2014 (4) TMI 159 - AT - Income Tax

Provision for loss on mark to market treated as notional loss - Whether the CIT(A) was justified in deleting the addition on account of provisions for loss on mark to market, on derivatives by treating it as notional loss Held that - The decision in Edelweiss Capital Ltd., Mumbai Versus Income Tax Officer 3(1) (1), Mumbai 2012 (10) TMI 223 - ITAT, MUMBAI followed - the loss due to a fall in price below cost is allowed even if such loss has not been actually realized - The derivatives have been treated as stock-in-trade then there is nothing unusual in the assessee valuing each derivative by applying the rule cost or market whichever is lower - ICAI in its guidelines have also approved of the rule of prudence which really means that while anticipated losses can be taken note of while valuing the closing stock, anticipated profits cannot be recognized - The anticipated loss cannot be treated as a contingent liability Decided against Revenue.

Summary

Issues:
Challenge to deletion of addition on account of provisions for loss on mark to market on derivatives.

Analysis:

1. Background of the Appeal:
The Revenue appealed against the order passed by the Commissioner (Appeals) challenging the deletion of an addition of Rs. 96,00,244 on account of provisions for loss on mark to market on derivatives under section 143(3) of the Income Tax Act, 1961.

2. Factual Dispute:
The assessee debited Rs. 96,00,244 in the Profit & Loss account for provisions of loss on marked to market for open contracts in equity index/stock futures. The Assessing Officer disallowed the claim of loss, considering it an unascertained liability and a notional loss.

3. Arguments Before Commissioner (Appeals):
The assessee relied on a Tribunal decision in a group company's case and the Commissioner (Appeals) order for a different assessment year to support their contention. The Commissioner (Appeals) allowed the appeal, citing the Tribunal's decision that the provisions reflected the loss arising from the valuation of closing stock.

4. Departmental Representative's Stand:
The Departmental Representative supported the Assessing Officer's findings before the Tribunal.

5. Judicial Precedence and Decision:
The Tribunal found that the issue was covered by the decision of the Supreme Court in CIT v/s Woodward Governor (India) P. Ltd. and the Tribunal's decision in the group company's case. The Tribunal upheld the Commissioner (Appeals) order based on judicial precedence and dismissed the Revenue's appeal.

6. Final Decision:
The Tribunal dismissed the Revenue's appeal, upholding the deletion of the addition on account of provisions for loss on mark to market on derivatives. The decision was based on the Tribunal's adherence to the Supreme Court's decision and the Tribunal's previous ruling in a similar case.

In conclusion, the Tribunal affirmed the Commissioner (Appeals) decision, emphasizing the importance of judicial precedence in resolving the dispute over the treatment of provisions for loss on mark to market on derivatives.