2022 (3) TMI 391 - HC - Income Tax

Valuation of mark-to-market loss as on 31st March, 2008 - HELD THAT - A Division Bench of this Court in Commissioner of Income Tax 16, Mumbai vs. D. Chetan Co. 2016 (10) TMI 629 - BOMBAY HIGH COURT has held that so long as it is not a case of speculative transaction and the loss incurred was of forward contract in the regular course of business, the loss incurred as forward contract should be allowed as business loss. Addition u/s 14A r.w.r. 8D - investment of shares and securities held as stock in trade - HELD THAT - Tribunal has followed a judgment of this Court in Commissioner of Income Tax - 9 vs. India Advantage Securities Ltd. 2015 (6) TMI 140 - BOMBAY HIGH COURT to hold that the provisions of Section 14A read with Rule 8D will not be applicable to investment of shares and securities held as stock in trade. Nothing is placed to indicate, as to why this judgment of the Bombay High Court was not applicable to the facts in hand. No interest is disallowable under Rule 8D2(ii) as assessee has more interest free funds than the investments - ITAT has accepted that the assessee has demonstrated that the interest income earned during the relevant previous years far exceeds the interest expenditure. The ITAT has also relied upon a judgment of this Court in Commissioner of Income Tax 2, MumbaI vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT where the Court held that where assessee s own funds and other interest bearing funds were more than investment in tax free securities, order passed by Assessing Officer disallowing a part of interest demand under Section 14A has to be set aside. There is nothing to indicate why this judgment is not applicable to the facts and circumstances of the case. Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that questions as pressed raise any substantial question of law

Summary

Issues:
Valuation of mark-to-market loss on equity stock future contracts, valuation mark-to-market loss on future contracts held as closing stock-in-trade, mark-to-market loss on interest rate swaps, treatment of investment in shares held as stock-in-trade, addition of mark-to-market losses on future contracts to Book-Profits u/s 115JB, disallowance of interest under Rule 8D2(ii) due to interest-free funds, disallowance of interest under Rule 8D2(ii) when interest income exceeds interest expenditure.

Analysis:
1. Valuation of Mark-to-Market Loss on Equity Stock Future Contracts: The Court considered whether the ITAT was justified in treating mark-to-market loss on open equity stock future contracts as ascertained loss without appreciating the significance of the expiry date of the contract. Referring to a previous judgment, the Court held that if the loss was incurred in the regular course of business and not from speculative transactions, it should be allowed as a business loss.

2. Valuation Mark-to-Market Loss on Future Contracts Held as Closing Stock-in-Trade: The Tribunal relied on a judgment to determine that the provisions of Section 14A read with Rule 8D would not be applicable to investments of shares and securities held as stock in trade. The Court found no reason why this judgment should not apply to the present case, indicating consistency in the legal interpretation.

3. Mark-to-Market Loss on Interest Rate Swaps: The Court examined whether the ITAT was justified in treating mark-to-market loss on interest rate swaps as ascertained loss. The Court emphasized the importance of considering the expiry date of the contract for crystallization and determination of loss, indicating a need for a comprehensive understanding of the financial instruments involved.

4. Treatment of Investment in Shares Held as Stock-in-Trade: The Tribunal held that investment in shares held as stock-in-trade should be excluded from 'Investments' as required under Rule 8D. The Court noted the Tribunal's adherence to a previous judgment, highlighting the consistency in legal interpretation and application of relevant provisions.

5. Addition of Mark-to-Market Losses to Book-Profits u/s 115JB: The Court assessed whether mark-to-market losses on future contracts should be added back to Book-Profits u/s 115JB. It was emphasized that the expiry date of the contract is crucial for determining the loss, rather than just the value, indicating a nuanced understanding of accounting principles and legal requirements.

6. Disallowance of Interest under Rule 8D2(ii) due to Interest-Free Funds: The ITAT accepted that the assessee had demonstrated that interest income exceeded interest expenditure. Citing a judgment, the Court found that when the interest income earned exceeds the interest expenditure, the disallowance of interest under Rule 8D2(ii) should be set aside, showcasing a consistent application of legal principles.

7. Dismissal of Appeal: Ultimately, the Court found that the Tribunal had not erred in its decision-making process, applying correct principles to the facts presented. As a result, the appeal was deemed devoid of merits and dismissed without any costs, indicating a thorough and well-reasoned judgment.