2019 (9) TMI 388 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - average value of investments for the purpose of Rule 8D(2)(ii) (iii) - HELD THAT - As in the case of REI Agro Ltd. Vs. DCIT 2013 (9) TMI 156 - ITAT KOLKATA has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by HC 2014 (4) TMI 713 - CALCUTTA HIGH COURT We note that assessee has suomoto disallowed direct expenses of ₹ 3,940/- under Rule 8D(2)(i), the said disallowance is hereby confirmed. So far Rule 8D(2) (iii) is concerned, we direct the AO to compute the disallowance taking into account dividend bearing securities as held by the Coordinate Bench in the case of REI Agro(supra). Hence, we allow the ground No. 1 raised by the assessee for statistical purposes. Addition on account of loss incurred by the assessee on account of forward and option derivative contract - HELD THAT - A liability is said to have accrued when a pending obligation on the balance sheet date was determinable with reasonable certainty. Hence, the loss on account of unexpired future contracts should be allowed by the A.O. We note that the assessee company follows method of valuation of stock in trade as 'lower of cost or market price'. This method is consistently followed by the company. Futures and options in the share trading business are derivatives in the nature of stock-in-trade which are required to be valued at the method of valuation adopted by the Company by using accounting standards and therefore accordingly loss arising from 'Marked to Market' valuation is allowable as deduction. Such loss is not considered as notional as per accounting standard-30 (Now, as per Ind AS 109 which is applicable to big companies in India). DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. As relying on M/S. NAGREEKA EXPORTS LTD. 2016 (9) TMI 638 - ITAT KOLKATA we allow the ground raised by the assessee. Disallowance of STT - AO noticed that as per Form No. 10DB there is difference between STT paid and amount debited by assessee - AO treated the balance sum as income of the assessee from undisclosed sources and hence he disallowed the same - HELD THAT - Assessing Officer did not understand the factual position as it was given in certificate 10DB submitted by the assessee. The amount of ₹ 7,94,107/- considered by the Assessing Officer includes three forms for F.Y. 2008-09. We note that copies of Form No. 10DB reflecting aggregate amount of ₹ 4,50,677/- with respect to STT paid for F.Y. 2007-08 has not been considered by AO. Therefore, we direct the Assessing Officer to examine form No. 10DB and allow the claim of the assessee to the tune of ₹ 4,50,677/- in accordance to law. Therefore, we allow this ground raised by the assessee for statistical purposes.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance under Section 14A read with Rule 8D.
3. Disallowance of loss on forward and option derivative contracts.
4. Disallowance of Securities Transaction Tax (STT).

Detailed Analysis:

1. Condonation of Delay:
The appeal filed by the assessee for the assessment year 2008-09 was barred by a 16-day delay. The assessee moved a petition to condone the delay. After hearing the parties and considering the reasons provided, the Tribunal condoned the delay and admitted the appeal for hearing.

2. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of ?1,45,034/- under Section 14A read with Rule 8D. The Tribunal noted that where an assessee has sufficient own funds to cover investments, a presumption is drawn that the investments were made from own funds. This principle was supported by the judgment in CIT v. Reliance Utilities and Power Ltd. (313 ITR 340). The Tribunal also referred to the Coordinate Bench's decision in REI Agro Ltd. Vs. DCIT (144 ITD 141) and the Calcutta High Court's affirmation of this decision, which held that only investments yielding dividends during the previous year should be considered for Rule 8D(2)(ii) & (iii). Consequently, the Tribunal confirmed the suomoto disallowance of ?3,940/- under Rule 8D(2)(i) and directed the AO to recompute the disallowance under Rule 8D(2)(iii) based on dividend-bearing securities. This ground was allowed for statistical purposes.

3. Disallowance of Loss on Forward and Option Derivative Contracts:
The assessee claimed a loss of ?19,39,257/- on derivative trading, which was disallowed by the AO as notional. The AO argued that "Marked to Market" (MTM) losses were not actual but contingent in nature. The Tribunal, however, noted that the assessee followed the Accounting Standard 30 issued by ICAI, which mandates accounting for MTM losses. The Tribunal held that the loss on unexpired future contracts should be allowed as it represents a binding obligation and is determinable with reasonable certainty. This view was supported by the ITAT Kolkata's decision in Nagreeka Exports Ltd. and other judicial precedents. Hence, the Tribunal allowed the assessee's claim for the MTM loss.

4. Disallowance of Securities Transaction Tax (STT):
The AO disallowed ?3,43,430/- as income from undisclosed sources, noting a discrepancy between the STT paid as per Form 10DB and the amount debited by the assessee. The CIT(A) directed the AO to verify the claim. The Tribunal found that the total STT amount of ?7,94,107/- pertained to two financial years (2007-08 and 2008-09). The AO had not considered the forms reflecting the STT paid for F.Y. 2007-08. Therefore, the Tribunal directed the AO to examine Form 10DB and allow the claim of ?4,50,677/- in accordance with the law. This ground was allowed for statistical purposes.

Conclusion:
The appeal was partly allowed, with the Tribunal providing directions on each issue raised by the assessee. The Tribunal emphasized the importance of judicial precedents and accounting standards in determining the allowable deductions and disallowances.