2015 (8) TMI 1143 - AT - Income Tax

Tribunal partially allows appeal, orders deletion of mark-to-market loss disallowance, revisits tax deduction under section 14A.

The Tribunal partly allowed the appeal, directing the AO to delete the mark to market loss disallowance, exempting the non-deduction of tax at source due ... Allowability of mark-to-market loss on interest rate swap contracts - contingent liability versus allowable business loss - disallowance under section 40(a)(ia) for failure to deduct tax at source - applicability of section 194J to transaction charges - disallowance under section 14A read with Rule 8DAllowability of mark-to-market loss on interest rate swap contracts - contingent liability versus allowable business loss - Deductibility of mark-to-market loss on interest rate swap contracts debited to profit and loss account. - HELD THAT: - The Tribunal found as fact that the assessee had valued outstanding interest rate swap contracts at the year end and debited the resultant loss to the P&L account following Accounting Standard AS-11. Prior Tribunal Special Bench decisions and the Supreme Court decision in Woodward Governor India Pvt. Ltd. were held to support the allowability of such mark-to-market losses and to displace the contention that the liability is contingent. The Tribunal also rejected the AO's observation that gains were not accounted for, noting that the accounts do record gains where they arose. On this basis the Tribunal set aside the CIT(A)'s confirmation of the addition and directed deletion of the addition representing the mark-to-market loss. [Paras 3, 6]Addition of Rs. 18,29,87,255/- on account of mark-to-market loss deleted.Disallowance under section 40(a)(ia) for failure to deduct tax at source - applicability of section 194J to transaction charges - Whether payments to the Bombay Stock Exchange attracting transaction charges were liable to TDS under section 194J and accordingly disallowable under section 40(a)(ia) for the year under consideration. - HELD THAT: - The Tribunal noted that the Bombay High Court in Kotak Securities Ltd held transaction charges to be subject to TDS under section 194J, but observed that between 1995 and 2005 both Revenue and assessees proceeded on the footing that section 194J did not apply. The return for the year was filed prior to the High Court decision being pronounced. Taking these factual and temporal circumstances into account, the Tribunal concluded that no fault could be found with the assessee for not deducting tax in the year under consideration and therefore no disallowance should be made for that year. [Paras 2, 7]Disallowance of Rs. 94,01,055/- under section 40(a)(ia) deleted for the assessment year 2008-09.Disallowance under section 14A read with Rule 8D - Correctness of the disallowance computed under section 14A read with Rule 8D in respect of expenditure relating to exempt dividend income. - HELD THAT: - The Tribunal accepted the assessee's contention that the AO's computation did not adhere to the spirit of section 14A read with Rule 8D and specifically observed that investments yielding taxable income should not be included in computing average investment. Rather than deciding the matter on merits, the Tribunal restored the issue to the file of the AO for fresh consideration in accordance with section 14A read with Rule 8D, directing the AO to exclude investments whose income is taxable from the computation. [Paras 2, 8]Issue under section 14A r.w. Rule 8D remanded to the AO for fresh consideration; treated as allowed for statistical purposes.Final Conclusion: The appeal is partly allowed: the mark-to-market loss addition and the disallowance under section 40(a)(ia) are deleted for AY 2008-09, while the section 14A r.w. Rule 8D disallowance is remanded to the AO for fresh consideration. Issues involved:1. Disallowance of mark to market loss.2. Non-deduction of tax at source on payment to Bombay Stock Exchange.3. Disallowance under section 14A of the Income Tax Act.Analysis of the Judgment:Issue 1: Disallowance of mark to market lossThe assessee challenged three additions, including a mark to market loss of Rs. 18,29,87,255. The AO observed the loss but denied the deduction, stating inconsistency in the assessee's accounting. The CIT(A) confirmed the disallowance treating it as speculation loss and contingent liability. However, the Tribunal disagreed, citing precedents and the Accounting Standard AS-11. The Tribunal found the AO's observations misplaced, as the assessee had accounted for gains as well. Relying on judicial decisions, the Tribunal directed the AO to delete the addition.Issue 2: Non-deduction of tax at sourceThe AO disallowed the payment made to Bombay Stock Exchange under section 40(a)(ia) for non-deduction of tax. The Tribunal noted that the issue was covered in favor of the assessee, citing a High Court decision exempting the assessee due to past practices. Considering the timeline of events, the Tribunal allowed the appeal, as the return was filed before the relevant decision.Issue 3: Disallowance under section 14ARegarding the disallowance under section 14A, the Tribunal found discrepancies in the AO's computation. The Tribunal directed a fresh consideration by the AO, emphasizing that investments generating taxable income should not be included in the average investment calculation. The issue was restored to the AO for proper assessment.In conclusion, the Tribunal partly allowed the appeal, directing the AO to delete the mark to market loss disallowance, exempting the non-deduction of tax at source due to past practices, and requiring a reassessment of the disallowance under section 14A. The judgment was pronounced on 18th February 2015.