2021 (10) TMI 445 - AT - Income Tax

Appeals Decided with Detailed Directions and Precedent Adherence

The Tribunal partly allowed the appeals of both the Revenue and the assessee, providing detailed directions on each issue, ensuring adherence to judicial ... Disallowance of provision for mark to market loss on trading of derivative instruments - treating it as notional loss both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act - HELD THAT:- We find that this issue is squarely covered by the order of this Tribunal in assessee‟s own case[2019 (3) TMI 1060 - ITAT MUMBAI] for earlier years. We find that the ld. CIT(A) had followed the decision relied by this Tribunal in the case of Edelweiss Securities Ltd., [2012 (3) TMI 612 - ITAT MUMBAI] and DCIT vs. ECL Finance Ltd. [2013 (1) TMI 783 - ITAT MUMBAI], both being sister concerns of the assessee, wherein similar issue has been decided in favour of the assessee. The relevant portion of the said orders are not reiterated herein for the sake of brevity. Hence, we do not find any infirmity in the order of the ld. CIT(A) following the Tribunal order while granting relief to the assessee. Accordingly, the ground Nos. 1 & 2 raised by the Revenue are dismissed. Disallowance made u/s.14A of the Act r.w.r.8D(2) - suo-moto disallowance of expenses as expenditure incurred for earning exempt income - HELD THAT:- We find that the Hon'ble Gujarat High Court in the case of Nirma Credit and Capital Pvt. Ltd.[2017 (9) TMI 485 - GUJARAT HIGH COURT] had categorically held that only the net interest expenditure should be considered for the purpose of working out the disallowance of interest under Rule 8D(2)(ii) of the Rules. Total investments the assessee is having own funds to the tune of ₹ 67.89 Crores which is evident from the perusal of the financial statements enclosed in the paper book filed before us. Hence, it could be reasonably presumed that investments only to the tune of ₹ 4.23 Crores have been made out of borrowed funds, for which disallowance of interest could be made. Hence, in the light of decision of Reliance Industries Ltd., [2019 (1) TMI 757 - SUPREME COURT] and the decision of the Vireet Investments [2017 (6) TMI 1124 - ITAT DELHI], we direct the ld. AO to recompute the disallowance of expenses u/s.14A of the Act as under:- i) To consider only net interest expenditure as per the decision of the Hon'ble Gujarat High Court in the case of Nirma Credit and Capital Pvt. Ltd., referred to supra. ii) To consider only those investments which had actually yielded exempt income to the assessee for the purpose of working out the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii). iii) While working out the same, investments which were presumed to be made out of own funds should be given credit or should be reduced for the purpose of working out the disallowance under Rule 8D(2)(ii) of the Rules. iv) In any case, the total disallowance made u/s.14A of the Act shall not exceed exempt income. Disallowance on account of provision for expenses made under normal provisions of the Act as well as in the computation of book profits u/s.115JB - HELD THAT:- As assessee being a subsidiary of Edelweiss Financial Services Ltd., which is a listed company had to get its accounts audited on or before 31st May from the end of the accounting year in order to submit the balance sheet to the stock exchange in accordance with listing norms. The audited financial statements of the assessee company has been signed on 14th May 2013, for which purpose, obviously accounts need to be freezed at least by the end of April. Hence, for the purpose of freezing of accounts, expenses and income that had accrued need to be provided atleast on estimated basis and based on past practices prevailing in the company. The assessee company does not have a luxury to wait for the receipt of actual bills from the concerned parties after the end of the financial year. Since assessee could not adopt “wait and watch approach‟ and had to necessarily make provision for certain expenses on an estimated basis based on past practices to finalize its accounts, the provision made thereon cannot be treated as an unascertained liability or liability which is contingent in nature. In view of the same, we find that the ld. CIT(A) had rightly deleted the disallowance. Disallowance being loss incurred by the assessee of trading in commodity forward contract - CIT- A deleted the addition - HELD THAT:- CIT(A) had categorically observed that the parties with whom assessee company had entered into the forward contracts are regularly assessed to income tax and had duly paid their taxes on the income earned by them by entering into forward contracts with the assessee. The assessee has filed computation of total income and assessment orders framed in the hands of those group companies wherein it could be