DCIT 3(2), MUMBAI V. PRIME WOVEN LTD, MUMBAI

ITA 1503/MUM/2012

• Counselvise Citation: 150319914 RSA 2012
• Duration Of Justice: 1 year(s) 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 29-08-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 05-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A C TEJPAL
• Section: 37; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C , MUMBAI BEFORE SHRI P.M. JAGTAP , ACCOUNTANT MEMBER AND SHRI SANJAY GARG , JUDICIAL MEMBER ITA NO . 1503/M/2012 ASSESSMENT YEAR: 2008 - 09 DY. COMMISSIONER OF INCOME TAX - 3(2), ROOM NO.608, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400020 VS. M/S. PRIME WOVEN LTD. 807 EMBASSY CENTRE, NARIMAN POINT, MUMBAI - 400021 PAN: AACCP9493M (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIJAY MEHTA R EVENUE BY : SHRI A.C. TEJPAL, CIT D.R. DATE OF HEARING : 05.12. 201 3 DATE OF PRONOUNCEMENT : 22.01.2014 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A) DATED 14.12.11 RE LEVANT TO ASSESSMENT YEAR 2008 - 09. GROUND NO. 1 : THE GROUND NO.1 OF THE APPEAL READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES. OF THE CASE AND IN LAW THE L D . CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.10,64,95,433/ - MADE BY DISALLOWING T HE MARK - TO - MARKET LOSS CLAIMED ON ACCOUNT OF TRADING IN DERIVATIVE TRANSACTIONS, WITHOUT APPRECIATING THE FACT THAT THE LOSS CLAIMED ON THE BASIS OF VALUE OF DERIVATIVE AS ON 3 1ST MARCH IS MERELY A NOTIONAL LOSS AND THE ACTUAL LOSS OR THE PROFIT IN RESP ECT OF SUCH DERIVATIVE TRANSACTIONS WOULD GET CRYSTALLIZED ONLY AT THE TIME OF SETTLEMENT OF SUCH TRANSACTION . 2. AT THE OUTSET, THE LD. A.R. HAS SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE CO - ORDINATE B ENCH OF THE TRIBUNAL (INCIDENTALLY CONSTITUTED BY BOTH OF US) IN THE CASE OF M/S. INDSEC ITA NO .1503/M/2012 M/S. PRIME WOVEN LTD. 2 SECURITIES & FINANCE LTD. IN ITA NO.4236/M/2012 VIDE ORDER DATED 06.09.13 . W HILE DEALING WITH THE IDENTICAL ISSUE , THE FOLLOWING OBSERVATIONS WERE MADE BY THE BENCH: 8. GROUND NO.2 OF THE APPEAL RELATES TO THE CONFIRMATION OF DISALLOWANCE OF MARK - TO - MARKET LOSS OF RS.83,655/ - TREATING IT AS CONTINGENT IN NATURE. 9. THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE CO - ORDINATE BENCH OF TH IS TRIBUNAL DATED 03.05.13 PASSED IN ITA NO.1502/M/12 (ASSESSMENT YEAR 2008 - 09) IN THE CASE OF KOTAK MAHINDRA INVESTMENT LTD. WHEREIN THE CO - ORDINATE BENCH OF THIS TRIBUNAL WHILE RELYING UPON THE LAW LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P.) LTD. (2009) 179 TAXMAN 326, HAS OBSERVED THAT T HE STOCK FUTURE IS ONE OF THE TYPES OF FORWARD CONTRACT, WHICH IS TRADED ON EXCHANGES. THIS CAN BE TRADED IN BSE AS WELL AS IN NSE. IN SUCH TYPE OF CONTRACTS THE STOCK IS N OT ACTUALLY PURCHASED RATHER THE PROFIT OR LOSS IS CALCULATED ON THE BOOK VALUE IN COMPARISON TO THE ACTUAL MARKET RATE OF THE STOCKS ON THE DATE WHICH HAS BEEN AGREED BY THE PARTIES FOR THE PERFORMANCE OF THE CONTRACT. CERTAIN STOCKS ARE BOOKED TO BE PURC HASED AT PREDETERMINED PARTICULAR RATE ON FUTURE DATE AND WHEN SUCH FUTURE DATE OF PERFORMANCE OF CONTRACT BECOMES DUE, THEN THE PREDETERMINED PRICE IS COMPARED WITH THE ACTUAL MARKET RATE OF THE BOOKED STOCK AND THE DIFFERENCE, IF ANY, IS PAID BY THE PART IES WITHOUT ACTUALLY PURCHASING OR SELLING THE STOCKS IN QUESTION. THE DAILY MARKET RATE OF