WALLFORT FINANCIAL SERVICES LTD., MUMBAI V. A.C.I.T. CIRCLE 4(2), MUMBAI

ITA 2451/MUM/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71350 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 26-09-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 12-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R M MADHAVI
• Assessee Lawyers: BEHARILAL
• Keywords: Capital asset; Depreciation; Cost of acquisition
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH G , MUMBAI BEFORE SHRI D. KARUNAKARA RAO , ACCOUNTANT MEMBER AND SHRI SANJAY GARG , JUDICIAL MEMBER ITA NO. 2451/M/12 ASSESSMENT YEAR: 2008 - 09 M/S. WALLFORT FINANCIAL SERVICES LTD. 205, GUNDECHA CHAMBERS , NAGINDAS MASTER ROAD, FORT, MUMBAI - 400 001 PAN: AA AC W0617L VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 4 ( 2 ), AAYAKAR BHAVAN, MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI B E HARILAL REVENUE BY : MS. R.M. MADHAVI DATE OF HEARING : 26.09.13 DATE OF PRONOUNCEMENT : 30.09.13 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) DATED 29.02.12 RE LEVANT TO ASSESSMENT YEAR 2008 - 09. GROUND NO.1 2. THE GROUND N O.1 OF APPEAL FOR THE SAKE OF CONVENIENCE IS REPRODUCED AS UNDER: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW LEARNED CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWAN CE OF MARK TO MARKET LOSS OF RS.2,46,031/ - ON UNEXPIRED FUTURE & OPTION CONTRACTS. ITA NO. 2451/M/12 M/S. WALLFORT FINANCIAL SERVICES LTD. 2 3. THE LD. A.R. AT THE OUTSET HAS SUBMITTED THAT THE GROUND N O.1 IS COVERED WITH THE JUDGMENT OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL DATED 03.05.13 PASSED IN ITA NO.1 502/M/12 IN THE CASE OF DEPUTY COMMISSIONER OF INCOME TAX VS. KOTAK MAHINDRA INVESTMENT LTD. WHILE DEALING WITH THE SIMILAR ISSUE, THE CO - ORDINATE BENCH OF THIS TRIBUNAL OBSERVED THAT THE STOCK FUTURE IS ONE OF THE TYPES OF FORWARD CONTRACT, WHICH IS TR ADED ON EXCHANGES. THIS CAN BE TRADED IN BSE AS WELL AS IN NSE. IN SUCH TYPE OF CONTRACTS , THE STOCK IS NOT 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 PURCHASED AT A 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 PARTIES WITHOUT ACTUALLY PURCHASING OR SELLING THE STOCKS IN QUESTION. THE DAILY MARKET RATE OF THE SAID STOCK IN QUESTION IS TAKEN AND THE DIFFERENCE BE TWEEN 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 PROFIT AND LOSS ARE CALCULATED ON DAILY BASIS AND THE MARGINS ARE SETTLED ACCORDINGLY. SUCH TYPE OF CONTRACTS ARE NOT PURELY CONTINGENT IN NATURE RATHE R LOSS OR PROFIT IS SOMEWHAT ASCERTAINABLE IN VIEW OF CONSTANT WATCH ON DAILY MARKET VALUE AND EVEN THE QUANTUM OF PROFIT OR LOSS THOUGH NOT ACTUALLY ASCERTAINABLE, CAN BE ANTICIPATED IN VIEW OF THE TRENDS OF THE MARKET. THE DIFFERENCE BETWEEN THE PREDETER MINED PRICE AND MARKET PRICE IS SETTLED DAILY ON ITA NO. 2451/M/12 M/S. WALLFORT FINANCIAL