2013 (4) TMI 223 - AT - Income Tax

Disallowance of notional loss - Held that - Finding merit in the plea of assessee that in the statement showing details of loss in open position of F&O as on 31-3-2008 appearing in assessee s paper book the assessee has shown profit of Rs. 6342/- in one transaction and in remaining three transactions the assessee has shown loss of Rs. 1,77,002/- and after adjusting the profit of Rs. 6342/- the net loss of Rs. 1,70,660/- was claimed as a loss in open position of F&O. In Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI) it has been held that that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period, i.e., before the date of maturity of the forward contract is allowable. In the absence of any distinguishing feature brought on record by the Revenue the said loss claimed by the assessee is allowable and allow the ground taken by the assessee.

Issues:
1. Disallowance of loss on account of mark to market valuation of open positions in respect of futures.
2. Disallowance under section 14A of the Income Tax Act.
3. Sustenance of notional loss disallowance.

Analysis:

Issue 1: Disallowance of loss on account of mark to market valuation of open positions in respect of futures:
The appellant, engaged in trading shares and securities, declared total income but the Assessing Officer (A.O.) disallowed a loss on mark to market valuation of open positions in futures. The A.O. observed that notional losses are not allowable under the Income Tax Act, and added the disallowed loss to the total income. On appeal, the Commissioner of Income Tax (Appeals) upheld the disallowance, citing a Supreme Court decision. The appellant challenged this disallowance before the Appellate Tribunal.

Issue 2: Disallowance under section 14A of the Income Tax Act:
One of the grounds raised by the appellant was against the sustenance of disallowance under section 14A of the Income Tax Act amounting to Rs. 2,00,756/-. During the hearing, the appellant's counsel did not press this ground, and as no supporting material was presented, the ground was rejected.

Issue 3: Sustenance of notional loss disallowance:
Another ground raised by the appellant was against the sustenance of disallowance of notional loss of Rs. 1,70,000/-. The appellant argued that the loss claimed should be allowed, referring to specific entries in the financial statement. The appellant cited a decision by a Special Bench of the Tribunal to support their claim. The Departmental Representative supported the A.O. and the Commissioner of Income Tax (Appeals).

Upon reviewing the submissions and the material on record, the Appellate Tribunal found merit in the appellant's plea regarding the details of loss in open positions of futures and options. The Tribunal noted that the appellant had shown both profit and loss in the relevant transactions, and after adjusting, the net loss was claimed. Citing a precedent, the Tribunal held that the loss claimed by the appellant was allowable. Consequently, the Tribunal set aside the order of the Commissioner of Income Tax (Appeals) and allowed the appellant's ground regarding the notional loss disallowance.

In conclusion, the Appellate Tribunal allowed the appellant's appeal, specifically addressing the disallowance issues related to mark to market valuation losses and notional losses, while rejecting the disallowance under section 14A of the Income Tax Act due to lack of supporting material.

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