THE SAID STOCK IN QUESTION IS TAKEN AND THE DIFFERENCE BETWEEN THE MARKET RATE AND THE PREDETERMINED RATE IS DAILY CALCULATED AND THE DIFFERENCE MARGIN, IF ANY, IS RECEIVED/PAID TO THE BROKER AND FINALLY ON THE STIPULATED DATE THE CONTRACTS ARE SQUARED OFF RESULTING INTO ACTUAL LOSS OR PROFIT. THE CONTRACTS IN SUCH TYPE OF CASES CAN BE SQUARED OFF BEFORE THE ARRIVAL OF ACTUAL PERFORMANCE DATE OF CONTRACT, AS THE PROF IT AND LOSS ARE CALCULATED ON DAILY BASIS AND THE MARGINS ARE SETTLED ACCORDINGLY. SUCH TYPE OF CONTRACTS ARE NOT PURELY CONTINGENT IN NATURE RATHER LOSS OR PROFIT IS SOMEWHAT ASCERTAINABLE IN VIEW OF CONSTANT WATCH ON DAILY MARKET VALUE AND EVEN THE QUANT UM OF PROFIT OR LOSS THOUGH NOT ACTUALLY ASCERTAINABLE, CAN BE ANTICIPATED IN VIEW OF THE TRENDS OF THE MARKET. THE DIFFERENCE BETWEEN THE PREDETERMINED PRICE AND MARKET PRICE IS SETTLED DAILY ON MARK - TO - MARKET BASIS. IN SUCH TYPE OF CONTRACTS, IT IS NOT T HE STOCK VALUE WHICH IS SUBJECT MATTER OF THE CONTRACT RATHER THE CONTRACT ITSELF IS THE STOCK IN TRADE WHICH IS PURCHASED BY PAYING/DEPOSITING THE INITIAL MARGINS ON PERCENTAGE BASIS TO THE BROKER TAKING INTO CONSIDERATION MAXIMUM ANTICIPATED RISE OR FALL IN THE PRICE OF THE STOCK IN FUTURE. THE DIFFERENCE OF MARGIN IS CALCULATED AND SETTLED ON DAILY BASIS IN VIEW OF THE MARKET RATES AND TRENDS. THE HONBLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD (2009) 179 TAXMAN 326, WHILE DEALING WITH THE QUESTION AS TO WHETHER THE ADDITIONAL LIABILITY ARISING ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE CAN BE ALLOWED TO BE ADJUSTED PENDING ACTUAL PAYMENT OF THE VARIED, HAS OBSERVED THAT EXPENDITURE AS USED IN SECTION 37 IN INCOME T AX ACT MAY IN THE CIRCUMSTANCES OF A PARTICULAR CASE COVER AN AMOUNT WHICH IS A LOSS EVEN THOUGH SAID AMOUNT HAS NOT BEEN GIVEN FROM THE POCKET OF THE ASSESSEE. IT HAS BEEN FURTHER OBSERVED THAT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING REQUIRES TH AT IN THE PROFIT & LOSS ACCOUNT THE VALUE OF STOCK IN TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD ITA NO .1503/M/2012 M/S. PRIME WOVEN LTD. 3 BE ENTERED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIA TED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASE PROFITS BEFORE ACTUAL REALIZATION. PROFITS FOR INCOME - TAX PURPOSES ARE TO BE COMPUTED IN ACCORDANCE WITH ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTI NG, UNLESS, SUCH PRINCIPLES STAND SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS. UNREALIZED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF THE ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEARS ACCOUNT IN A CONTI NUING BUSINESS ARE NOT BROUGHT TO THE CHARGE AS A MATTER OF PRACTICE, THOUGH, AS STATED ABOVE, LOSS DUE TO FALL IN THE PRICE BELOW COST IS ALLOWED EVEN THOUGH SUCH LOSS HAS NOT BEEN REALIZED ACTUALLY. ACCOUNTS REGULARLY MAINTAINED IN THE COURSE OF BUSINESS ARE TO BE TAKEN AS CORRECT UNLESS THERE ARE STRONG AND SUFFICIENT REASONS TO INDICATE THAT THEY ARE UNRELIABLE. THE CO - ORDINATE BENCH OF THIS TRIBUNAL FURTHER RELYING UPON THE JUDGMENT OF ANOTHER CO - ORDINATE BENCH OF THE TRIBUNAL DATED 10.11.10 PASSED IN ITA NO.5324/MUM/2007 FOR A.Y. 2004 - 05 IN THE CASE OF EDELWEISS CAPITAL LTD. FURTHER HELD THAT IT IS NOT ONLY THE ACTUAL STOCK BUT DERIVATIVES CAN ALSO BE HELD AS STOCK IN TRADE AND THE PRINCIPLE COST OR MARKET PRICE WHICHEVER IS LOWER HAS BEEN RIGHTLY F OLLOWED BY THE ASSESSEE IN VALUING THE DERIVATIVES AND FURTHER WHEN THE DERIVATES ARE HELD AS STOCK IN TRADE THEN WHATEVER RULES APPLY TO THE STOCK IN TRADE WILL HAVE TO APPLY TO THEIR VALUATION ALSO. