2019 (11) TMI 268 - AT - Income Tax

Deduction of mark to market losses (MTM) - assessee being a stockbroker and engaged in the business of trading in derivative segment by entering into future and options contracts, some of the future and options contracts could not be squared up at the end of the financial year and, therefore, the assessee booked the expected loss in such contracts on Mark to market basis - HELD THAT - There is no dispute that the assessee is engaged in stockbroking business. It is also not in dispute that the assessee also engaged in the business of trading in derivatives segment and entered into the future and options contract, some of which could not be squared up at the end of the financial year and, therefore, the assessee booked the expected loss in such contracts on Mark to market basis. Assessee claimed a loss as calculated on Mark to market basis claiming that he was following this practice continuously year after year and according to the assessee, the same was as per recognised accounting standards. Contention of the assessee has been that since the MTM losses arise out of contractual obligation existing as on the reporting date, the same cannot be regarded as contingent or notional loss in nature. As rightly considered by the CIT(A), the question involved in this matter is whether such MTM losses are allowable as expenditure or how to be disallowed on the ground that these were notional losses. The authorities below, however, placing reliance on the circular dated 23/3/2010, decided the issue against the assessee. According to the Ld. AR this issue is no longer res Integra. MTM losses arising out of contractual obligation existing on the reporting date cannot be regarded as contingent or notional in nature and merely because the liability has to be discharged at a future date, the same cannot be regarded so. With this view of the matter, we find it difficult to sustain the addition and accordingly set aside the impugned order and direct the assessing officer to delete the addition made in this regard. Appeal of the assessee is allowed.

Summary

Issues:
1. Allowability of mark to market losses as expenditure.
2. Interpretation of CBDT instruction dated 23/3/2010 on notional losses.

Issue 1: Allowability of mark to market losses as expenditure:
The case involved an appeal by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the Assessment Year 2015-16. The assessee, a company engaged in stock broking, claimed deduction for mark to market (MTM) losses on future and options contracts. The Assessing Officer disallowed the deduction, stating that expected or notional losses cannot be allowed under the Income-tax Act, 1961. The Commissioner upheld this decision, citing a CBDT instruction from 2010. The assessee argued that MTM losses were not contingent or notional but based on recognized accounting standards. The Tribunal analyzed the nature of MTM losses and held that they were allowable as expenditure, overturning the lower authorities' decision.

Issue 2: Interpretation of CBDT instruction dated 23/3/2010 on notional losses:
The CBDT instruction dated 23/3/2010 was a crucial aspect of the case, as it guided the treatment of notional losses. The Commissioner and Assessing Officer relied on this instruction to disallow the assessee's claim for MTM losses, considering them as notional losses. However, the Tribunal examined precedents and relevant case law, including the decision in Kotak Securities Ltd, Mumbai, where similar MTM losses were allowed as business expenditure. Additionally, the Tribunal referred to the Bombay High Court's ruling in PCIT vs International Gold Company Ltd., emphasizing that losses on forward contracts should be allowed as business losses, contrary to being treated as notional losses. Ultimately, the Tribunal concluded that MTM losses arising from contractual obligations should not be considered contingent or notional, and directed the assessing officer to delete the addition made by disallowing the deduction.

This detailed analysis of the judgment showcases the thorough consideration given to the legal issues involved and the application of relevant legal principles and precedents in arriving at the final decision.