seen that the correct income had been duly taxed at the higher slab rate of 30%, hence, there cannot be any tax avoidance or mala fide intention on the assessee to reduce tax liability - loss incurred by the assessee in the forward contract by buying or selling the aluminium commodity, Nickel, or platinum is only incurred in the normal course of running the business of the assessee and the prices thereof are purely driven by market forces. The transactions carried out with related parties are of no relevance for disallowing the loss incurred by the assessee. Reliance in this regard has been rightly placed by the ld. AR on the decision of Pitty Bros. Pvt. Ltd., [1979 (1) TMI 42 - BOMBAY HIGH COURT] - No infirmity in the order of the ld. CIT(A) deleting the disallowance being the loss incurred on account of trading in forward contracts. Deduction on account of education cess - assessee has raised an additional ground - HELD THAT:- We find that this additional ground deserves to be admitted as all the facts necessary for its adjudication are already on record and there is no dispute that assessee had indeed paid the education cess. Hence, respectfully following the decision of Sesa Goa Ltd.[2020 (3) TMI 347 - BOMBAY HIGH COURT] we direct the ld. AO to grant deduction on account of education cess paid by the assessee as an allowable business expenditure. Accordingly, the additional ground raised by the assessee is allowed. Issues Involved:1. Disallowance of provision for mark-to-market loss on trading of derivative instruments.2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.3. Disallowance of provision for expenses.4. Disallowance of loss incurred on trading in commodity forward contracts.5. Deduction on account of education cess.Detailed Analysis:1. Disallowance of Provision for Mark-to-Market Loss on Trading of Derivative Instruments:The assessee, engaged in trading and arbitrage of commodities, securities, and derivative instruments, recognized a loss of Rs. 2,77,67,241 on Mark-to-Market (MTM) trading in derivative instruments, which was disallowed by the Assessing Officer (AO) as a notional loss. The AO's reasons included the absence of actual loss and reliance on the Supreme Court judgment in Sanjeev Woolen Mills vs. CIT and CBDT's instruction dated 23.03.2010. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, noting that the loss was recognized following accepted accounting principles and various judicial precedents, including the Supreme Court's decision in CIT vs. Woodward Governor India Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, noting the issue was covered by prior Tribunal decisions in favor of the assessee.2. Disallowance under Section 14A Read with Rule 8D:The AO disallowed Rs. 3,94,46,638 under Section 14A read with Rule 8D, which was restricted by the CIT(A) to the extent of exempt income. The Tribunal directed the AO to:- Consider only net interest expenditure.- Include only those investments that yielded exempt income.- Account for investments presumed to be made out of own funds.- Ensure total disallowance does not exceed exempt income.3. Disallowance of Provision for Expenses:The AO disallowed Rs. 3,58,10,173 as unascertained liability, which was reversed by the assessee in the subsequent year and offered to tax. The CIT(A) deleted the disallowance, noting that the provision was made based on reasonable estimates and past practices, supported by Accounting Standard (AS) 29 and the Supreme Court's decision in Bharat Earth Movers vs. CIT. The Tribunal upheld the CIT(A)'s decision, recognizing the necessity of making such provisions for timely finalization of accounts.4. Disallowance of Loss Incurred on Trading in Commodity Forward Contracts:The AO treated a loss of Rs. 7,74,36,669 incurred on trading in forward contracts with group entities as speculative and disallowed it. The CIT(A) deleted the disallowance, noting that the transactions were genuine, driven by market forces, and duly reflected in the books of both the assessee and the group entities. The Tribunal upheld the CIT(A)'s decision, emphasizing that suspicion alone cannot replace evidence and noting that the profits from similar transactions were accepted by the AO.5. Deduction on Account of Education Cess:The assessee raised an additional ground for claiming deduction on account of education cess. The Tribunal admitted the additional ground, noting that all necessary facts were on record and directed the AO to grant the deduction, following the jurisdictional High Court's decision in Sesa Goa Ltd. vs. JCIT.Conclusion:The Tribunal partly allowed the appeals of both the Revenue and the assessee, providing detailed directions on each issue, ensuring adherence to judicial precedents and accounting standards. The decisions rendered in one case were applied to other identical cases for consistency.