2017 (3) TMI 1229 - AT - Income Tax

Deduction under section 10A - Held that - AO was not justified in set off of the unabsorbed business loss against profits of the eligible units and the assessee is entitled for exemption under section 10B of the Income Tax Act. This ground of appeal is allowed. See C.I.T. & Another Versus M/s Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT

Summary

Issues involved:
1. Taxation of notional forex fluctuation gain on restatement of external commercial borrowing (ECB) for capital expenditure.
2. Compliance with directions issued by the Dispute Resolution Panel regarding forex fluctuation treatment.
3. Computation of exemption under section 10B after setting off unabsorbed depreciation/business losses.

Issue 1: Taxation of notional forex fluctuation gain on ECB:
The appellant contested the taxation of notional forex fluctuation gain on ECB by the Assessing Officer (AO) as a revenue item, arguing it should be treated as capital. The AO relied on a circular stating that losses must be set off against profits of eligible units before allowing deductions under section 10B. The AO referred to a Karnataka High Court decision approving this interpretation, which was upheld by the Supreme Court. The appellant cited a different Karnataka High Court decision in their favor, emphasizing that deductions under section 10B should be allowed independently of other losses. The Tribunal, following the Supreme Court's judgment, ruled in favor of the appellant, stating that unabsorbed business losses should not be set off against profits of eligible units for section 10B exemption.

Issue 2: Compliance with Dispute Resolution Panel's directions:
The appellant raised concerns about the AO not adhering to directions from the Dispute Resolution Panel regarding consistent treatment of forex fluctuation on ECB. However, the Tribunal rejected this ground as the appellant did not pursue it during the hearing.

Issue 3: Computation of exemption under section 10B:
The AO computed the exemption under section 10B after setting off unabsorbed depreciation/business losses, citing a circular and a Karnataka High Court decision. The appellant argued that deductions under section 10B should be allowed independently. The Tribunal, following a Supreme Court decision, ruled in favor of the appellant, stating that unabsorbed business losses should not be set off against profits of eligible units for section 10B exemption.

Overall, the Tribunal allowed the appeal, holding that the AO was incorrect in setting off unabsorbed business losses against profits of eligible units, and the appellant was entitled to exemption under section 10B of the Income Tax Act.