SERVICES LTD. 3 MARK - TO - MARKET BASIS. IN SUCH TYPE OF CONTRACTS, IT IS NOT THE STOCK VALUE WHICH IS SUBJECT MATTER OF THE CONTRACT RATHER THE CONTRACT ITSELF IS THE STOCK IN TRADE WHICH IS PURCHASED BY PAYING/DEPOSITING T HE INITIAL MARGINS ON PERCENTAGE BASIS TO THE BROKER TAKING INTO CONSIDERATION MAXIMUM ANTICIPATED RISE OR FALL IN THE PRICE OF THE STOCK IN FUTURE. AS OBSERVED ABOVE, THE DIFFERENCE OF MARGIN IN 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 CA N BE ALLOWED TO BE ADJUSTED PENDING ACTUAL PAYMENT OF THE VARIED, HAS OBSERVED THAT EXPENDITURE AS USED IN SECTION 37 IN INCOME TAX ACT MAY IN THE CIRCUMSTANCES OF A PARTICULAR CASE COVER AN AMOUNT WHICH IS A LOSS EVEN THOUGH SAID AMOUNT HAS NOT BEEN G IVEN FROM THE POCKET OF THE ASSESSEE. IT HAS BEEN FURTHER OBSERVED THAT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING REQUIRES THAT IN THE PROFIT & LOSS ACCOUNT THE VALUE OF STOCK IN TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED 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 ACCOUNTING, UNLESS, SUCH PRINCIPLES STAND SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS. UNREALIZED PROFITS IN THE SHAPE OF APPRE CIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF THE ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEARS ACCOUNT IN A CONTINUING 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. ITA NO. 2451/M/12 M/S. WALLFORT FINANCIAL SERVICES LTD. 4 4 . SO RESPECTFULLY FOLLOWING THE LAW LAID DOWN BY THE HONBLE SUPREME COURT AND ALSO IN VIEW OF THE FINDINGS OF THE CO - ORDINATE BENCH OF THE TRIBUNAL ON THE SIMILAR ISSUE, THE D ISALLOWANCE MADE BY THE LD. CIT(A) IN RESPECT OF MARK TO MARKET LOSSES ON DERIVATIVES IS HEREBY ORDERED TO BE DELETED. THIS GROUND IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. GROUND NO.2 THE GROUND NO.2 OF THE APPEAL FOR THE SAKE OF CONVENIENCE IS REPRODUCED AS UNDER: 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW LEARNED CIT(A) HAS ERRED IN UPHOLDING ACTION OF THE AO TO COMPUTE LONG TERM CAPITAL GAIN ON SALE OF BSE SHARES BY TAKING THE WRITTEN DOWN VALUE OF BSE CARD AS O N 31.03.2005 AS THE COST OF ACQUISITION AND ALSO TO CALCULATE INDEXATION THEREON FROM THE FINANCIAL YEAR 2005 - 06. 5 . THE LD. A.R. HAS SUBMITTED THAT THE ISSUE TAKEN IN GROUND N O.2 IS ALSO COVERED BY THE JUDGMENT OF THE CO - ORDINATE BENCH OF THIS TRIBUNA L PASSED IN ITA NO. 1416/M/12 IN THE CAS E OF JOINDRE CAPITAL SERVICES LTD. VS. THE DCIT VIDE ORDER DATED 28.06.13 . 