Consistent lower-of-cost-or-market valuation supports allowance of equity share and derivative mark-to-market losses.

Consistent valuation of equity shares and equity stock futures at lower of cost or market value was accepted as producing an allowable trading loss. The Tribunal held that CBDT Instruction No. 3/2010, dealing with forex derivatives, could not be applied to closing stock valuation of equity shares. It also treated mark-to-market loss on outstanding equity derivative positions as a real business loss where the method had been regularly followed and accepted in earlier years. The disallowances were therefore not sustained, and the appellate relief to the assessee was affirmed.

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Issues: (i) Whether the loss arising from valuation of closing stock of equity shares at lower of cost or market value was allowable. (ii) Whether the provision for mark to market margin on equity stock futures was allowable.

Issue (i): Whether the loss arising from valuation of closing stock of equity shares at lower of cost or market value was allowable.

Analysis: The assessee had consistently followed the method of valuing stock-in-trade at cost or market value, whichever was lower, and that method had been accepted in earlier years. The disallowance made by the Assessing Officer was based on the view that the diminution was speculative and covered by the Explanation to section 73 of the Income-tax Act, 1961, and on reliance placed upon CBDT Instruction No. 3/2010 dated 23.03.2010. The Tribunal held that the instruction related to forex derivatives and could not govern valuation of closing stock of equity shares. It also followed the earlier coordinate bench decisions in the assessee's own case and accepted the claim.

Conclusion: The addition on account of mark to market loss on closing stock of equity shares was not sustainable and was rightly deleted.

Issue (ii): Whether the provision for mark to market margin on equity stock futures was allowable.

Analysis: This claim was treated as identical in principle to the earlier issue and was examined in the light of the assessee's past assessment years. The Tribunal followed its earlier decisions, which had accepted mark to market loss on outstanding equity derivatives as a real business loss based on the valuation principle that closing stock must reflect market value at the year-end. The disallowance made by the Assessing Officer was therefore reversed by the appellate authority and upheld by the Tribunal.

Conclusion: The deletion of the disallowance relating to provision for mark to market margin on equity stock futures was sustained.

Final Conclusion: Both revenue appeals failed, and the appellate relief granted to the assessee on the disputed mark to market adjustments was affirmed.

Ratio Decidendi: Where stock-in-trade or outstanding equity derivative positions are consistently valued at lower of cost or market value and such method has been accepted in prior years, the resultant diminution represents an allowable trading loss and cannot be rejected merely by invoking the speculation-loss provision or a circular dealing with a different category of derivatives.

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