRECISION SCREWS VS. ACIT IN [2015] 38 ITR (T) 233 DELHI HOLDING THAT THE GAINS FROM FOREIGN EXCHANGE FLUCTUATIONS WAS DIRECTLY RELATED WITH EXPORT ACTIV ITIES AND THEREFORE LIABLE TO BE INCLUDED IN 'EXPORT TURNOVER' AND 'TOTAL TURNOV ER' AND THEREFORE LIABLE FOR DEDUCTION U/S. 10B. ADDITIONAL RELIANCE WAS PLACED ON THE FULL BENCH DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS HEWLETT PACKARD GLOBAL SOFT LTD. IN ITA NO. 812/2007 WHEREIN THE VIEW TAKEN IN THE CASE OF CIT V. MOTOROLA IS REAFFIRMED. RELIANCE IS ALSO PLACED ON THE FOLLOWING DECISIONS 1. CIT V. PENTSOFTTECHNOLOGIES LTD (2013) 33 TAXMA NN.COM 570(MAD.) 2. HIRACO INDIA PVT. LTD V.DCIT,2300/ MUM/2015 AY 2009-10 DT 20.01.2016 :-8-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 3. MAJESTIC EXPORTS V. JCIT (2015) 62 TAXMANN.COM 3 07. 4. COMSTAR AUTOMOTIVE TECHNOLOGIES P.LTD V. DCIT ITA NOS 771& 815/MDS/2015 AY 2009-10 DT 17.6.2016. PER CONTRA, T HE DR RELIED ON THE ORDER OF THE CIT(A). 3.2 WE HEARD THE RIVAL SUBMISSIONS. THE RELEVANT PO RTION OF THE TRIBUNAL ORDER IN THE ASSESSEES CASE , SUPRA, IS EXTRACTED AS UNDER : 5.3 FURTHER, THE CO-ORDINATE BENCH OF THIS TRIBUNA L IN THE CASE OF M/S. COTTON BLOSSOM (I) PVT. LTD.,IN ITA NO.583/MDS./2014 & 153 1/MDS./2015 VIDE ORDER DATED 31.1.22015 AFTER CONSIDERING THE VARIOUS JUDGEMENTS OF THE CO-ORDINATE BENCH, IN THE CASE OF M/S. AISHWARYA & CO P. LTD IN ITA NO.860 /MDS/2014, DATED 29.05.2015, WHEREIN THEY FOLLOWED THE JUDGMENT OF THE CALCUTTA H IGH COURT IN THE CASE OF M/S. BALJIT SECURITIES PVT. LTD. (88 CCH 313) HELD THAT T HE ASSESSING OFFICER HAS TO CONSIDER THE FOREIGN EXCHANGE DERIVATIVE IN PROPORT ION TO EXPORT TURNOVER AS REGULAR BUSINESS TRANSACTION OF THE ASSESSEE. IF THE DERIVA TIVE TRANSACTION UNDERTAKEN BY THE ASSESSEE IS IN EXCESS OF EXPORT TURNOVER THEN T HAT LOSS SUFFERED IN RESPECT OF THAT PORTION OF EXCESS TRANSACTION HAS TO BE CONSID ERED AS SPECULATIVE LOSS ONLY AND THAT EXCESS DERIVATIVE TRANSACTION HAS NO PROXIMITY WITH EXPORT TURNOVER AND THE ASSESSING OFFICER IS DIRECTED TO COMPUTE ACCORDINGLY. FURTHER, THE ASSESSING OFFICER HAS TO SEE WHETHER THERE IS ANY PREMATURE CANCELLATION OF FORWA RD CONTRACT OF FOREIGN EXCHANGE AND THAT TRANSACTION SHOULD BE TAKEN OUT FO R THE PURPOSE OF CONSIDERING THE BUSINESS LOSS AND ONLY THE TRANSACTIONS WHICH A RE COMPLETED TO BE CONSIDERED FOR THE PURPOSE OF DETERMINING THE BUSINESS LOSS FROM THIS FOREIGN EXCHANGE FORWARD CONTRACT AND REMITTED THE MATTER TO ASSESSIN G OFFICER FOR FRESH CONSIDERATION. 