6 . IT MAY BE OBSERVED THAT A SIMILAR ISSUE HAS BEEN DEALT BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN PARAGRAPH N O.10 OF THE JUDGMENT IN THE ABOVE NOTED CASE, WHEREIN THE CO - ORDINATE BENCH OF THE TRIBUNAL HAS OBSERVED AS UNDER : 10. WE HAVE CONSIDERED THE ISSUE AND RIVAL CONTENTIONS. THERE IS NO DISPUTE WITH THE FACTS OF PURCHASE OF BSE CARD AND ACQUIRING SHARES IN LIEU THERE OF IN BSE. P ROVISIONS OF SECTION 55 (2)(AB) ARE AS UNDER: SEC. 55: MEANING OF ADJUSTED, COST OF IMPROVEMENT AND COST OF ACQUISITION. (1)... (2)FOR THE PURPOSE OF SEC.48 AND 49, COST OF ACQUISITION (A).... ITA NO. 2451/M/12 M/S. WALLFORT FINANCIAL SERVICES LTD. 5 (AA)..... (AB) IN RELATION TO A CAPITAL ASSET, BEING EQUITY SHARE OR SHARES ALLOTTED TO A SHAREHOLDER OF A RECOGNISED STOCK EXCHANGE IN INDIA UNDER A SCHEME FOR [DEMUTUALISATION OR] CORPORATISATION APPROVED BY THE SECURITIES AND EXCHANGE BOARD OF INDIA ESTABLISHED UNDER SECTION 3 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992), SHALL BE THE COST OF ACQUISITION OF HIS ORIGINAL MEMBERSHIP OF THE EXCHANGE:] [ PROVIDED THAT THE COST OF A CAPITAL ASSET, BEING TRADING OR CLEARING RIGHTS OF THE RECOGNISED STOCK EXCHANGE ACQUIRED BY A SHARE HOLDER WHO HAS BEEN ALLOTTED EQUITY SHARE OR SHARES UNDER SUCH SCHEME OF DEMUTUALISATION OR CORPORATISATION, SHALL BE DEEMED TO BE NIL;] THUS AS PER THE PROVISIONS OF THE ACT, THE COST OF ACQUISITION IS ALWAYS TAKEN AT THE ORIGINAL COST OF MEMBERSHIP. TH ERE ARE NO PROVISIONS EITHER FOR ADJUSTING THE DEPRECIATION ALREADY ALLOWED OR INDEXATION FROM THE DATE OF ACQUISITION. IN FACT THE ORIGINAL CARD WAS SURRENDERED AND SHARES WERE ALLOTTED IN THE YEAR 2005 - 06. SO CLAIM OF INDEXATION FROM A.Y 1998 - 99 ALSO DO ES NOT ARISE, IN VIEW OF THE SPECIFIC PROVISIONS OF LAW ON THE SHARES OBTAINED ON DEMUTUALIZATION. THEREFORE, WE MODIFY THE ORDER OF CIT(A) AND ALLOW THE GROUND OF ASSESSEE TO THE EXTENT OF CLAIM OF COST OF ACQUISITION AS PER SECTION 55 (2)(AB). GROUND IS PARTLY ALLOWED. 7 . THE ISSUE BEFORE US IS SQUARELY COVERED BY THE FINDINGS GIVEN BY THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF JOINDRE CAPITAL SERVICES LTD. VS. THE DCIT (SUPRA) AS REPRODUCED ABOVE. T HE LD. D.R. COULD NOT BRING BEFORE US ANY CONTRARY FACT OR CASE LAW WHICH MAY JUSTIFY DEPARTURE THERE FROM. SO RESPECTFULLY FOLLOWING THE PROPOSITION OF LAW LAID DOWN BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL , WE MODIFY THE ORDER OF LD. CIT(A) AND ALLOW THE GROUND OF ASSESSEE TO THE EXTENT OF CLAIM OF COST OF ACQUISITION AS PER SECTION 55 (2)(AB). ACCORDINGLY THIS G ROUND IS PARTLY ALLOWED. GROUND NO.3 & 4 8 . GROUND NOS.3 & 4 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. ITA NO. 2451/M/12 M/S. WALLFORT FINANCIAL SERVICES LTD. 6 9 . IN VIEW OF OUR FINDINGS GIVEN ABOVE THE APPEAL OF TH E ASSESSEE IS HEREBY BY PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON . 2013. SD/ - SD/ - ( D. KARUNAKARA RAO ) ( SANJAY GARG ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 30.09. 2013. * KISHORE COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT ( A) CONCERNE D, MUMBAI THE DR C BENCH //TRUE COPY// [ BY ORDER DY/ASSTT. REGISTR AR, ITAT, MUMBAI.