2018 (10) TMI 59 - AT - Income Tax

Rejection of claim of set off of loss incurred by the appellant in 100% Export Oriented Unit as eligible for exemption u/s 10B - alleged loss was claimed as set off against the profit of other Division of the assessee - Held that - From perusal of the CBDT Circular No.7/DV/2013 dated 16.7.2013 as well as the judgments referred and relied by the Ld. Counsel for the assessee, we find force in the contention of the assessee. Hon ble Bombay High Court in the case of DCIT V Hindustan Unilever 2010 (4) TMI 206 - BOMBAY HIGH COURT dealing with the same issue has allowed the claim of set off of loss incurred in one of the EOU units eligible for exemption u/s 10B of the Act against the profits of other units run by the same assessee. - Decided in favour of assessee Marked to market loss - Disallowance of claim of foreign currency fluctuation loss as suffered by the assessee on account of forward market contract of forex derivatives outstanding at the year end - Held that - Co-ordinate Bench, Mumbai in the case of ACIT V M/s. D. Dipak & Co 2013 (7) TMI 255 - ITAT MUMBAI dealing with the same issue of marked to market loss of notional nature, allowed the issue in favour of the assessee by relying on the Special Bench decision in the case of DCIT V Bank of Bahrain & Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI concluded that a liability is said to have crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty. - Decided in favour of assessee

Summary

Issues Involved:
1. Rejection of claim of set-off of loss incurred in 100% Export Oriented Unit (EOU) Technology Division.
2. Disallowance of foreign currency fluctuation loss.

Issue-Wise Analysis:

1. Rejection of Claim of Set-Off of Loss Incurred in 100% Export Oriented Unit (EOU) Technology Division:

The assessee, a public limited company engaged in various businesses including a 100% Export Oriented Unit (EOU) Technology Division, disclosed an income of ?141,32,99,510/- in its income tax return. The case was selected for scrutiny, and the total income was assessed at ?168,51,36,442/- after making various additions. The assessee appealed against the order, which was partly successful, leading to the current appeal before the Tribunal.

The primary issue raised was the rejection of the claim of set-off of a loss of ?53,26,361/- incurred by the appellant in its 100% EOU Technology Division, which was eligible for exemption under Section 10B of the Income Tax Act. The assessee argued that the loss should be set off against the profits of other divisions. The Tribunal noted that the issue was covered in favor of the assessee by CBDT Circular No.7/DV/2013 dated 16.7.2013 and several judgments, including those from the Bombay High Court and Delhi High Court.

The Tribunal observed that Section 10B, as amended by the Finance Act 2000, provides for a deduction rather than an exemption. The Hon'ble Bombay High Court in DCIT v. Hindustan Unilever (2012) held that the loss incurred by an eligible unit under Section 10B could be set off against the profits of other units run by the same assessee. The Tribunal, following this judgment, concluded that the lower authorities erred in denying the set-off and allowed the assessee's claim.

2. Disallowance of Foreign Currency Fluctuation Loss:

The second issue involved the disallowance of a foreign currency fluctuation loss of ?2,82,42,778/- suffered by the assessee due to forward market contracts of forex derivatives outstanding at the year-end. The assessee argued that this issue was covered in its favor by various judgments, including the Special Bench decision in DCIT v. Bank of Bahrain & Kuwait 132 TTJ 505 (Mum) (SB).

The assessee claimed a total foreign exchange fluctuation expenditure of ?118.32 crores, which included a notional loss of ?2,82,42,778/- due to "marked to market" valuation of pending forward contracts. The lower authorities allowed the actual loss incurred but disallowed the notional loss, arguing that it was merely notional and not a realized loss.

The Tribunal noted that the assessee followed Accounting Standard-11, which mandates recognizing the effect of changes in foreign exchange rates in the profit and loss account. The Tribunal referred to several judgments, including the Supreme Court's decision in CIT v. Woodward Governor India P. Ltd (2009), which upheld the allowance of such notional losses. The Tribunal also cited the Mumbai ITAT's decision in ACIT v. M/s. D. Dipak & Co, which allowed a similar claim for "marked to market" loss.

The Tribunal concluded that the lower authorities erred in not allowing the notional loss and allowed the assessee's claim for the foreign currency fluctuation loss of ?2,82,42,778/-.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal setting aside the findings of the lower authorities on both issues. The order was pronounced in the open Court on 28.9.2018.