2014 (2) TMI 365 - AT - Income Tax

Confirmation of disallowance of mark-to-market loss Held that - The decision in M/s. Indsec Securities & Finance Ltd. Versus The Deputy Commissioner of Income Tax 2014 (1) TMI 1382 - ITAT MUMBAI followed - 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 thus, mark to market losses on account of trading in derivative transactions are allowable deductions Decided in favor of Assessee. Deduction u/s 80-IB of the Act Interest received on FDRs Held that - The decision in Pandian Chemicals Ltd. Versus Commissioner of Income-Tax 2003 (4) TMI 3 - SUPREME Court followed - interest income is not directly flowing from the Industrial Undertaking as such deduction for the same is not allowable - the words derived from in Section 80HH must be understood as something which has direct or immediate nexus with the appellant s industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking - The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself and concluded that the interest earned by industrial undertaking on deposits with Electricity Board does not qualify for relief the order of the CIT(A) set aside Decided in favour of Revenue.

Summary

Issues:
1. Deletion of mark-to-market loss claimed on derivative transactions.
2. Consideration of interest income on FDRs for deduction u/s. 80IB.

Analysis:

Issue 1: Deletion of mark-to-market loss claimed on derivative transactions

The appeal was filed by the Revenue against the CIT(A) order relevant to the assessment year 2008-09, challenging the deletion of an addition of Rs.10,64,95,433 made by disallowing mark-to-market loss on derivative transactions. The Tribunal noted that the issue was covered in favor of the assessee by a previous judgment. The Tribunal emphasized that mark-to-market losses on derivative transactions are allowable deductions. It was explained that in such contracts, profit or loss is calculated daily based on market rates, and the difference is settled daily on a mark-to-market basis. The Tribunal referred to the principle that anticipated losses are considered in the valuation of closing stock, but anticipated profits are not accounted for until realization. Relying on previous judgments, the Tribunal decided in favor of the assessee, ordering the deletion of the addition made by the AO. The decision was based on established legal principles and consistent judicial interpretations.

Issue 2: Consideration of interest income on FDRs for deduction u/s. 80IB

The second ground of appeal raised by the Revenue concerned the CIT(A)'s decision to allow a deduction of interest income of Rs.5,86,887 received on Fixed Deposit Receipts (FDRs) given as security to the Electricity Board under section 80IB. The Revenue contended that the interest income did not have a direct nexus with the industrial undertaking, citing a Supreme Court judgment in the case of Pandian Chemicals Ltd. The Supreme Court had held that for income to qualify for relief under section 80HH, it must have a direct or immediate connection with the industrial undertaking. The Tribunal, in line with the legal position established by the Supreme Court, allowed the Revenue's appeal, setting aside the CIT(A)'s decision to allow the deduction. The decision was based on the interpretation of the law as laid down by the Supreme Court.

In conclusion, the Tribunal partially allowed the Revenue's appeal based on the legal interpretations and precedents cited in the judgments, emphasizing the importance of direct nexus and established principles in determining the allowability of deductions under the Income Tax Act.