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TMI Blog2020 (12) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... have already noted the Explanation (2) in section 263 has been added from 1.6.2015 and the same is not operative in the period under consideration. Broken period interest and mark to market loss - on the touchstone of above Hon'ble Bombay High Court decision in State bank of India [ 2018 (6) TMI 1326 - BOMBAY HIGH COURT] when the issues were given in note in the computation of income and case laws were referred, it cannot be said that Assessing Officer has not examined the issues and applied his mind. Assessee has duly explained the quantum of broken period interest being claimed and the basis for the same has been explained in the case of American Express Bank [ 2002 (9) TMI 96 - BOMBAY HIGH COURT] .- CIT s view is that AO has not enquired and applied his mind in as much as the same is not dealt with in the assessment order. On the touchstone of Hon'ble Bombay High Court decision in the case of State Bank of India Vs. ACIT (supra) it cannot be said that the Assessing Officer has not applied his mind on this issue. Once it is held that the Assessing Officer has after application of mind taken a view, learned CIT cannot exercise his jurisdiction u/s. 263 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable opportunity of hearing to the appellants. 3. The CIT erred in directing the AO to examine the issues raised vide order under section 263 and take appropriate action as warranted by the facts and circumstances of the case. 4. The CIT erred in setting aside the regular assessment on the issue of broken period interest and holding that broken period interest paid on purchase of securities was required to be considered at the time of valuing closing stock and then work out the loss/profit from the business income accordingly. 5. The CIT erred setting aside the regular assessment on the issue of claim for debenture issue expenses. 6. The CIT erred in setting aside the regular assessment on the issue of claim of deduction for Mark to Market losses in relation to Equity Linked Notes. 3. Brief facts are that the assessing officer in this case passed an order under section 143(3) of the I.T. Act on 15.11.2011. Upon this assessment order, the learned CIT invoked his jurisdiction under section 263 of the I.T. Act. In this regard notice under section 263 was issued, after considering the assessee reply learned CIT passed the following order under section 263 of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en period interest is part of the purchase price. To the extent it pertains to security which remains unsold on 31st March and is reflected in closing stock, such security has to be valued after including the broken period interest. Broken period interest on such security will be allowed as a deduction only at the time of sate of these securities. These facts are totally at variance with cases cited by the assessee. In the present case, assessee has paid Rs,9,41,67/- as broken period interest for 11.3% GOI Bonds 2010. Likewise, ₹ 1,58,01,984/- has been paid as broken period interest at the time of purchase of bonds of Housing Dev. Finance Corpn. Both the above bonds were lying unsold as on 31.03.2008. Therefore, this interest being part of purchase consideration was required to be considered at the time of valuing closing stock and then work out the loss/profit from the business income accordingly. (iii) As regards disallowance on account of provision for depreciation on the investment is concerned, this aspect was referred only to point out that A.O. acted in a mechanical and perfunctory manner. If the securities are held as stock-in-trade which is the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant details. This loss being arrived at for open derivative position need to be considered as per Instruction No. 3/2010 of the CBDT. The A.O. failed to follow instructions of the CBDT on this regard. 5. In the light of above discussions, I am of considered opinion that assessment order is erroneous and prejudicial to the interest of the revenue on account of failure of the AO to carry out relevant and meaningful inquiries. This inference is also supported by ratio of various decisions of Malabar Industrial Co. Ltd. vs CIT 243 ITR 83 (SC), CIT vs Max India Ltd. 295 ITR 282(SC) CIT Vs Mangal Castings 303 ITR 23(P H), CIT v. Kohinoor Tobacco Products(P)Ltd.[1998] 234 ITR 557, CIT v. Mahavar Traders[1996] 220 ITR 167(MP), Duggal Co.v. CIT[1996] 220 ITR 456, CIT vs MEPCO Industries Ltd 294 ITR 121 (Mad.), Meerut Roller Flour Mills Ltd vs C1T[2013] 3S Taxman.com 183(AH.), Bharti Hexacom Ltd v CIT [2013] 33 Taxman.com.153(Cat.), M.I. Overseas Ltd v DIT (Int. Tax)[2012] 28 Taxman. com.279(Uttarakhand), Bharat Overseas Bank Ltd v CIT[2012] 26 Taxman.com 330(Chennai), CIT v Harsh J Punjabi 345 ITR 451 (Dei.), CIT v Infosys Techn. Ltd 17 Taxman.com 203 Sripan Land Dev.(P) Ltd v CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation with RBI as a Non Banking Financial Company which has been received on 2nd August. 2007. Company has commenced its business on January 2008. 2) In accordance with its objects, the company has placed deposits with bank and the entire interest income has been offered to tax. 3) Deduction has been claimed for broken period interest of ₹ 16,743,650 paid on purchase of securities lying in the inventory as on 31.03.08 relying on the judgement of the Hon'ble Bombay High Court in the case of American Express Bank reported in 258 ITR 601. 