DCIT, CHENNAI vs. COMSTAR AUTOMOTIVE TECHNOLOGIES P LTD., CHENGALPUT

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

The assessee as well as the Revenue filed these appeals against

the orders of the Commissioner of Income Tax (Appeals)-5, Chennai in ITA

No. 77 & 78/CIT(A)-5/2008-09 dated 06.02.2017 for assessment years 2005-

06 and ITA New No. 82 & 85/CIT(A)-1/2011-12 dated 09.02.2017 for

assessment year 2007-08 & 2008-09.

engaged in the manufacture of starter motors, alternators and computer

software and a 100% EOU. Let us first take the assessee’s 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 setting 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 CIT Vs Himatasingike Saide

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Ltd in 286 ITR, first set off brought forward unabsorbed 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 proceeded to determine

the total income . Aggrieved , the assessee filed appeals before the CIT(A).

The CIT(A) though relied on the decision of the Apex Court in the case of CIT

vs Yokogawa India Ltd in 2016 TIOL 228-SC-IT but held 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 upholding the setting off of

brought (carried) forward unabsorbed depreciation losses pertaining to the

ays 2001-02 & 2001-03 before granting the deduction u/s 10B. The assessee

also questioned the correctness of the brought forward figures adopted in the

assessment orders.

2.2 In this regard, the AR pleaded to allow the appeals on the ratio of the

decision of the Apex Court in CIT vs Yokogawa India Ltd , which was

followed by this tribunal in the case of Caterpillar 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).

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2.3 We heard the rival submissions. The relevant portion of the tribunal

order, supra, is extracted as under :

“36. The next ground for our consideration is with regard to setting off brought forward of business losses and unabsorbed depreciation of earlier years before allowing deduction u/s. 10A of the Act. 37. The facts of the case are that the AO mentioned in the assessment order that Section 10A allows deduction only from total income of 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 income 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 carry 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 legislature contemplates that profits and gains of the undertakings from the export of articles or things or computer software are to be deducted while computing the profits and gains of business or profession. The deduction under section 10A(1) is computed with reference to the sub-section 10A(4) which refers to the 'profits of business of the undertaking' and harmonious interpretation of section 10A(1) along with 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 that 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 Chapter VI-A of the Act. A deduction under Chapter III of the Act is to be granted first while computing the profits and gains of business itself and not from the Gross Total Income. The assessee case involves set off of unabsorbed depreciation and losses from other business or undertakings i. e. Non 10A unit, against the profit of the 10A unit. The Id. AR further submitted that the Intellinet Technologies India case upon is based on the kamataka High Court ruling in the case of Himatasingike Seide Ltd. case

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(supra). The Himatasingike Seide Ltd. case (supra) is distinguishable on facts since it was on the set off of unabsorbed depreciation of the 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 judgement of Supreme Court in the case of eIT v. Yokogawa India Ltd. [2007] 391 ITR 274177 taxmann.com 411244 Taxman 273 wherein held that:- "16. From a reading of the relevant provisions of Section 1 OA 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. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship 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 [first 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 natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage 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 therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total income of

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the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression "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 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."

In view of the above judgement of Apex Court, we are inclined to allow the

ground taken by the assessee.

Following the above order, we allow the assessee’s appeals.

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 Court in CIT vs Shah

Originals 327 ITR 19. Aggrieved , the assessee filed an appeal before the

CIT(A). The CIT (A) upheld the AO’s finding as well as his reliance on the

Bombay High Court decision , supra, and held that there is no nexus between

the income and the undertaking with respect to gains arising out of foreign

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exchange fluctuations. Aggrieved , the assessee filed this appeal pleading

that the gains arising on account of foreign exchange fluctuations should be

considered as having been derived from the export business and it should be

treated as integral part of profits for the purposes of deduction u/s 10B.The

assessee pleaded that the CIT(A) erred in law holding that the foreign

exchange gain on transactions carried out of Exchange Earners Foreign

Currency account be treated as income from other sources and not

considered as eligible profits for deduction u/s 10B.

3.1 In this regard, the AR placed reliance on the decision 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 activities and therefore liable to

be included in 'export turnover' and 'total turnover' 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

20.01.2016

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815/Mds/2015 ay 2009-10 dt 17.6.2016. Per contra, the DR relied on

the order of the CIT(A).

3.2 We heard the rival submissions. The relevant portion of the tribunal

order in the assessee’s case , supra, is extracted as under :

“5.3 Further, the Co-ordinate Bench of this Tribunal in the case of M/s. Cotton Blossom (I) Pvt. Ltd.,in ITA NO.583/Mds./2014 & 1531/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 High Court in the case of M/s. Baljit Securities Pvt. Ltd. (88 CCH 313) held that the Assessing Officer has to consider the foreign exchange derivative in proportion to export turnover as regular business transaction of the assessee. If the derivative transaction undertaken by the assessee is in excess of export turnover then that loss suffered in respect of that portion of excess transaction has to be considered 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 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. 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 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

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transaction. With this observation, we remit the issue to the file of AO for fresh consideration.”