5.3 IN VIEW OF THE ABOVE DISCUSSION, 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 DE TERMINE THE MTM LOSS AND ALSO IF THERE IS ANY PREMATURE CANCELLATION OF FORWARD CONT RACT OF FOREIGN EXCHANGE, IT SHALL BE EXCLUDED TO CONSIDER THE BUSINESS LOSS AND THESE TRANSACTIONS ARE SPECULATIVE :-9-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 TRANSACTION. WITH THIS OBSERVATION, WE REMIT THE IS SUE TO THE FILE OF AO FOR FRESH CONSIDERATION. FOLLOWING THE ABOVE ORDER, WE REMIT THE ISSUE TO TH E AO TO FOLLOW THE ABOVE RATIO AFTER GIVING ADEQUATE OPPORTUNITY TO THE ASSE SSEE. THE ASSESSEES GROUNDS ARE TREATED AS ALLOWED. 4. IN THE ASSESSMENTS MADE FOR THE ASSESSMENT YEARS 2005-06 & 2007-08, THE ASSESSING OFFICER LEVIED INTEREST U/S. 234B. O N APPEALS, THE CIT(A) FOLLOWING THE RATIO OF THE SC IN THE CASE OF CIT VS ANJUM M.H. GHASWALA (252 ITR 1) HELD THAT THE LEVY OF INTEREST IS MANDATORY. AGGRIEVED AGAINST THOSE ORDERS, THE ASSESSEE FILED APPEALS. 4.1 WE HEARD THE RIVAL SUBMISSIONS. SINCE, THE CIT (A) HAS APPLIED THE RATIO OF THE SC, WE DO NOT FIND ANY INFIRMITY IN THOSE OR DERS. THE ASSESSEES CORRESPONDING APPEAL GROUNDS ARE DISMISSED. 5. DISALLOWANCE U/S. 14A: ITA NO. 830/2017,ASSESSEES APPEAL & 1072/2017 DEPARTMENTS APPEAL FOR A Y 2008-09 : WHILE MAKING THE ASSESSMENT FOR ASSESSMENT YEAR 200 8-09, THE AO FOUND THAT THE ASSESSEE HAS INVESTMENT IN TAX FREE TERRITORY AMOUNT TO RS.2,09,41,000. THE RETURN ON SUCH INVESTMENT BEING DIVIDEND OF RS.54,88,249 IS EXEMPT U/S 10(35). THE ASSESSEE HAS INTEREST OUTGO OF :-10-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 RS.1,08,77,141 AND HENCE HE DISALLOWED INTEREST IN ACCORDANCE WITH RULE 8D AT RS.9,77,156. BEFORE THE CIT(A) THE ASSESSEE HAD PROVIDED THE COMPUTATION AND CONTENDED THAT THE FIGURES ADOPTED BY THE AO AR E NOT CORRECT. ACCORDING TO THE ASSESSEE THE DISALLOWANCE MADE IS IMPERFECT SINCE IT HAD NOT INCURRED ANY EXPENDITURE TOWARDS OPERATING AND MAINTAINING T HE INVESTMENT. THE ASSESSEE CONTENDED THAT THE INTEREST PAYMENT IS FOR LOAN OBTAINED FOR SPECIFIC PURPOSES AND NOT FOR INVESTMENT AND IT HAS ENORMOUS RESERVES & SURPLUS AND THE INVESTMENTS WERE OUT OF OWN FUNDS AND HENCE SEC OND LIMB OF RULE BD IS ALSO UNTENABLE ETC. THE CIT(A) HELD THAT INVOKING O F RULE 8D BY THE AO IS IN ORDER AND DIRECTED THE AO TO EXAMINE WHETHER THE IN TEREST PAYMENT IS FOR THE LOAN OBTAINED FOR SPECIFIC PURPOSE AND NOT FOR INVE STMENTS. AGGRIEVED, THE ASSESSEE AS WELL AS THE REVENUE FILED APPEALS 5.1 WE HEARD THE RIVAL SUBMISSIONS. THE RELEVANT P ORTION OF THE ORDER OF THE CIT(A) IS EXTRACTED AS UNDER: 23. I HAVE CAREFULLY PERUSED THE FACTS IN ISSUE, SUBMISSIONS OF THE APPELLANT AND MATERIAL ON RECORD. IT WOULD SERVE US EFUL PURPOSE TO REFER TO THE