2013 (10) TMI 978 - AT - Income Tax

Accrual of income - Whether enhancement of its income by Rs.4,90,512/- by making an addition in respect of mark to market profit of Rs.7,92,365/- in respect of derivative transactions outstanding as at the year-end, is correct Held that - Without doubt, the loss of Rs.3.02 lacs on the unsettled derivative contracts has not crystallized - Prudence is a fundamental accounting assumption, duly recognized by law per Accounting Standard (AS I) issued by the CBDT u/s.145(2) of the Act. The same prescribes booking of all known liabilities and losses, while at the same time not booking, similarly, unrealized profits or income - The closing rate in respect of the security transactions for which loss has been booked/accounted for is substituted for the cost price, so that it is only the price, plus or minus, with reference to the said rate, that would be/is considered while booking the profit and loss on the settlement of the transaction. As such, the matter has to be regarded not with reference to inconsistency, but with regard to the prudence, which, as aforesaid, is a fundamental accounting assumption/principle and, therefore, is to inform all accounting statements. Directed the deletion of the addition of Rs.7.92 lacs made by the ld. CIT(A). Needless to add, the said income would stand to be deleted, and the loss of Rs.3.02 lacs claimed and allowed to the assessee, adjusted against the income, speculative or non-speculative, as the case may be, under which the income from derivatives stands classified for the year of settlement Decided in favor of Assessee. Rebate u/s 88E to be adjusted in computation of MAT profit u/s 115JB of the Income Tax Act Held that - Reliance has been placed on the decision in the case of CIT vs. Horizon Capital Ltd. 2011 (10) TMI 489 - KARNATAKA HIGH COURT - Rebate u/s.88E could not be confined to the tax under regular provisions of the Act, and would, therefore, extend also to that payable on the book profit u/s.115JB. Accordingly, once a comparison between the higher of the two tax payables, i.e., on the income assessed on the regular provisions as well as on the basis of the book-profit, is made to determine the tax exigible, the rebate as exigible under law u/s.88E would have to be allowed irrespective of whether the tax is payable under the regular provisions of the Act or under the book profit Decided in favor of Assessee.

Summary

Issues:
1. Enhancement of income by making an addition in respect of mark to market profit of Rs.7,92,365 in derivative transactions.
2. Disallowance of speculative loss claimed by the assessee.
3. Allowance of rebate u/s.88E on book profit tax.

Issue 1: Enhancement of Income in Derivative Transactions
The judgment pertains to a set of Cross Appeals by the Assessee and the Revenue challenging the Order by the Commissioner of Income Tax (Appeals) dated 12.12.2011. The primary issue was the enhancement of the assessee's income by Rs.4,90,512 by adding mark to market profit of Rs.7,92,365 in derivative transactions outstanding at the year-end. The Assessing Officer found the assessee's conduct inconsistent as it claimed a loss of Rs.3,01,853 but did not account for the profit of Rs.7.92 lacs on other unsettled transactions. The ld. CIT(A) added the unrealized gain, leading to an enhancement in income. The Tribunal accepted the assessee's stand, emphasizing the fundamental accounting principle of prudence and directed the deletion of the addition made by the ld. CIT(A).

Issue 2: Disallowance of Speculative Loss
The second issue involved the disallowance of speculative loss claimed by the assessee. The Assessing Officer disallowed the loss as the interest expenditure was entirely booked against share trading income without proper allocation for the derivative business. The Tribunal noted that the assessee had not allocated the interest expenditure against the two business segments, requiring a reasonable basis for allocation. The matter was remanded back to the Assessing Officer to consider the proposed allocation and assess income from both segments accordingly, emphasizing the need for a reasonable and cogent basis for allocation.

Issue 3: Allowance of Rebate u/s.88E on Book Profit Tax
The third issue revolved around the allowance of rebate u/s.88E on book profit tax. The Assessing Officer computed tax under regular provisions and on book profit u/s.115JB, resulting in a higher tax demand. The ld. CIT(A) did not allow the rebate on book profit tax initially but later directed for its allowance. The Tribunal, citing relevant case law, held that the rebate u/s.88E should extend to tax payable on book profit u/s.115JB. Therefore, the rebate had to be allowed irrespective of the tax payable under regular provisions or book profit. The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal.

In conclusion, the Tribunal's judgment addressed the issues of income enhancement in derivative transactions, disallowance of speculative loss, and allowance of rebate on book profit tax, providing detailed analysis and legal reasoning for each issue.