2020 (3) TMI 591 - AT - Income Tax

LTCG on sale of BSE equity shares - taking the depreciated value of BSE card as on 31.03.2005 as cost of acquisition of BSE shares - HELD THAT - Perusing the material on record and the decision in the case of Techno Shares Stocks Ltd. 2019 (11) TMI 359 - ITAT MUMBAI we observe that the identical issue has been decided by the co-ordinate bench 3rd Member wherein it has been held that the cost of acquisition of the shares of BSE shares shall be the original cost of acquisition to the members of card in terms of section 55(2)(ab) of the Act even though the assessee has claimed depreciation on the cost of membership card in the earlier year. Disallowance of loss on mark to market basis in respect of trading in derivatives - HELD THAT - In this case the assessee has treated the derivatives as stocks during the year as the assessee is a share broker in BSE. The assessee has computed mark to market loss as on 31.03.2008 with reference to the prevailing rate of foreign exchange in respect of those contracts which were not settled at the end of the year and thus recognized the said loss according to the accounting standard- 30 issued by ICAI. The AO has disallowed the said loss as contingent and being unascertained as the settlement of the derivative contracts have not taken place. However, it is undisputed that assessee is dealing in derivatives which has to be valued on prevailing foreign exchange rate at the year end in view of the mercantile system being followed by the assessee. In our opinion the said loss is allowable as the issue is squarely covered by the decision of CIT vs. Woodward Governor India (P.) Ltd. 2009 (4) TMI 4 - SUPREME COURT and also in the case of Edelweiss Capital 2012 (10) TMI 223 - ITAT, MUMBAI and Motilal Oswal Securities Ltd. vs. DCIT 2016 (3) TMI 962 - ITAT MUMBAI . Addition under rule 14A read with rule 8D - suo moto disallowance - non recording of satisfaction - HELD THAT - In this case the AO has simply applied the provisions of section 14A read with rule 8D and computed the disallowance without recording any satisfaction as to how the suo-moto disallowance made by the assessee is incorrect. Under these circumstances, we are of the view that a mechanical application of section 14A read with rule 8D is not correct and against the provisions of the Act. The case of the assessee is squarely covered by the decision of the Hon ble Supreme Court in the case of Godrej Boyce Manufacturing Co. Ltd. Vs. DCIT 2017 (5) TMI 403 - SUPREME COURT wherein held that AO must record his satisfaction as to how the assessee s calculation is incorrect having regard to the books maintained by the assessee. The Hon ble Apex Court has held that in absence of any satisfaction by the AO, the provisions of section 14A read with rule 8D can not be invoked. - Decided in favour of assessee.

Issues Involved:
1. Computation of Long Term Capital Gain on Sale of BSE Equity Shares
2. Disallowance of Loss on Mark to Market Basis in Respect of Trading in Derivatives
3. Disallowance under Section 14A read with Rule 8D for Expenses Related to Earning Exempt Income

Issue-Wise Detailed Analysis:

1. Computation of Long Term Capital Gain on Sale of BSE Equity Shares:
The primary issue was the computation of long-term capital gain on the sale of BSE equity shares. The assessee, a share broker, reported a long-term capital gain of ?1,79,77,183 on the sale of 6,386 BSE shares. The cost of acquisition was calculated by the assessee as ?2,60,90,000, which included the original cost of the BSE membership card and the cost of shares, indexed from 2000-01. The AO, however, computed the cost of acquisition based on the WDV of the BSE card as of 31.03.2005, resulting in a higher capital gain of ?2,89,84,795.

The CIT(A) upheld the AO's calculation, but the Tribunal referenced a co-ordinate bench decision (ITA No.5938/M/2012) which held that the cost of acquisition should be the original cost of the BSE membership card as per Section 55(2)(ab) of the Act, even if depreciation had been claimed earlier. The Tribunal concluded that the assessee's computation was correct, and the AO's calculation was set aside.

2. Disallowance of Loss on Mark to Market Basis in Respect of Trading in Derivatives:
The second issue involved the disallowance of a loss of ?16,24,254 claimed by the assessee on a mark-to-market basis for trading in derivatives. The AO disallowed this loss, arguing it was an unascertained liability, not crystallized at the time of settlement. The CIT(A) upheld this disallowance.

However, the Tribunal found that the assessee, following the mercantile system of accounting, correctly recognized the mark-to-market loss as per Accounting Standard 30 issued by ICAI. The Tribunal referenced the Supreme Court decision in CIT v. Woodward Governor India (P.) Ltd. and other relevant cases, concluding that the loss was allowable. The CIT(A)'s order was set aside, and the loss was allowed.

3. Disallowance under Section 14A read with Rule 8D for Expenses Related to Earning Exempt Income:
The third issue was the disallowance of ?1,80,369 under Section 14A read with Rule 8D for expenses related to earning exempt income. The assessee had earned ?6,84,354 in dividend income and made a suo-moto disallowance of ?5,000. The AO applied Rule 8D without recording any satisfaction regarding the assessee's calculation.

The CIT(A) upheld the AO's disallowance. However, the Tribunal noted that the AO failed to record satisfaction as required by the Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT. The Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition.

Separate Judgments:
The Tribunal also addressed the Revenue's appeal and the assessee's cross-objection on similar grounds. The Revenue's appeal was dismissed as it became infructuous following the decision in the assessee's appeal. The cross-objection regarding the disallowance under Section 14A was allowed, with the Tribunal directing the AO to delete the addition due to the lack of recorded satisfaction.

Conclusion:
The Tribunal allowed the assessee's appeal, setting aside the CIT(A)'s orders on all grounds. The Revenue's appeal was dismissed, and the assessee's cross-objection was allowed. The Tribunal's decisions were based on the correct interpretation of the relevant sections and precedents, ensuring that the assessee's computations and claims were upheld.

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