2020 (2) TMI 1016 - AT - Income Tax

Tribunal allows marked to market loss on derivatives, partially allows disallowance, no fresh adjudication

The Tribunal allowed the assessee's claim of Rs. 5,96,510/- representing marked to market loss on derivatives, recognizing it as a genuine loss under ... Disallowance of marked to market loss on derivatives - nature of speculation loss - HELD THAT:- Pertinently in the statement of facts filed with the memorandum of appeal in form No. 35 before learned Commissioner (Appeals), the assessee has specifically stated that it has carried out its transactions in derivatives in future and option segments of National Stock Exchange. From the impugned order if learned Commissioner (Appeals) it is patent obvious that he has completely overlooked the aforesaid factual position while observing that the assessee has entered into over the counter derivative transaction and not in any recognized stock exchanges, while treating it as speculative loss u/s. 43(5) of the Act. Keeping in view, the factual position arising out if the material on record, the contention of the assessee that the derivative transaction in respect of which it has claimed mark to market loss comes within the exception as per Clause (d) of the proviso to Sec. 43(5) of the Act appears to have substantial strength, hence, needs to be accepted. Now, it is fairly well settled by the ratio laid down in the case of CIT Vs. Woodward Governor India Pvt Ltd [2009 (4) TMI 4 - SUPREME COURT] that mark to market loss as on the balance sheet date is allowable u/s 37(1) of the Act. Further, it has been brought to our notice by learned Authorized Representative that in subsequent assessment years the Assessing Officer has consistently allowed assessee’s claim of mark to market loss. In view of the aforesaid, we hold that mark to market loss is not in the nature of speculation loss, hence, has to be allowed. Disallowance u/s 14A - disallowance of interest expenditure under Rule 8(D)(2)(ii) - HELD THAT:- Financial statement available on record clearly indicate that the assessee had sufficient interest free funds available with it. That being the case, it has to be presumed that the interest free funds were utilized in investment in shares. Thus, no part of the interest expenditure can be attributed for earning of exempt income. Therefore, the only disallowance which can be made u/s 14A of the Act is the administrative expenditure as per Rule 8D(2)(iii). Here also, while computing the disallowance the Assessing Officer has to consider only those investments which have yielded exempt income during the year, as held by the Income Tax Appellate Tribunal, Delhi (Special Bench) in the case of ACIT Vs Vireet Investments (P) Ltd. [2017 (6) TMI 1124 - ITAT DELHI]. It is relevant to observe, the assessee has furnished a working of disallowance under Rule 8D(2)(iii) quantifying the disallowance. Admittedly, the aforesaid working has been furnished by the assessee for the first time before us and was not available either before the Assessing Officer or learned Commissioner (Appeals). We direct the Assessing Officer to verify the aforesaid working furnished by the assessee and thereafter compute the disallowance under Rule 8D(2)(iii) - Decided in favour of assessee partly. Issues Involved:1. Disallowance of Rs. 5,96,510/- representing marked to market loss on derivatives.2. Disallowance under Section 14A of the Income Tax Act.3. Fresh adjudication of issues for assessment year 2007-08 and 2008-09.Detailed Analysis:1. Disallowance of Rs. 5,96,510/- Representing Marked to Market Loss on Derivatives:The assessee, engaged in shares and stock broking, trading in debt securities, mutual funds distribution, and other financial services, filed its return of income declaring a loss under normal provisions and book profit under Section 115JB of the Income Tax Act. During the assessment, the Assessing Officer (AO) noticed a loss on trading in derivative transactions and questioned whether this included any provision for loss on outstanding derivative contracts as of 31.03.2008. The assessee confirmed that the loss included a mark to market loss of Rs. 5,96,510/- on outstanding derivative contracts, justified by the accounting guidelines prescribed by the Institute of Chartered Accountants of India (ICAI). The AO, however, treated this as notional loss and disallowed it, a decision upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].The Tribunal, after considering the rival submissions and various case laws, concluded that the derivative transactions were carried out through recognized stock exchanges (NSE) and thus should not be treated as speculative transactions under Section 43(5)(d) of the Act. The Tribunal also noted that the mark to market loss is allowable under Section 37(1) of the Act, as established by the Supreme Court in CIT Vs. Woodward Governor India Pvt Ltd. Consequently, the Tribunal allowed the assessee's claim of Rs. 5,96,510/-.2. Disallowance under Section 14A of the Income Tax Act:The AO noticed that the assessee earned exempt income by way of dividends and disallowed an amount under Section 14A towards expenditure attributable to earning the dividend income. The AO computed the disallowance by applying Rule 8D, resulting in a significant disallowance, which was partly sustained by the CIT(A).The Tribunal observed that the assessee had sufficient interest-free funds available and that the borrowed funds were specifically for investment in debt securities, which are not exempt income-yielding assets. The Tribunal directed that no part of the interest expenditure could be attributed to earning exempt income and that only administrative expenditure under Rule 8D(2)(iii) should be disallowed. The Tribunal also instructed the AO to verify the assessee's working of disallowance and compute it accordingly.3. Fresh Adjudication of Issues for Assessment Year 2007-08 and 2008-09:The Tribunal's consolidated order for the assessment years 2007-08 and 2008-09 was challenged by both parties before the Hon’ble Jurisdictional High Court. The High Court restored the issues for the assessment year 2008-09 for fresh adjudication by the Tribunal. However, the High Court inadvertently referred to the appeal number for the assessment year 2007-08 instead of 2008-09. The Tribunal clarified that the order for the assessment year 2007-08 remained intact and required no fresh adjudication. The Tribunal disposed of the appeals for statistical purposes in terms of the earlier order.Conclusion:- The assessee's appeal regarding the marked to market loss on derivatives was allowed, recognizing it as a genuine loss under Section 37(1).- The disallowance under Section 14A was partly allowed, with directions to the AO to verify and compute the administrative expenditure disallowance.- The appeals for the assessment year 2007-08 were partly allowed as per the earlier Tribunal order, with no need for fresh adjudication.Result:- ITA No. 456/Mum/2012: Partly allowed.- ITA No. 660/Mum/2012: Dismissed.- ITA Nos. 225 & 229/Mum/2011: Partly allowed.