DECISION IN THE CASE OF CIT VS. DAGA CAPITAL MANAGE MENT P LTD, 117 ITO 169 (2008) THE PROVISIONS OF S.14A ARE APPLICABLE RETRO SPECTIVELY SINCE THEY ARE PROCEDURAL IN NATURE. BASED ON THIS DECISION, THE B OARD HAS RELEASED A CIRCULAR NO.173 DATED 4.2.2009 HOLDING THAT THE PROVISIONS O F S.14A(2) & (3) WILL BE APPLICABLE RETROSPECTIVELY W.E.F. 1.4.1962. HOWEVER , THIS DECISION HAS BEEN REVERSED BY GODREJ & BOYCE MFG. CO. LTD V. DCIT (32 8 ITR 81) (2010) (BOM.) WHICH HAS COME SUBSEQUENTLY IN 2010. EVEN THOUGH TH E PROVISIONS OF RULE 80 HAVE COME INTO EFFECT FROM 24.3.2008 AS PER THE DEC ISION OF GODREJ & BOYCE WHICH STATES THAT APPLICATION OF PROVISIONS OF 14A ARE 'CONSTITUTIONALLY VALID' AND :-11-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 RULE 80 IS APPLICABLE FROM AY 08-09, IT ALSO STATED THAT PROVISIONS OF S.14A ARE STILL APPLICABLE FOR EARLIER YEARS AND AO IS DUTY B OUND TO DETERMINE EXPENDITURE BY ADOPTING A REASONABLE BASIS OR METHOD. 24. WITH REGARD TO THE PLEA THAT THE PROVISIONS OF S. 14A CANNOT BE INVOKED WHEN THERE IS NO EXPENDITURE INCURRED TO EARN THE E XEMPT INCOME, THE SAME CANNOT BE ACCEPTED. IN THIS CONTEXT IT WILL SERVE U SEFUL PURPOSE TO REFER TO HON'BLE ITAT CHENNAI DECISION IN M/S LAKSHMI RING T RAVELLERS V. ACIT IN ITA NO'.2083(MDS)/2011 DATED 2.3.2012 FOR AY.2008-09 WH EREIN IT WAS HELD 'THAT EVEN IN A CASE WHERE NO EXPENDITURE IS STATED TO HA VE BEEN INCURRED THE ASSESSING AUTHORITY HAS TO APPLY RULE BD.' 25. THE APPELLANT HAS BROUGHT TO MY NOTICE THE DECI SION OF THE CHENNAI TRIBUNAL IT THE CASE OF TVS INVESTMENTS P LTD (SUPR A) STATING THAT THE PROVISIONS OF 14A R.W.R 8D ARE NOT APPLICABLE FOR A.Y 08-09, T HEREFORE IT WAS ARGUED THAT IN THE APPELLANT CASE ALSO THE PROVISIONS OF RULE 80 S HOULD NOT BE APPLIED FOR AY.2008-09. THIS ARGUMENT CANNOT BE ACCEPTED SINCE IN THE CASE OF TVS INVESTMENTS, THE ITAT BY RELYING ON THE DECISION IN THE CASE OF MAXOPP INVESTMENTS LTD V. CIT (347 ITR 272) (DELHI HC) WHI CH PERTAIN TO AY.02-03, HAS HELD AS UNDER: 'IN THE LIGHT THEREOF, WE ARE ALSO OF THE OPINION T HAT BOTH THE AUTHORITIES BELOW HAVE ERRED IN APPLYING SECTION 14A(3) READ WI TH RULE 80. AT THE SAME TIME, THE HON'BLE COURT HAS ALSO HELD THAT THE DISALLOWANCE QUEA EXPENDITURE IN EARNING EXEMPT INCOME CAN STILL BE M ADE ON 'REASONABLE BASIS.' 