Mark-to-market derivative losses and director remuneration as salary were both held outside disallowance under tax provisions.

Year-end mark-to-market loss on outstanding equity derivatives, valued at the lower of cost or market value, was treated as an ascertained trading loss and allowed as a deduction; the disallowance was deleted. Commission paid to working directors, being part of the remuneration package and in substance salary, was not hit by section 40(a)(ia) because that provision does not apply to salary payments; the Revenue's challenge therefore failed.

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Issues: (i) Whether the mark-to-market loss on outstanding equity derivatives, valued at lower of cost or market value on the balance-sheet date, was allowable as a deduction; (ii) Whether commission paid to directors, treated as part of salary, could be disallowed under section 40(a)(ia) for non-deduction of tax at source.

Issue (i): Whether the mark-to-market loss on outstanding equity derivatives, valued at lower of cost or market value on the balance-sheet date, was allowable as a deduction.

Analysis: The assessee had valued the outstanding derivative position at the balance-sheet date and booked the resultant diminution as loss. The valuation reflected the year-end position and the loss was not treated as a mere contingent claim. The principle applied was that year-end losses embedded in closing stock or similar trading positions are to be recognised on prudent valuation, and the decision in Woodward Governor was relied upon for the proposition that loss arising on year-end valuation is allowable.

Conclusion: The loss was allowable and the disallowance was deleted, in favour of the assessee.

Issue (ii): Whether commission paid to directors, treated as part of salary, could be disallowed under section 40(a)(ia) for non-deduction of tax at source.

Analysis: The commission was approved as part of the remuneration package of working directors and was treated as salary in substance. On that footing, the payment was exigible to tax deduction under the salary provisions and not as commission falling under the TDS provisions for contract payments. Since section 40(a)(ia) applies to specified payments and not to salary, the disallowance on that basis was unsustainable.

Conclusion: The disallowance was not permissible under section 40(a)(ia), and the Revenue's challenge failed.

Final Conclusion: The assessee succeeded on both issues, and the Revenue's appeals were dismissed.

Ratio Decidendi: A year-end loss on valuation of trading positions at lower of cost or market value is allowable when it represents an ascertained trading loss, and remuneration paid to directors as salary cannot be disallowed under section 40(a)(ia) merely because no tax was deducted under the commission TDS provision.

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