2015 (4) TMI 1296 - AT - Income Tax

Disallowance of Mark to Market loss in trading of derivates - HELD THAT - Respectfully following the decision of the Tribunal in the case of Edelweiss Capital Ltd. 2012 (10) TMI 223 - ITAT MUMBAI which view has further been followed by another co-ordinate Bench of this Tribunal in the case of Shri Ramesh Kumar Damani vs. The Addl. CIT. 2010 (11) TMI 851 - ITAT MUMBAI it can be safely held that it is not only the actual stock but derivatives can also be held as stock in trade and the principle cost or market price whichever is lower has been rightly followed by the assessee in valuing the derivatives and further when the derivates are held as stock in trade then whatever rules apply to the stock in trade will have to apply to their valuation also. While anticipated loss is taken into account while valuation of closing stock anticipated profit in the shape of appreciated value of the closing stock is not brought into account as not prudent trader would care to show increased profits before actual realization. Respectfully following the law laid down by the authorities as mentioned above we hold that the assessee has rightly claimed mark- to-market loss which is liable to be allowed. The learned CIT(A) has rightly allowed the claim of the assessee his order is hereby upheld. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of Mark to Market loss in trading of derivatives.

Analysis:
The case involved an appeal challenging the deletion of an addition made on account of disallowance of Mark to Market loss in trading of derivatives. The Assessee, a company engaged in financial services, filed its return of income declaring a total income of Rs. 1.55 Crores. The Assessing Officer (AO) completed the assessment, determining the income at Rs. 5.18 Crores, with the main issue being the disallowance of Mark to Market loss of Rs. 4,98,65,834 in trading of derivatives. The AO disallowed the losses on Nifty options, considering them as notional and contingent. However, the First Appellate Authority (FAA) allowed the appeal of the assessee. During the hearing, it was noted that a similar issue was decided in favor of the assessee by the Tribunal in a previous assessment year. The Tribunal explained the nature of stock futures and the method of trading, emphasizing that such contracts are not purely contingent and the profit or loss is somewhat ascertainable based on daily market values. The Tribunal referred to accounting standards followed by the assessee and upheld the claim of mark-to-market loss, as recognized in the profit and loss account. The Tribunal also cited previous decisions supporting the treatment of anticipated loss in valuing closing stock, concluding that the assessee rightly claimed the mark-to-market loss, which was allowed by the CIT(A). The Tribunal dismissed the appeal filed by the AO, upholding the order in favor of the assessee.

In conclusion, the Tribunal upheld the deletion of the addition made by the AO regarding the disallowance of Mark to Market loss in trading of derivatives. The decision was based on the nature of stock futures, accounting standards followed by the assessee, and previous legal precedents supporting the treatment of anticipated loss in valuing closing stock. The Tribunal ruled in favor of the assessee, following the principle of "cost or market price whichever is lower" in valuing derivatives held as stock in trade. The appeal filed by the AO was dismissed, and the order in favor of the assessee was upheld.