2019 (11) TMI 860 - AT - Income Tax

Loss on account of mark to market - Business Expenditure - Assessee submitted that it had made provisions for loss following accepted accounting principles as per the Guidance Note on Accounting for Equity Index Equity Stock Futures and Options issued by theICAI and claimed the loss as deductable business expenditure. HELD THAT - As decided in case of M/s. Edel Commodities Limited v. DCIT 2018 (4) TMI 562 - ITAT MUMBAI , even though the loss has not finally crystallized if as per prudent and regular system of accounting, the loss has to be accounted for, the same should be allowed. Disallowance u/s 14A read with Rule 8D(2)(iii) - HELD THAT - In the case of Nirma Credit Capital (P) Ltd 2017 (9) TMI 485 - GUJARAT HIGH COURT it is held that for the purpose of applying factors contained in clause (ii) of sub-rule (2) of rule 8D, prior to its amendment w.e.f 02.06.2016, amount of expenditure by way of interest would be interest paid by assessee on borrowings minus taxable interest earned during financial year. Addition made to Book Profit computed u/s 115JB on account of disallowance made u/s 14A - HELD THAT - We have heard the rival submissions and perused the material available on record. In the case of Vireet Investment (P) Ltd 2017 (6) TMI 1124 - ITAT DELHI it is held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s.14A r.w. Rule 8D.

Summary

Issues:
1. Allowance of mark to market loss in trading of derivative instruments.
2. Disallowance under section 14A of the Income Tax Act, 1961.
3. Addition to Book Profit computed under section 115JB due to disallowance under section 14A.

Issue 1 - Mark to Market Loss:
The appeal by the Revenue questioned the allowance of mark to market loss on derivative instruments by the CIT(A). The assessee, a limited company, claimed the loss as a deductible business expenditure following accounting principles. The AO disallowed the loss as notional, but the CIT(A) allowed it based on various precedents. The ITAT upheld the CIT(A) decision citing similar cases and the well-settled practice of valuing closing stock at market value or cost. The ITAT concluded that the mark to market loss was allowable.

Issue 2 - Disallowance under Section 14A:
The AO determined a disallowance under section 14A r.w. Rule 8D, which the CIT(A) reversed by considering net interest income. The ITAT upheld the CIT(A) decision based on precedents and principles established by the Gujarat High Court and the Bombay High Court. The ITAT confirmed that net interest should be considered for making a disallowance under Rule 8D(2)(ii), resulting in the dismissal of the 2nd ground of appeal.

Issue 3 - Addition to Book Profit:
The AO made an addition to the Book Profit under section 115JB due to the disallowance under section 14A. However, the CIT(A) deleted this disallowance following the order of the Special Bench of the Tribunal. The ITAT upheld the CIT(A) decision, stating that the computation under clause (f) of Explanation 1 to section 115JB(2) should be made without resorting to the computation under section 14A r.w. Rule 8D. Consequently, the 3rd ground of appeal was dismissed, and the appeal filed by the Revenue was ultimately dismissed.

This judgment provides a detailed analysis of the issues related to mark to market loss, disallowance under section 14A, and addition to Book Profit under section 115JB, highlighting the application of legal principles, precedents, and interpretations of relevant provisions of the Income Tax Act, 1961.