2016 (11) TMI 1409 - HC - Income Tax

Admit on the following substantial questions of law (i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the appeal of the assessee in respect of disallowance made by the Assessing Officer on account of mark to market loss of ₹ 2,46,031/on unexpired future and option contract? (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the appeal of the assessee i.e. to the extent of claim of cost of acquisition as per Section 55(2)(ab) on the issue of calculating the long term capital gain on sale of shares of BSE at ₹ 4,40,41,965/as against ₹ 2,83,63,407/claimed by the assessee? Derivatives transactions entered into by the respondent assessee does not seem to be supported by an underlying asset i.e. to safeguard loss in export / import of goods on account of the foreign exchange variation.

Summary

Issues:
1. Disallowance of mark to market loss on future and option contract
2. Calculation of long term capital gain on sale of shares of BSE

Analysis:
1. The first issue pertains to the disallowance made by the Assessing Officer on account of mark to market loss on unexpired future and option contracts. The Tribunal allowed the appeal of the assessee in this regard. The Court observed that the derivatives transactions entered into by the assessee did not seem to be supported by an underlying asset to safeguard loss in export/import of goods due to foreign exchange variation. The Court distinguished a previous decision where derivatives transactions were considered hedging transactions. The Court directed the Registry to provide a copy of the order to the Tribunal for further proceedings.

2. The second issue revolves around the calculation of long term capital gain on the sale of shares of BSE. The Tribunal also allowed the appeal of the assessee to the extent of the claim of cost of acquisition under Section 55(2)(ab). The assessee claimed a higher amount for the sale of shares compared to the amount initially claimed. The Court did not provide detailed reasoning in the summary for this issue, but it was admitted as a substantial question of law for further consideration. The Court ordered that this appeal would be heard along with another Income Tax Appeal.

In conclusion, the judgment by the Bombay High Court addressed two main issues related to the disallowance of mark to market loss on future and option contracts and the calculation of long term capital gain on the sale of shares of BSE. The Court provided detailed analysis and directions for further proceedings, emphasizing the need for underlying assets in derivatives transactions and the importance of accurate calculation of capital gains.