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT WHILE VALU ATION OF CLOSING STOCK, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NOT PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROFITS BEFORE ACTUAL REALIZATION. 10. RESPECTFULLY FOLLOWING THE LAW LAID D OWN BY THE AUTHORITIES AS MENTIONED ABOVE, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND THE ADDITION MADE BY THE AO ON THIS GROUND IS HEREBY ORDERED TO BE DELETED. 3. THE LD. D.R. COULD NOT BRING BEFORE US ANY CONTRARY FACT OR CASE LAW WHICH MAY J USTIFY DEPARTURE FROM THE ABOVE OBSERVATIONS MADE BY THE TRIBUNAL. HENCE, FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH OF THE TRIBUNAL , IT IS HELD THAT MARK TO MARKET LOSSES ON ACCOUNT OF TRADING IN DERIVATIVE TRANSACTIONS ARE ALLOWABLE DEDUCTIONS. HE NCE GROUND NO.1 OF THE APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE . GROUND NO.2 GROUND NO.2 OF THE APPEAL IS READ AS UNDER: '2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD.CIT(A) HAS ERRED IN HOLDING THAT INTEREST OF RS.5,86,88 7/ - RECEIVED ON FDRS GIVEN AS SECURITY TO ELECTRICITY BOARD BE CONSIDERED FOR THE PURPOSE OF ALLOWING DEDUCTION U/S.80IB WITHOUT APPRECIATING THE FACT THAT THE SAID INTEREST INCOME IS NOT DIRECTLY FLOWING FROM THE INDUSTRIAL UNDERTAKING AS SUCH DEDUCTION FOR THE SAME IS NOT ALLOWABLE IN VIEW OF THE HONBLE SUPREME COURT IN THE CASE OF ITA NO .1503/M/2012 M/S. PRIME WOVEN LTD. 4 PANDIAN CHEMICALS LTD. (262 ITR 178)(SC) (2003)'. 4 . AT THE OUTSET, THE LD. D.R. HAS CONTENDED THAT THE ISSUE IS SQUARELY COVERED AGAINST THE ASSESSEE AND IN FAVOUR OF T HE REVENUE BY THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS LTD. ( 2003 ) 262 ITR 2 78) (SC) WHEREIN THE HONBLE SUPREME COURT WHILE DEALING WITH THE IDENTICAL ISSUE HAS HELD THAT THE WORDS DERIVED FROM IN SECTION 80HH MUST BE U NDERSTOOD AS SOMETHING WHICH HAS DIRECT OR IMMEDIATE NEXUS WITH THE APPELLANTS INDUSTRIAL UNDERTAKING. ALTHOUGH ELECTRICITY MAY BE REQUIRED FOR THE PURPOSES OF THE INDUSTRIAL UNDERTAKING, THE DEPOSIT REQUIRED FOR ITS SUPPLY IS A STEP REMOVED FROM THE BUS INESS OF THE INDUSTRIAL UNDERTAKING. THE DERIVATION OF PROFITS ON THE DEPOSIT MADE WITH ELECTRICITY BOARD CANNOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UNDERTAKING ITSELF AND CONCLUDED THAT THE INTEREST EARNED BY INDUSTRIAL UNDERTAKING ON DEPOSITS W ITH ELECTRICITY BOARD DOES NOT QUALIFY FOR RELIEF UNDER SECTION 80HH. 5 . IN VIEW OF THE SETTLED LEGAL POSITION ON THE ISSUE , THIS GROUND OF THE REVENUES APPEAL IS ALLOWED AND THE ORDER OF THE CIT(A) ALLOWING DEDUCTION OF RS.5,86,887/ - ON FDR GIVEN AS S ECURITY TO ELECTRICITY BOARD IS HELD TO BE NOT SUSTAINABLE UNDER LAW AND IS HEREBY SET ASIDE . 6 . IN THE RESULT , APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.01. 201 4 . SD/ - SD/ - ( P.M. JAGTAP ) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 22.01. 201 4 . * KISHORE ITA NO .1503/M/2012 M/S. PRIME WOVEN LTD. 5 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT ( A) CONCERNED, MUMBAI THE DR C BENCH //TRUE COPY// [ BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.