Following the above order, we remit the issue to the AO to follow the above

ratio after giving adequate opportunity to the assessee. The assessee’s

grounds are treated as allowed.

the assessing officer levied interest u/s. 234B. On 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 orders. The assessee’s

corresponding appeal grounds are dismissed.

1072/2017 Department’s appeal for A Y 2008-09 :

While making the assessment for assessment year 2008-09, 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

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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 are not correct. According

to the assessee the disallowance made is imperfect since it had not incurred

any expenditure towards operating and maintaining the 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 second limb of Rule BD is

also untenable etc. The 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. Aggrieved, the

assessee as well as the Revenue filed appeals

5.1 We heard the rival submissions. The relevant portion 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 useful purpose to refer to the decision in the case of CIT vs. Daga Capital Management P Ltd, 117 ITO 169 (2008) the provisions of s.14A are applicable retrospectively since they are procedural in nature. Based on this decision, the Board has released a Circular No.173 dated 4.2.2009 holding that the provisions of 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 (328 ITR 81) (2010) (Bom.) which has come subsequently in 2010. Even though the provisions of Rule 80 have come into effect from 24.3.2008 as per the decision of Godrej & Boyce which states that application of provisions of 14A are 'Constitutionally valid' and

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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 bound 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 exempt income, the same cannot be accepted. In this context it will serve useful purpose to refer to Hon'ble ITAT Chennai decision in M/s Lakshmi Ring Travellers v. ACIT in ITA NO'.2083(Mds)/2011 dated 2.3.2012 for AY.2008-09 wherein it was held "that even in a case where no expenditure is stated to have been incurred the assessing authority has to apply Rule BD." 25. The appellant has brought to my notice the decision of the Chennai Tribunal it the case of TVS Investments P Ltd (supra) stating that the provisions of 14A r.w.r 8D are not applicable for A.Y 08-09, therefore it was argued that in the appellant case also the provisions of Rule 80 should 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) which pertain to AY.02-03, has held as under: "In the light thereof, we are also of the opinion that both the authorities below have erred in applying section 14A(3) read with 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 made on 'reasonable basis." 26. It is understood that when Maxopp Investments(supra) was under consideration before the Delhi High Court for AY.02-03 while holding the provisions of Rule 8D are prospective in nature, the 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), the assessment year happened to be AY. 08-09. Therefore, what was applicable in Maxopp Investments for AY.02-03 cannot be applicable in TVt 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

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opinion that invoking of Rule 80 by the AO in the appellant's case for AY. 013- 09 is in order. 27. Further, it is found that before the AO the appellant has argued that interest payment is for loan obtained for specific purpose and not for investments. However on the facts of this case no such 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 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.

year wise as under:

6.1 Expenditure incurred in foreign currency : deduction u/s. 10B:

ITA No: 1071 & 1072/2017 Department’s appeal for AYs 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 turnover for the purposes of

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computation of deduction u/s. 10B. Aggrieved , the assessee filed appeals

before the CIT(A). The CIT (A) following the decision 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 the AO to exclude them

from both the export turnover as well as from the total turnover for

computing the deduction u/s. 10B .Aggrieved against the orders of the

CIT(A), the Revenue filed these appeals pleading that the CIT(A) failed to

appreciate that section 10B mandates exclusion relating to expenditure in

foreign currency towards freight charges from export turn over only while

computing the deduction u/s. 10B and not from the Total turnover.

6.1.2 We heard the rival contentions and find that 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 interference, so we do not find merit

in the Revenue’s grounds and dismiss them.

6.2 Disallowance of Mark-to-Market ‘MTM’ loss on forward

contracts: ITA No: 1072/2017 - Department’s 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

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be allowed and the profits of business should not include 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 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

transactions.” In view of that and since the facts are similar for the year

under consideration, the CIT(A) allowed the assessee’s appeal. Aggrieved,

the Revenue filed this appeal.

6.2.2 We heard the rival contentions. 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.

830/Chny/2017 for ays 2005-06, 2007-08 & 2008-09 are partly allowed while

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the Revenue’s appeals in ITA nos 1071, 1072/Chny/2017 for ays 2007-08 &

2008-09 are dismissed

Order pronounced on Tuesday, the 13th day of February, 2018 at Chennai.

Sd/- Sd/- (जॉज�माथन) (एसजयरामन) (GEORGE MATHAN) (S. JAYARAMAN) लेखासद#य/Accountant Member "या�यकसद#य/Judicial Member

चे�नई/Chennai, 2दनांक/Dated: 13th February, 2018 JPV आदेशक-4�त5ल6पअ7े6षत/Copy to: 1. अपीलाथ8/Appellant 2. 4:यथ8/Respondent 3. आयकरआयु;त ) अपील(/CIT(A) 4. आयकरआयु;त/CIT 5. 6वभागीय4�त�न�ध/DR 6. गाड�फाईल/GF