26. IT IS UNDERSTOOD THAT WHEN MAXOPP INVESTMENTS(S UPRA) WAS UNDER CONSIDERATION BEFORE THE DELHI HIGH COURT FOR AY.02 -03 WHILE HOLDING THE PROVISIONS OF RULE 8D ARE PROSPECTIVE IN NATURE, TH E COURT HAS HELD THAT APPLICATION OF S.14A R.W. RULE ,8D HAS BEEN WRONGLY APPLIED IN THAT CASE FOR AY.02-03. IN THE CASE OF TVS INVESTMENTS (SUPRA), T HE ASSESSMENT YEAR HAPPENED TO BE AY. 08-09. THEREFORE, WHAT WAS APPLI CABLE IN MAXOPP INVESTMENTS FOR AY.02-03 CANNOT BE APPLICABLE IN TV T INVESTMENTS CASE WHICH IS FOR AY.08-09. FURTHER, IN THE CASE OF' GODREJ & BOYCK MFG. CO. LTD (SUPRA), IT WAS CATEGORICALLY HELD THAT THE PROVISIONS. OF RULE 80 HAVE COME INTO EFFECT FROM 24.3.2008 AND APPLICABLE FROM AY.08-09 ONWARDS . THIS DECISION HAS NOT BEEN REVERSED SO FAR. SINCE THE PROVISIONS OF RULE 8D ARE APPLICABLE FROM AY. 08-09 , THE AO IS BOUND TO INVOKE THEM. IN VIEW OF THE ABOVE, I AM OF THE :-12-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 OPINION THAT INVOKING OF RULE 80 BY THE AO IN THE A PPELLANT'S CASE FOR AY. 013- 09 IS IN ORDER. 27. FURTHER, IT IS FOUND THAT BEFORE THE AO THE APP ELLANT HAS ARGUED THAT INTEREST PAYMENT IS FOR LOAN OBTAINED FOR SPECIFIC PURPOSE AND NOT FOR INVESTMENTS. HOWEVER ON THE FACTS OF THIS CASE NO S UCH CLEAR SEGREGATION HAS BEEN FURNISHED. THE AO IS DIRECTED TO CALL FOR THE DETAILS OF THE SAME AND EXCLUDE THE INTEREST PORTION IF FOUND CORRECT. THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 28. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 5.2 FROM THE ABOVE, IT IS CLEAR THAT THE CIT(A) HAS APPLIED THE RATIO IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD., SUPRA. FURTHER, HIS DIRECTION TO THE AO TO VERIFY WHETHER THE INTEREST EXPENDITURE I S RELATED TO THE IMPUGNED INVESTMENTS BEING A FACT FINDING EXERCISE FOR APPLY ING THE CORRECT LAW, WE DO NOT FIND ANY INFIRMITY IN HIS ORDER, SUPRA. THUS, THE ASSESSEES APPEAL GROUNDS ARE DISMISSED. SO ALSO THE GROUNDS OF APPEAL FILED BY THE REVENUE. 6. NOW LET US EXAMINE THE REVENUES APPEALS , ISSUE WISE & ASSESSMENT YEAR WISE AS UNDER: 6.1 EXPENDITURE INCURRED IN FOREIGN CURRENCY : DEDUCTIO N U/S. 10B: ITA NO: 1071 & 1072/2017 DEPARTMENTS APPEAL FOR A YS 2007-08 & 2008-09: IN THE ASSESSMENTS MADE FOR AYS 2007-08 & 2008-09, THE AO EXCLUDED THE EXPENDITURE INCURRED FOR FREIGHT / TELECOM CHARGES IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER AND INCLUDED IT IN THE TOTAL TU RNOVER FOR THE PURPOSES OF :-13-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 COMPUTATION OF DEDUCTION U/S. 10B. AGGRIEVED , THE ASSESSEE FILED APPEALS BEFORE THE CIT(A). THE CIT (A) FOLLOWING THE DECISI ON OF THE MUMBAI HIGH COURT IN THE CASE OF CIT V GEM PLUS JEWELLERY INDIA LTD IN ITA NO 2426 OF 2009 DT 23.6.2010 AND THE SPECIAL BENCH DECISION IN THE CASE OF ITO VS SAK SOFT LTD [2009] 30 SOT 55 (CHENNAI) (SB) DIRECTED T HE AO TO EXCLUDE THEM FROM BOTH THE EXPORT TURNOVER AS WELL AS FROM THE T OTAL TURNOVER FOR COMPUTING THE DEDUCTION U/S. 10B .AGGRIEVED AGAINST THE ORDERS OF THE CIT(A), THE REVENUE FILED THESE APPEALS PLEADING T HAT THE CIT(A) FAILED TO APPRECIATE THAT SECTION 10B MANDATES EXCLUSION REL ATING TO EXPENDITURE IN FOREIGN CURRENCY TOWARDS FREIGHT CHARGES FROM EXPOR T TURN OVER ONLY WHILE COMPUTING THE DEDUCTION U/S. 10B AND NOT FROM THE T OTAL TURNOVER. 