4) During the year the company had issued Equity Linked Notes a liability product offered by the company. The company marks to market the open positions at the year end and the liability with respect to mark to market loss is recognized in the profit and loss account in accordance with accounting prudence norms. For the current year, the company has recocgnised an amount of INR 14,244,981 as a mark to market liability in its profit and loss account towards the subject product. The same has accordingly been claimed as lax allowable in the return in the return of income for the current year i.e. AY 2008-09. 7. Further, learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y enclosed at pages 174 to 175 of the paper book). d) In this connection, we wish to rely on the decision of Mumbai Tribunal in the case of The DCIT vs. Kotak Mahindra Investment Ltd. (ITA No. 1502/M/2012) dated 3 May 2013 (copy enclosed at pages 176 to 184 of the paper book), wherein the Tribunal has held that the mark to market losses in respect of future contracts was allowable as deduction. e) As regards, to the CBDT instruction, we wish to submit that the instruction was with respect to the loss on forex derivative transaction and applicability of section 43 of the Income tax Act. Equity linked notes are not derivatives and are in the nature of bonds and hence the CBDT instruction relating to the derivatives is not applicable in the instant case. f) Further reliance is placed On the decision of Special Bench of Mumbai ITAT in the case DCIT v. Bank of Bahrain and Kuwait, ((2010) (41 SOT 290) (copy enclosed at pages 185 to 204 of the paper book) wherein it has been held that Mark to Market losses in respect of forward foreign exchange contracts debited to profit and loss account is allowable as deduction. This view has also been upheld by the Hon'ble Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Commissioner or Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee or not. Here we note that there is no presumption that non-following of RBI guidelines in an assessment will result in an order which is prejudicial to the interest of revenue. The RBI guidelines and the prudential norms are not designed to pluck revenue leakage from income tax point of view. These are mandate to ensure that the assessee follows proper Banking norms. Hence, learned CIT s inference that non examination of adherence to RBI guidelines by the Assessing Officer has resulted in a order which is erroneous in so far as it is prejudice to the interest of revenue is liable to be set aside. Moreover as we have already noted the Explanation (2) in section 263 has been added from 1.6.2015 and the same is not operative in the period under consideration. 14. We further note that on the issue of broken period interest and mark to market loss, learned Counsel of the assessee has submitted that the necessary details were given in the computation of income and on the touchstone of Hon'ble Bombay High Court decision in the case of State Bank of India (supra) it cannot be said that the Assessing Officer has not applied his mind on this issue. He submits that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were given in note in the computation of income and case laws were referred, it cannot be said that Assessing Officer has not examined the issues and applied his mind. 16. As regards the broken period interest is concerned we note that the same was duly given in note of computation of income as under :- Deduction has been claimed for broken period interest of ₹ 16,743,650 paid on purchase of securities lying in the inventory as on 31.03.08 relying on the judgement of the Hon'ble Bombay High Court in the case of American Express Bank reported in 258 ITR 601. 17. Hence, the assessee has duly explained the quantum of broken period interest being claimed and the basis for the same has been explained to be Hon'ble Jurisdictional High Court in the case of American Express Bank (supra). We note the learned CIT s view is that Assessing Officer has not enquired and applied his mind in as much as the same is not dealt with in the assessment order. On the touchstone of Hon'ble Bombay High Court decision in the case of State Bank of India Vs. ACIT (supra) it cannot be said that the Assessing Officer has not applied his mind on this issue. Once it is held that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above State Bank of India Vs. ACIT (supra) it cannot be held that the Assessing Officer has not applied his mind or made enquiry on the issue. As held above once it is held that the Assessing Officer has applied his mind and has taken one of the possible view, learned CIT cannot invoke its jurisdiction u/s. 263 of the Act. Moreover, in the order u/s. 263 learned CIT(A) has nowhere dislodged the detail submission on this issue by the assessee, and the case laws which have been claimed by the assessee in favour of the assessee being Special bench decision in the case of Bank of Bahrain and Kuwait (supra) and also the reference to Hon'ble Apex Court decision in the case of Woodward Governor India Pvt. Ltd. (supra). Hence, the view adopted by the Assessing Officer cannot be said to be ex facie untenable. 21. Thus once it is held that the Assessing Officer has adopted one of the two possible view with which learned CIT does not agree, the same does not give learned CIT(A) jurisdiction to exercise revisionary power u/s. 263 of the Act. Moreover, as we have already held above that by asking the Assessing Officer to make further examination without any finding about the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue. The above case law duly supports the case of the assessee. 24. Since the issue has been decided by following Hon'ble Supreme Court Hon'ble Bombay High Court decisions directly applicable, dealing with other case laws referred by learned Departmental Representative is only of academic interest. 25. We have already quashed the order of lea ..... 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