2010 (11) TMI 851 - AT - Income Tax

Disallowed u/s 014A - HELD THAT - In case of Godrej Boyce Manufacturing Company Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT held that Rule 8D will not apply to assessment years prior to A.Y 2008-09. In respect of assessment years prior to 2008-09 the AO has to make the disallowance u/s 014A of the Act on a reasonable basis. We are of the view that the basis adopted by the AO was reasonable and we, therefore, direct that a sum of Rs. 1.00 lac directed to be disallowed by the AO u/s 14A should be restored. We order accordingly. Loss in valuation of the closing stock - HELD THAT - the assessee has valued each scrip of the derivatives as at the end of the year. We do not see how this can make any difference to the legal principle. If the derivatives have been treated as stock-in-trade then there is nothing unusual in the assessee valuing each derivative by applying the rule cost or market whichever is lower. We, therefore, direct the AO to allow the provision as reflecting in substance the loss arising on account of valuation of the closing stock. The ground is allowed.

Summary

Issues:
1. Disallowance under section 14A for tax-free interest income and dividend.
2. Disallowance of Mark to Market Loss on Future Contracts.

Issue 1: Disallowance under section 14A for tax-free interest income and dividend:
The appellant, an individual dealing in shares and investments, contested the addition made by the Assessing Officer under section 14A for expenses related to earning tax-free interest income on RBI Bonds and dividends. The appellant argued that no expenses were incurred in earning the said income, which did not form part of the total income. The CIT(A) directed the application of Rule 8D for disallowance based on a Special Bench decision. However, the Tribunal referred to a Bombay High Court judgment stating that Rule 8D would not apply to assessment years before 2008-09. The Tribunal found the Assessing Officer's estimation of expenses reasonable and directed the restoration of the disallowed sum of Rs. 1.00 lac.

Issue 2: Disallowance of Mark to Market Loss on Future Contracts:
The appellant claimed a Mark to Market Loss of Rs. 9,25,911 on Future Contracts, following accounting guidelines by ICAI. The Assessing Officer rejected the claim, stating that derivative contracts did not constitute stock in trade and mark to market losses were considered as unascertained liabilities. The CIT(A) upheld the Assessing Officer's decision. However, the Tribunal referenced a previous decision involving a similar issue and held that the provision for anticipated losses on derivatives, treated as stock-in-trade, should be allowed. Following this precedent, the Tribunal directed the Assessing Officer to allow the claim made by the appellant.

In conclusion, the appeal was partly allowed by the Tribunal, with directions given regarding the disallowance under section 14A and the treatment of Mark to Market Loss on Future Contracts.