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TMI Blog2017 (2) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities, derivative instruments and other products. In the course of assessment proceedings, the Assessing Officer after examining the accounts of the assessee noticed that it has claimed deduction of ₹ 5,57,39,071 on account of provisions for marked to market loss on open future contracts. He also found that assessee had claimed deduction of ₹ 3,50,57,000 being provisions for marked to market loss on stock in trade. He noticed, assessee has claimed deduction of ₹ 33,21,000 on account of marked to market provisions on open interest rate swaps as on 31st March 2008. He, therefore, called upon the assessee to show cause why provisions for marked to market loss claimed on account of provisions for open equity stock future contract should not be disallowed as they are in the nature of contingent liability. In response to the show cause notice assessee submitted a detailed reply justifying its claim of deduction on account of loss. The Assessing Officer after considering the submissions of the assessee, however, did not find merit in the same. Ultimately, he concluded that marked to market loss should be considered as notional loss which do not involve actual outgo as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted, in no case, it can be considered as contingent liability as it is the actual stock in trade of the assessee and as per the accounting principle it has to be valued at year end at cost or market rate whichever is lower. He submitted, the assessee has shown profit of ₹ 766 crore and the assessed profit is ₹ 783 crore. Therefore, it is highly improbable that assessee would be claiming loss of such a meager amount to show less income. In support of his contention, learned Authorised Representative relied upon the decision of the Hon'ble Supreme Court in United Commercial Bank (supra). As far as loss on account of provisions of interest rate swap is concerned, the learned Authorised Representative submitted, the issue is fully covered by the decision of the Tribunal, Mumbai Bench, in ABN Amro Securities India Pvt. Ltd. (supra). He, therefore, submitted no interference is called for on this issue. 7. We have considered the submissions of the parties and perused the material available on record. As could be seen, the Assessing Officer has disallowed assessee s claim of loss on open equity stock future contracts primarily for the reason that they are in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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, in the light of the judgment of the Supreme Court cited above, cannot be treated as a contingent liability. 8. Following the aforesaid decision, the Tribunal, Mumbai Bench, in Kotak Mahendra Ltd. (supra), expressed similar view. Thus, the view expressed by the learned Commissioner (Appeals) being in consonance with the aforesaid view of the Tribunal, we do not find any reason to interfere with the order of the learned Commissioner (Appeals) on this issue. 9. 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, 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 rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason to interfere with the order of the learned Commissioner (Appeals). 14. Ground no.5, raised by the Department is challenging the decision of the learned Commissioner (Appeals) in deleting ₹ 3,50,57,000 representing marked to market loss in stock in trade for computing book profit under section 115JB. 15. Brief facts are, the Assessing Officer holding that marked to market loss being unascertained liability the same cannot be allowed. Accordingly, while computing the book profit, he added back the amount to the book profit along with the other loss claimed. The learned Commissioner (Appeals), while sustaining the addition made to the book profit on account of other loss deleted the addition made on account of marked to market loss on stock in trade. 16. Learned Departmental Representative relied upon the reasoning of the Assessing Officer. 17. Learned Authorised Representative on the other hand, referring to Explanation 1(c) to section 115JB submitted that the loss claimed by the assessee being ascertained liability it will not come within Explanation 1(c) to section 115JB, hence, cannot be considered for computing book profit under section 115JB. 18. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed Representative is, during the relevant previous year, assessee had earned interest income of ₹ 786 crore as against interest expenditure incurred of ₹ 521 crore. It was submitted as the assessee has positive interest income no disallowance of interest expenditure under rule 8D(2)(ii) can be made. He submitted, the only disallowance, therefore, which can be made under section 14A r/w rule 8D(2) is 0.5% on average value of investment in terms of rule 8D(2)(iii). 24. Learned Departmental Representative relied upon the observations of the Assessing Officer. 25. We have considered the submissions of the parties and perused the material available on record. As far as the disallowance of interest expenditure is concerned, we find merit in the submissions of the assessee. Firstly, shares held as stock in trade, have to be excluded for the purpose of computation of disallowance under section 14A. Secondly, as noticed from audited financial statements of the assessee for the relevant previous year, assessee is having sufficient interest free surplus fund available with it to take care of the exempt income yielding investment. Though, this fact was brought to the notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. 27. In the result, assessee s appeal for A.Y. 2008 09 is partly allowed. ITA No. 5404/Mum./2014 Revenue s Appeal A.Y. 2009 10 28. Grounds no.1 and 2 are on the issues of allowance of assessee s claim of marked to market loss on open equity stock future contract and provision for marked to market loss on stock in trade. 29. These issues are similar to the issues raised by the Department in grounds no.1 and 2 in its appeal being ITA no.2600/Mum./2013, for A.Y. 2008 09. Following our decision in Para 7 and 8 of this order, we dismiss the grounds no.1 and 2, raised by the Department. 30. Ground no.3, is in relation to deletion of addition made of ₹ 1,18,58,639, under section 14A. 31. Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee had earned exempt income by way of dividend of ₹ 51.10 lakh and has disallowed amount of ₹ 24 lakh under section 14A towards expenditure incurred for earning exempt income. The Assessing Officer, however, did not accept the disallowance made by the Assessing Officer and proceeded to compute disallowance under section 14A r/w rule 8D independently which worked ou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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