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2013 (1) TMI 783 - AT - Income TaxMark to Market Loss - Rule of Prudence - AO had disallowed mark- to- market loss claimed on account of trading in derivative transactions. The reason assigned by the AO was that loss on the last date of financial year was in the nature of noncrystallized loss and such loss should be added back for the purpose of computing taxable income of an assessee . - HELD THAT - Rule of prudence that means that while anticipated losses can be taken note of while valuing the closing stock, anticipated profits cannot be recognized , is applicable in this case. The addition made by disallowing the mark-to-market loss claimed on account of trading in derivative transactions should be deleted. Decision in the case of EDELWEISS CAPITAL LTD., MUMBAI VERSUS INCOME TAX OFFICER 3 (1) (1) , MUMBAI 2012 (10) TMI 223 - ITAT, MUMBAI , relied upon. Decision in favour of assessee .
Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961. 2. Deletion of addition made by disallowing the mark-to-market loss on derivative transactions. Detailed Analysis: Disallowance under Section 14A: The primary issue in ITA Nos. 6612/Mum/11, 6607/Mum/11, and 6609/Mum/11 revolves around the disallowance made under section 14A of the Income Tax Act, 1961. The appellants contended that the disallowance under section 14A was computed on a reasonable and scientific basis, considering direct and indirect expenditures related to dividend income. The CIT(A) accepted the contention that Rule 8D could not be applied for the assessment year 2007-08 based on the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, 328 ITR 81 (Bom). The CIT(A) directed the AO to work out the disallowance in accordance with this decision, ensuring a reasonable opportunity for the appellant to present their case. The Tribunal upheld the CIT(A)'s directions, stating that the consistent view for assessment years before 2008-09 was to follow the decision of the Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Company Ltd. Thus, the appeals filed by the assessee regarding this issue were dismissed. Deletion of Addition for Mark-to-Market Loss: In ITA No. 7656/Mum/11, the issue pertains to the deletion of an addition of Rs. 21,21,248/- made by disallowing the mark-to-market loss claimed on account of trading in derivative transactions. The AO disallowed the loss, considering it a non-crystallized loss as of the financial year's end. However, the CIT(A) decided in favor of the assessee, referencing a similar decision in the case of Edelweiss Capital Ltd. vs. ITO for A.Y 2004-05, where the Tribunal allowed such a loss. The department argued that the Tribunal, in the Edelweiss case, did not consider Instruction No. 3/2010 dated 23/3/2010 issued by CBDT, which instructed that such losses should be added back for computing taxable income. The Tribunal, however, noted that these instructions, while binding on Income Tax authorities, are not binding on appellate authorities. Furthermore, the Tribunal had already considered all aspects in detail in the Edelweiss case, and since the assessment order in the present case was dated 31/12/2009, the instructions did not apply. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the departmental appeal. Conclusion: The Tribunal dismissed all the appeals, upholding the CIT(A)'s decisions regarding both the disallowance under section 14A and the deletion of the addition for mark-to-market loss on derivative transactions. The judgments were pronounced in the open court on 30th January 2013.
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