2014 (1) TMI 1382 - AT - Income Tax

Tribunal remands expense disallowance issue but rules in favor of appellant on mark-to-market loss treatment

The Tribunal remanded the issue of disallowance of expenses for earning exempt income under section 14A/Rule 8D back to the Assessing Officer due to lack ... Confirmation of enhancement of disallowance u/s 14A of the Act r.w. Rule 8D(2) of the Act – Exempted income as dividend income earned - Held that:- Under section 14A of the Income Tax Act resort can be made to Rule 8D (2) of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure - while making the disallowance under consideration – thus, the matter remitted back to the AO to examine the computation made. Confirmation of disallowance - Mark-to-market loss treated as contingent loss – Held that:- The decision in DEPUTY COMMISSIONER OF INCOME TAX. Versus KOTAK MAHINDRA INVESTMENT LTD. [2013 (7) TMI 355 - ITAT MUMBAI] followed - the stock future is one of the types of forward contract, which is traded on exchanges. This can be traded in BSE as well as in NSE. In such type of contracts the stock is not actually purchased rather the profit or loss is calculated on the book value in comparison to the actual market rate of the stocks on the date which has been agreed by the parties for the performance of the contract - it is not only the actual stock but derivatives can also be held as stock in trade and the principle “cost or market price whichever is lower” has been rightly followed by the assessee in valuing the derivatives and further when the derivates are held as stock in trade then whatever rules apply to the stock in trade will have to apply to their valuation also - While anticipated loss is taken into account while valuation of closing stock, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as not prudent trader would care to show increased profits before actual realization - the addition made by the AO on this ground is hereby ordered to be deleted – Decided in favour of Assessee. Issues:1. Disallowance of expenses for earning exempt income under section 14A/Rule 8D.2. Treatment of mark-to-market loss as contingent in nature.Issue 1: Disallowance of expenses for earning exempt income under section 14A/Rule 8D:The appellant contested the disallowance of Rs.18,09,124/- by the Assessing Officer (AO) against the Rs.2,84,274/- already disallowed, related to exempt dividend income. The appellant argued that no investment was made specifically for earning dividends, and expenses were not incurred for tax-free income. The AO invoked Rule 8D without reason, but the CIT(A) upheld the disallowance due to lack of separate expense records. The Tribunal noted the AO's failure to question the appellant's calculations before applying Rule 8D directly. Consequently, the issue was remanded to the AO for proper examination, directing cooperation from the appellant.Issue 2: Treatment of mark-to-market loss as contingent in nature:The appellant's mark-to-market loss of Rs.83,655/- was treated as contingent by the AO. However, a precedent from a co-ordinate bench favored the appellant, explaining stock futures contracts and the treatment of such losses. Citing the Supreme Court's stance on commercial accounting principles, the Tribunal ruled in favor of the appellant, stating that anticipated losses are allowable even if not realized. The judgment emphasized the valuation of derivatives as stock in trade and the application of 'cost or market price whichever is lower' principle. Consequently, the AO's addition on this ground was ordered to be deleted, and the appeal of the assessee was allowed.In conclusion, the Tribunal's judgment addressed the issues of disallowance of expenses for earning exempt income and the treatment of mark-to-market loss as contingent. The decision provided detailed reasoning based on legal principles and precedents, ultimately favoring the appellant in both matters.