TaxTMI 
TaxTMI 
2020 (12) TMI 104
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd prejudicial to the interest of the revenue. The appellants pray that the order of the CIT passed under section 263 of the Act be quashed. 2. The CIT erred in directing AO to frame fresh assessment order (de novo) after giving reasonable opportunity of hearing to the appellants. 3. The CIT erred in directing the AO to examine the issues raised vide order under section 263 and take appropriate action as warranted by the facts and circumstances of the case. 4. The CIT erred in setting aside the regular assessment on the issue of broken period interest and holding that broken period interest paid on purchase of securities was required to be considered at the time of valuing closing stock and then work out the loss/profit from the business income accordingly. 5. The CIT erred setting aside the regular assessment on the issue of claim for debenture issue expenses. 6. The CIT erred in setting aside the regular assessment on the issue of claim of deduction for Mark to Market losses in relation to Equity Linked Notes. 3. Brief facts are that the assessing officer in this case passed an order under section 143(3) of the I.T. Act on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... while deduction on account of broken period interest for purchase is being disallowed in entirety. In the facts of the present case, what ought to have been considered for disallowance by the AO is broken period interest on securities lying unsold and shown in the closing stock. Since, broken period interest is part of the purchase price. To the extent it pertains to security which remains unsold on 31st March and is reflected in closing stock, such security has to be valued after including the broken period interest. Broken period interest on such security will be allowed as a deduction only at the time of sate of these securities. These facts are totally at variance with cases cited by the assessee. In the present case, assessee has paid Rs,9,41,67/- as broken period interest for 11.3% GOI Bonds 2010. Likewise, Rs. 1,58,01,984/- has been paid as broken period interest at the time of purchase of bonds of Housing Dev. Finance Corpn. Both the above bonds were lying unsold as on 31.03.2008. Therefore, this interest being part of purchase consideration was required to be considered at the time of valuing closing stock and then work out the loss/pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....before allowing this loss on the basis of mark to market to the Nifty option. Whether this loss claimed in the computation is notional expenditure or not ought to have been examined by A.O. in light of Instruction No.3/2010 dated 23.03.2010 issued by CBDT which is binding on the A.O. The A.O. as stated above failed to call for relevant details. This loss being arrived at for open derivative position need to be considered as per Instruction No. 3/2010 of the CBDT. The A.O. failed to follow instructions of the CBDT on this regard. 5. In the light of above discussions, I am of considered opinion that assessment order is erroneous and prejudicial to the interest of the revenue on account of failure of the AO to carry out relevant and meaningful inquiries. This inference is also supported by ratio of various decisions of Malabar Industrial Co. Ltd. vs CIT 243 ITR 83 (SC), CIT vs Max India Ltd. 295 ITR 282(SC) CIT Vs Mangal Castings 303 ITR 23(P&H), CIT v. Kohinoor Tobacco Products(P)Ltd.[1998] 234 ITR 557, CIT v. Mahavar Traders[1996] 220 ITR 167(MP), Duggal & Co.v. CIT[1996] 220 ITR 456, CIT vs MEPCO Industries Ltd 294 ITR 121 (Mad.), Meerut Roller Flour Mills Ltd vs ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ind on the points mentioned in the computation of income. In this regard learned counsel the assessee submits that following notes were duly mentioned in the computation of income. 1) The company was incorporated on 24th May. 2005. The principal business of the company is to undertake activities of a loan/investment company. The company had applied for registration with RBI as a Non Banking Financial Company which has been received on 2nd August. 2007. Company has commenced its business on January 2008. 2) In accordance with its objects, the company has placed deposits with bank and the entire interest income has been offered to tax. 3) Deduction has been claimed for broken period interest of Rs. 16,743,650 paid on purchase of securities lying in the inventory as on 31.03.08 relying on the judgement of the Hon'ble Bombay High Court in the case of American Express Bank reported in 258 ITR 601. 