2015 (5) TMI 233 - HC - Income Tax

Disallowance of mark to market loss on account of close of the year in derivative transactions - ITAT allowed the claim - Held that - The transactions in derivatives market has been taken out of the purview of speculation transaction . As per guidelines of SEBI, it is imperative to all who have open position, in the F&O segment on the end of the financial year i.e. 31st of march to show mark to market loss in their books of account. On the basis of the directions of the SEBI, the ICAI, which is the highest accounting body of the country, has issued necessary guidelines for the purposes of accounting mark to market losses. Thus no hesitation to hold that the losses booked on the close of the financial year in respect of open positions in futures is a crystalised liability and therefore allowable. We accordingly reverse the findings of the Ld.CIT(A) and direct the AO to allow the loss of ₹ 22,77,095/-. The view taken is in consonance with the factual materials and the guidelines so also the directions from the Securities Exchange Board of India (SEBI) and the Institute of Chartered Accountants of India (ICA). - Decided in favour of assessee.

Summary

Issues:
1. Justification of deleting tax liability under section 115JB of the I.T. Act, 1961.
2. Misdirection by the Tribunal in giving precedence to section 88E over section 115JB.
3. Allowance of mark to market loss in Future & Options.

Analysis:

Issue 1:
The Tribunal considered the appeal challenging the deletion of tax liability under section 115JB of the I.T. Act, 1961. The Tribunal relied on a decision of the Karnataka High Court in the case of M/s. Horizon Capital Ltd. The High Court found that the appeal raised substantial questions of law regarding the justification of deleting the tax liability. The Tribunal's decision was based on the interpretation of the provisions of the Act and the specific case law. The High Court acknowledged the substantial question of law raised and admitted the appeal for further consideration.

Issue 2:
The second substantial question of law raised was regarding the misdirection by the Tribunal in giving precedence to section 88E over section 115JB of the I.T. Act, 1961. The High Court analyzed the facts and circumstances of the case to determine whether the Tribunal had erred in its interpretation. The High Court noted the specific provisions of section 115JB dealing with Minimum Alternative Tax and section 88E related to tax on income from securities transactions. The High Court found that the Tribunal had misdirected itself in giving precedence to section 88E over section 115JB. The High Court agreed that this issue raised a substantial question of law warranting further examination.

Issue 3:
The third issue involved the allowance of mark to market loss in Future & Options transactions. The assessee had booked losses on account of mark to market valuation of open positions in futures. The assessing officer and the Commissioner disallowed the mark to market loss. However, the Tribunal reversed this decision based on guidelines from SEBI and ICAI, allowing the mark to market loss as a crystallized liability. The High Court examined the Tribunal's reasoning and found it to be in line with the SEBI and ICAI guidelines. The High Court upheld the Tribunal's decision to allow the mark to market loss, concluding that it was a justified allowance based on the specific circumstances of the case.

In conclusion, the High Court addressed all three issues raised in the appeal, admitting the first two for further consideration due to substantial questions of law and upholding the Tribunal's decision on the allowance of mark to market loss in Future & Options transactions based on SEBI and ICAI guidelines.