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.

IDBI Capital Market Services Ltd. Versus The DCIT, Range 4 (1), Mumbai

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 ... Disallowance of respect of mark to market loss - Held that:- It is an undisputed fact that the assessee has made the valuation of interest rate Swap contracts as at the end of the year. It is also an undisputed fact that assessee had incurred losses on such valuation. The said losses have been claimed as deduction in the P&L Account. It is also an undisputed fact that the assessee has made the entries following Accounting Standard, AS-11 of the ICAI. Such losses being treated as mark to market the losses have been allowed by the Tribunal in series of cases following Special Bench decision in the case of Bank of Bahrain & Kuwait ( 2010 (8) TMI 578 - ITAT, MUMBAI ). The Hon’ble Supreme Court in the case of Woodward Governor India Pvt. Ltd.( 2009 (4) TMI 4 - SUPREME COURT ) has considered such losses as allowable and not of contingent in nature. We find that the observations of the AO that the assessee has never accounted for the gains on such transactions is totally misplaced and against the facts of the case. As we find in the P&L Account at page 49 of the paper book when the assessee had gains of ₹ 25.57 lacs the assessee has included the same in its income. Considering the facts in totality and in the light of judicial decisions, we set aside the findings of Ld. CIT(A) and direct the AO to delete the addition - Decided in favour of assessee. Disallowance of non-deduction of tax at source on payment made to Bombay Stock Exchange amounting - Held that:- This issue is squarely covered in favour of the assessee and against the Revenue except that the transaction charges have been considered to be subject to TDS by the decision of Hon’ble Bombay High Court in the case of Kotak Securities Ltd [2011 (10) TMI 24 - Bombay High Court ]. The Hon’ble High Court further observed that in these circumstances if both the parties for nearly a decade proceeded on the footing that section 194J is not attracted, then in the assessment year in question, no fault can be found with the assessee in not deducting tax at source under section 194J of the Act and consequently, no action could be taken under section 40(a)(ia) of the Act. Return of income for the year under consideration was filed on 14/08/2009 and this decision of the Hon’ble was pronounced on 21/10/2011. Thus, the assessee had already filed the return of income and the time period for deducting tax at source was also lapsed. Thus no disallowance on this account should be made for the year under consideration - Decided in favour of assessee. Disallowance made under section 14A - Held that:- As the assessee stated that even if section 14A r.w. Rule 8D is applicable the AO has worked out the disallowance not in consonance with the spirit of section 14A r.w. Rule 8D. It is the say of the Ld. Counsel that the AO erred in including in average investment even then investment income from which is not exempt. We have given thoughtful consideration to these submissions of the Ld. Counsel. In our considered opinion this issue needs to be verified at the assessment stage. We accordingly, restore this issue to the file of the AO. The AO is directed to consider this issue afresh in the light of the provisions of section 14A r.w. Rule 8D keeping in mind that investment from which the income is taxable should not be included in computation of the average investment. - Decided in favour of assessee for statistical purposes. 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.