2017 (2) TMI 409 - AT - Income Tax

Addition of marked to market loss - AO disallowed claim on open equity stock future contracts primarily for the reason that they are in the nature of contingent liability - Held that - As 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. See Edelweiss Capital Ltd. 2012 (10) TMI 223 - ITAT, MUMBAI - Decided in favour of assessee As far as loss claimed on valuation of closing stock in trade, undisputedly, it is the actual stock in trade of the assessee which as per the accounting principles has to be valued at the year end at market rate or actual cost whichever is lower. The Hon ble Supreme Court in United Commercial Bank v/s CIT 1999 (9) TMI 4 - SUPREME Court , approved the aforesaid accounting method followed by the assessee. That being the case, the loss claimed by the assessee cannot be considered as contingent liability. As far as loss on account of provisions for interest rate swap the same is also covered by the decisions of the Tribunal in case of ABN Amro Securities (2011 (8) TMI 1257 - ITAT MUMBAI), wherein, the Tribunal deleted the disallowance made with the observation that allowability of deduction in the current year is subject to verification of corresponding adjustment in the year in which the non settlement date falls. In view of the aforesaid, we delete the addition with similar observation. Addition made under section 14A r/w rule 8D(2)(ii) and (iii) - Held that - Provisions of section 14A r/w rule 8D will not be applicable to investment in shares and securities held as stock in trade. See Commissioner of Income Tax-9 Versus India Advantage Securities Ltd. 2015 (3) TMI 1239 - BOMBAY HIGH COURT MAT - marked to market loss in stock in trade for computing book profit under section 115JB - Held that - While deciding ground no.2, of the Department in earlier part of the order, we have held that marked to market loss on stock in trade cannot be considered as unascertained liability Explanation 1(c) to section 115JB makes it clear that only unascertained liability can be considered for computation of book profit. That being the case, we agree with the decision of the learned Commissioner (Appeals) in deleting the addition while computing book profit of the assessee. Disallowance under section 14A r/w rule 8D - Held that - As per the decision of Four Dimensions Securities India Ltd. v/s ACIT 2013 (6) TMI 806 - ITAT MUMBAI for computing disallowance under rule 8D, only the net interest has to be considered which in the present case, is in the negative as the assessee has a positive interest income. Therefore, considering the aforesaid facts, we are of the opinion that no disallowance of interest expenditure under rule 8D(2)(ii) can be made. Therefore, only disallowance which can be made is under rule 8D(iii), i.e., 0.5% of the average value of investment. In this regard, we must make it clear that the shares held as stock in trade have to be excluded from the average value of investment while computing the disallowance under rule 8D(2)(iii). We direct the Assessing Officer to compute the disallowance accordingly

Issues Involved:
1. Deletion of addition of marked-to-market loss.
2. Partial relief granted under section 14A read with rule 8D.
3. Addition of marked-to-market loss in stock-in-trade for computing book profit under section 115JB.
4. Deletion of addition made under section 14A read with rule 8D for computing book profit under section 115JB.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Marked-to-Market Loss:
The assessee, a wholly owned subsidiary of DSP Merrill Lynch Ltd., claimed deductions for marked-to-market losses on open future contracts, stock-in-trade, and interest rate swaps. The Assessing Officer disallowed these claims, considering them as contingent liabilities. However, the Commissioner (Appeals) allowed the claims based on precedents such as Edelweiss Capital Ltd. v/s ITO and United Commercial Bank v/s CIT. The Tribunal upheld the Commissioner’s decision, emphasizing that the valuation of derivatives as stock-in-trade should follow the principle of "cost or market price, whichever is lower," as established by the Supreme Court in Chainrup Sampatram v/s CIT. Therefore, the marked-to-market loss on stock-in-trade and interest rate swaps were not considered contingent liabilities.

2. Partial Relief Granted Under Section 14A Read with Rule 8D:
The Assessing Officer disallowed ?7,68,71,967 under section 14A read with rule 8D, while the Commissioner (Appeals) granted partial relief by excluding investments held as stock-in-trade from the average value of investments. The Tribunal upheld this decision, citing the jurisdictional High Court's ruling in CIT v/s India Advantage Securities Ltd., which stated that section 14A read with rule 8D does not apply to investments held as stock-in-trade. Consequently, the Tribunal directed the Assessing Officer to compute the disallowance accordingly, excluding shares held as stock-in-trade.

3. Addition of Marked-to-Market Loss in Stock-in-Trade for Computing Book Profit Under Section 115JB:
The Assessing Officer added back marked-to-market loss while computing book profit under section 115JB, considering it an unascertained liability. The Commissioner (Appeals) deleted this addition, and the Tribunal upheld this decision. The Tribunal clarified that only unascertained liabilities could be added back for computing book profit under section 115JB, and since marked-to-market loss on stock-in-trade is an ascertained liability, it should not be added back.

4. Deletion of Addition Made Under Section 14A Read with Rule 8D for Computing Book Profit Under Section 115JB:
The Assessing Officer made an addition to book profit under section 115JB based on disallowance under section 14A read with rule 8D. The Commissioner (Appeals) deleted this addition, considering the net interest expenditure as a negative figure. The Tribunal upheld this decision, following the precedent set by the co-ordinate bench in Four Dimensions Securities India Ltd., which stated that only net interest should be considered for disallowance under rule 8D. Consequently, as the net interest expenditure was negative, no addition to book profit under section 115JB was warranted.

Conclusion:
The Tribunal dismissed the Department’s appeals for A.Y. 2008-09 and A.Y. 2009-10, and partly allowed the assessee’s appeal for A.Y. 2008-09. The decisions were based on established legal principles and precedents, ensuring that only ascertained liabilities and appropriate disallowances were considered for tax computations. The order was pronounced on 21.12.2016.

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