4) During the year the company had issued Equity Linked Notes a liability product offered by the company. The company marks to market the open positions at the year end and the liability with respect to mark to market loss is recognized in the profit and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any has recognized an amount of Rs. 14,244,981 as a mark to market loss in its profit and loss account. The details of the same are enclosed at page 173 of the paper book). c) In the captioned notice, it has been stated that the mark to market loss arising out the Equity Linked Notes, is notional in nature and hence should not be allowed as deduction in view of the CBDT Instruction No. 3/2010 dated 23 March 2010 (copy enclosed at pages 174 to 175 of the paper book). d) In this connection, we wish to rely on the decision of Mumbai Tribunal in the case of The DCIT vs. Kotak Mahindra Investment Ltd. (ITA No. 1502/M/2012) dated 3 May 2013 (copy enclosed at pages 176 to 184 of the paper book), wherein the Tribunal has held that the mark to market losses in respect of future contracts was allowable as deduction. e) As regards, to the CBDT instruction, we wish to submit that the instruction was with respect to the loss on forex derivative transaction and applicability of section 43 of the Income tax Act. Equity linked notes are not derivatives and are in the nature of bonds and hence the CBDT instruction relating to the derivatives is not applicable in the insta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation 1.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120; (b) "record" shall include and sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....us in so far it is prejudicial to the interest of the revenue. So it was incumbent upon learned CIT to give a finding that the order of the Assessing Officer is both erroneous and prejudicial to the interest of revenue. Hence, learned CIT(A)'s direction to make further examination without pointing out that order is both erroneous and prejudicial to the interest of revenue is not sustainable. 13. We note here that learned CIT's further objection is that the Assessing Officer has not examined whether RBI guidelines in this regard has been followed by the assessee or not. Here we note that there is no presumption that non-following of RBI guidelines in an assessment will result in an order which is prejudicial to the interest of revenue. The RBI guidelines and the prudential norms are not designed to pluck revenue leakage from income tax point of view. These are mandate to ensure that the assessee follows proper Banking norms. Hence, learned CIT's inference that non examination of adherence to RBI guidelines by the Assessing Officer has resulted in a order which is erroneous in so far as it is prejudice to the interest of revenue is liable to be set aside. Moreover as we have alrea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lied his mind at the time of passing an assessment order to this particular claim made in the basic document viz. computation of the income by not disallowing it in proceedings under Section 143(3) of the Act as he was satisfied with the basis of the claim as indicated in that very document. Therefore, where he accepts the claim made, the occasion to ask questions on it will not arise nor does it have to be indicated in the order passed in the regular assessment proceedings." 15. Thus on the touchstone of above Hon'ble Bombay High Court decision when the issues were given in note in the computation of income and case laws were referred, it cannot be said that Assessing Officer has not examined the issues and applied his mind. 16. As regards the broken period interest is concerned we note that the same was duly given in note of computation of income as under :- Deduction has been claimed for broken period interest of Rs. 16,743,650 paid on purchase of securities lying in the inventory as on 31.03.08 relying on the judgement of the Hon'ble Bombay High Court in the case of American Express Bank reported in 258 ITR 601. 17. Hence, the assessee has duly explain....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce norms. For the current year, the company has recocgnised an amount of INR 14,244,981 as a mark to market liability in its profit and loss account towards the subject product. The same has accordingly been claimed as lax allowable in the return in the return of income for the current year i.e. AY 2008-09. 20. Thus in the aforesaid note of computation of income the assessee has explained the accounting policy adopted for recognising mark to market loss and the assessee has quantified the amount also. On the touchstone of the Hon'ble Bombay High Court decision referred above State Bank of India Vs. ACIT (supra) it cannot be held that the Assessing Officer has not applied his mind or made enquiry on the issue. As held above once it is held that the Assessing Officer has applied his mind and has taken one of the possible view, learned CIT cannot invoke its jurisdiction u/s. 263 of the Act. Moreover, in the order u/s. 263 learned CIT(A) has nowhere dislodged the detail submission on this issue by the assessee, and the case laws which have been claimed by the assessee in favour of the assessee being Special bench decision in the case of Bank of Bahrain and Kuwait (supra) and al....