6.1.2 WE HEARD THE RIVAL CONTENTIONS AND FIND THA T THE DECISIONS RENDERED BY THE CIT(A) ARE BASED ON THE DECISIONS OF HC AND SPECIAL BENCH OF THE TRIBUNAL , SUPRA, THEY DO NOT REQUIRE ANY INTERFER ENCE, SO WE DO NOT FIND MERIT IN THE REVENUES GROUNDS AND DISMISS THEM. 6.2 DISALLOWANCE OF MARK-TO-MARKET MTM LOSS ON FORWAR D CONTRACTS: ITA NO: 1072/2017 - DEPARTMENTS APPEAL FOR AY 2008 -09 WHILE MAKING THE ASSESSMENT FOR AY 2008-09, THE 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 :-14-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 BE ALLOWED AND THE PROFITS OF BUSINESS SHOULD NOT I NCLUDE SPECULATION LOSS. AGGRIEVED , THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A). THE CIT(A) FOLLOWING HIS DECISION TAKEN IN ORDER FOR AY 2009- 10 WHICH HAS BEEN UPHELD BY THIS TRIBUNAL VIDE ITA NOS 771& 815/ MDS/2015 DT 17.6.2016 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 T HE BUSINESS INCOME OF ASSESSEE. HOWEVER, THE AO HAS TO CONSIDER THE TRAN SACTION EQUIVALENT TO THE EXPORT TURNOVER TO DETERMINE THE MTM LOSS AND ALSO IF THERE IS ANY PREMATURE CANCELLATION OF FORWARD CONTRACT OF FOREIGN EXCHANG E, IT SHALL BE EXCLUDED TO CONSIDER THE BUSINESS LOSS AND THESE TRANSACTIONS A RE SPECULATIVE TRANSACTIONS. IN VIEW OF THAT AND SINCE THE FACT S ARE SIMILAR FOR THE YEAR UNDER CONSIDERATION, THE CIT(A) ALLOWED THE ASSESSE ES APPEAL. AGGRIEVED, THE REVENUE FILED THIS APPEAL. 6.2.2 WE HEARD THE RIVAL CONTENTIONS. SINCE, THE C IT(A) HAS APPLIED THE RATIO LAID BY THIS TRIBUNAL IN THE ASSESSEES OWN CASE, W E DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND HENCE THE CORRESPONDING GROUNDS OF THE REVENUE ARE DISMISSED. 7. THUS, THE ASSSESSEES APPEALS IN ITA NOS 827, 8 28, 829 & 830/CHNY/2017 FOR AYS 2005-06, 2007-08 & 2008-09 AR E PARTLY ALLOWED WHILE :-15-: ITA NOS: 827, 828, 829, 830 1071, 1072/CHNY/2017 THE REVENUES APPEALS IN ITA NOS 1071, 1072/CHNY/20 17 FOR AYS 2007-08 & 2008-09 ARE DISMISSED ORDER PRONOUNCED ON TUESDAY, THE 13 TH DAY OF FEBRUARY, 2018 AT CHENNAI. SD/- ( ) (GEORGE MATHAN) '# /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) # /ACCOUNTANT MEMBER /CHENNAI, 2 /DATED: 13 TH FEBRUARY, 2018 JPV -45676 /COPY TO: 1. 8/ APPELLANT 2. 4:8 /RESPONDENT 3. ; ) (/CIT(A) 4. ; /CIT 5. 64 /DR 6. /GF