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2012 (3) TMI 612 - AT - Income TaxDisallowance for loss on Mark to Market on trading of Derivatives - The assessee had been engaging in marked to market on daily basis and accordingly provision is made in the P L Account against anticipated loss. AO disallowed the provision on account of loss in open future contracts debited in the profit loss account and added it back. - HELD THAT - Taking into account the guidance note issued by ICAI which the companies have to follow we are of the opinion that the assessee has rightly claimed the provision in the Profit Loss Account. We are of the considered view that the assessee has a strong case to make provision for loss on mark-to-market basis. We therefore delete the disallowance. Disallowance w.r.t V-SAT charges and Lease Charges and Transaction charges - TDS Deduction - Dept. appealed on account of deletion of disallowance made in respect of V-SAT and lease line charges - HELD THAT - CIT held that the VSAT and Lease line charges are not payments which come within the domain of fee for technical services and they are also not for any work done by NSE for the member broker. The TDS is therefore not deductible on the same. The CIT(A) further observed that in so far as the deductibility of TDS on transaction charges are concerned the I.T.A.T Mumbai in the case of KOTAK SECURITIES LTD. VERSUS ADDITIONAL COMMISSIONER OF INCOME-TAX 2008 (8) TMI 592 - ITAT MUMBAI has held that the Stock Exchange does not provide managerial services and the fees paid by the member to the Stock Exchange is not for any technical services rendered so TDS is not deductible on the same. We therefore refrain ourselves to take any adverse view on the view taken by the CIT(A) we uphold the order of the CIT(A) on both these issues.
Issues Involved:
1. Disallowance under section 14A. 2. Disallowance of provision for "Mark-to-Market" on trading of derivative instruments. 3. Deletion of disallowance of V-SAT and Lease line charges. 4. Deletion of disallowance of transaction charges. 5. Deletion of addition made on account of penalty payment to stock exchanges. Issue-wise Detailed Analysis: 1. Disallowance under section 14A: The assessee had suo moto made a disallowance of Rs. 2,85,023 on account of interest on borrowed funds. However, the AO made a further disallowance of Rs. 96,810 under section 14A following Rule 8D, citing Special Bench ITAT (Mumbai) in Daga Capital Management Pvt. Ltd. and Hon'ble Bombay High Court in Godrej & Boyce Co. Ltd. The assessee conceded to this disallowance being only 5% of the dividend income, and hence, this ground was dismissed. 2. Disallowance of provision for "Mark-to-Market" on trading of derivative instruments: The assessee claimed a provision of Rs. 13,09,233 for loss on mark-to-market margin on equity index/stock futures, which the AO disallowed, considering it contingent in nature. The AO referred to ICAI guidelines and various case laws, including CIT Vs. Kamani Metal & Alloys Limited, concluding that the provision for loss was not an ascertained liability. However, the ITAT upheld the assessee's claim, referencing the decision in Edelweiss Capital Ltd., where it was held that anticipated losses in derivatives trading should be accounted for in the valuation of closing stock. The ITAT also considered the ICAI's guidelines and other judicial pronouncements, concluding that the provision was rightly claimed in the Profit & Loss Account, thereby deleting the disallowance. 3. Deletion of disallowance of V-SAT and Lease line charges: The CIT(A) observed that VSAT and Lease line charges are reimbursement charges paid by members of the Stock Exchange for infrastructure and trading facilities, not fees for technical services. The ITAT upheld the CIT(A)'s view, referencing multiple case laws, including Kotak Securities vs. Addl.CIT, where it was held that TDS is not deductible on such charges. The department's appeal on this ground was dismissed. 4. Deletion of disallowance of transaction charges: The CIT(A) allowed the assessee's appeal based on the ITAT Mumbai Bench decision in Kotak Securities Vs. Addl.CIT, which held that transaction charges paid to the stock exchange are not for technical services, hence no TDS is deductible. The ITAT upheld the CIT(A)'s decision for the assessment year 2005-06 but reversed it for 2006-07, as the AR conceded that transaction charges were disallowed from 2006-07 onwards. 5. Deletion of addition made on account of penalty payment to stock exchanges: The CIT(A) viewed the penalty payments as procedural lapses rather than infraction of law, thus not invoking Explanation to section 37. The ITAT agreed with the CIT(A), noting that these payments were not for any violation of law or offense. Hence, the deletion of the addition was upheld. Conclusion: - ITA No. 2194/Mum/2009, Assessment Year 2005-06: Partly allowed. - ITA No. 2452/Mum/2009, Assessment Year 2005-06: Dismissed. - ITA No. 2193/Mum/2009, Assessment Year 2006-07: Allowed. - ITA No. 2453/Mum/2009, Assessment Year 2006-07: Partly allowed. Order pronounced on this 28th day of March, 2012.
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