DCIT 4(1), MUMBAI V. EDELWEISS SECURITIES P. LTD, MUMBAI

ITA 2452/MUM/2009

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7593 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 19-03-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 16-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Futures and options
• Section: 14A; 37

Judgement Text

IN THE INCOME TAX APPELLAT E TRIBUNAL MUMBAI BENCHES I, MUMBAI BEFORE SHRI G.E.VEERAB HADRAPPA, PRESIDENT AND SHRI VIVEK VARMA, JM ITA NOS.2194/MUM/2009 : ASST. YEARS 2005-2006 M/S. EDELWEISS SECURITIES LIMITED (FORMERLY KNOWN AS EDELWEISS SECURITIES PRIVATE LIMITED & ROOSHNIL SECURITIES PRIVATE LIMITED), 14 TH FLOOR, EXPRESS TOWERS NARIMAN POINT, MUMBAI 400 021. PAN : AAACK3792N. VS. THE ADDL.COMMISSIONER OF INCOME-TAX RANGE 4(1) MUMBAI. (APPELLANT) (RESPONDENT) ITA NOS.2452/MUM/2009 : ASST. YEARS 2005-2006 THE ADDL.COMMISSIONER OF INCOME-TAX RANGE 4(1) MUMBAI. VS. M/S. EDELWEISS SECURITIES LIMITED 14 TH FLOOR, EXPRESS TOWERS NARIMAN POINT, MUMBAI 400 021. (APPELLANT) (RESPONDENT) ITA NOS. 2193/MUM/2009 : ASST. YEARS 2006-2007 M/S. EDELWEISS SECURITIES LIMITED 14 TH FLOOR, EXPRESS TOWERS NARIMAN POINT, MUMBAI 400 021. PAN : AAACK3792N. VS. THE ADDL.COMMISSIONER OF INCOME-TAX RANGE 4(1) MUMBAI. (APPELLANT) (RESPONDENT) ITA NOS. 2453/MUM/2009 : ASST. YEARS 2006-2007 THE ADDL.COMMISSIONER OF INCOME-TAX RANGE 4(1) MUMBAI. VS. M/S. EDELWEISS SECURITIES LIMITED 14 TH FLOOR, EXPRESS TOWERS NARIMAN POINT, MUMBAI 400 021. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI PAVAN VED ASSESSEE BY : SHRI RAJAN R.VORA DATE OF HEARING : 19.03.2012 DATE OF PRONOUNCEMENT : 28.03.2012 O R D E R PER VIVEK VARMA, JM : THE REVENUE AND THE ASSESSEE ARE IN A PPEAL AGAINST THE ORDERS OF CIT(A)- IV, MUMBAI, DATED 02.01.2009 FOR ASS ESSMENT YEAR 2005-06 AND ORDER DATED ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 2 05.01.2009 FOR ASSESSMENT YEAR 2006-07, RESPECTIVELY. THE ASSESSEE AND THE AO HAVE RAISED COMMON GROUNDS IN BOTH TH E YEARS IN THE RESP ECTIVE APPEALS THAT HAVE BEEN FILED. AS ALL THE APPEALS WERE HEARD TOGETHER, WE FOR THE SAKE OF BREVITY HAVE PASSED A COMMON ORDER IN ALL THE APPEALS. ASSESSMENT YEAR 2005-06 ITA NO.2194/MUM/2009, (ASSESSEES APPEAL) : 2. THE ASSESSEE HAD FILED A COMPREHENSIVE PAPER BOOK WELL IN ADVANCE AND AT THE TIME OF HEARING, THE AR FOR TH E ASSESSEE FILED A SYNOPSIS AND A TABLE WHEREIN THE DETAILS OF POINTS OF DISPUTE IN THE APPEALS FILED BY THE ASSESSEE AND THE REVENUE HAD BEEN PREPARED AND AS TO HOW THE AR WOULD TACKLE THE IMPUGNED ISSUES / GROUNDS. 3. GROUNDS NO. 1 TO 3 ARE ON THE ISSU E OF DISALLOWANCE OF RS. 96,810 UNDER SECTION 14A. AT THE TIME OF HEARING, THE AR SUBMITTED THAT ALTHOUGH THE ASSESSEE COMPANY HAD SUO MOTO MADE A DISALLOWANCE OF RS. 2,85,023 ON ACCOUNT OF INTEREST ON BORROWED FUNDS, THE AO HAD MADE A FURTHER DISALLOWANCE OF RS. 96,810 AND ALLOCATED THE SAME AGAINST 14A UNDER RULE 8D, FOLLOWING SPECIAL BENCH ITAT (MUMBAI) IN DAGA CAPITAL MANAGEMENT PVT. LTD. AND BY HONBLE BOMBAY HIGH COURT IN GODREJ & BOYCE CO. LTD. 4. THE AR CONCEDED THE DISALLOWAN CE BEING ONLY 5% OF THE DIVIDEND INCOME. THIS GROUND IS THEREFORE DISMISSED. 5. GROUNDS NO. 4 TO 4.3 IS WITH REGA RD TO DISALLOWANCE OF ASSESSEES CLAIM FOR PROVISION ON MARK-TO-MARKET ON TRADING OF DERIVATIVE INSTRUMENTS AMOUNTING TO RS. 13,09,233. THE FACTS IN THIS ISSUE IS THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.13,09,233 ON ACC OUNT OF PROVISION FOR LOSS ON MARK-TO- MARKET MARGIN ON EQUITY INDEX / STOCK FU TURES. IT HAS BEEN OBSERVED BY THE AO THAT NO WRITTEN EXPLANATION REGARDING THIS ISSUE WAS FILED. DURING THE COURSE OF ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 3 ASSESSMENT PROCEEDINGS, THE ISSUE WAS DI SCUSSED. AFTER DISCUSSION, THE AO DISALLOWED THE CLAIM FOR PROVISION AS THE AO HELD IT TO BE CONTINGENT IN NATURE AND SINCE NO ASCERTAINED LIABILITY EMERGES, THE PROVISION COULD NOT BE ALLOWED TO BE MADE. THE AO GAVE A DETAILED NOTE AS TO WHAT ACCORDING TO ICAI GUIDELINES NOTE ON ACCOUNTING DESCRIBES FUTURES : A FUTURES CONTRACT, LIKE A FORWARD CONTRACT, IS AN AGREEMENT BETWEEN TWO PAR TIES TO BUY OR SELL AN ASSET AT A CERTAIN TIME IN FUTURE FOR AN AGREED PRICE. FU TURES CONTRACTS ARE NORMALLY TRADED ON AN EXCHANGE. TO MAKE TRADING POSSIBLE, THE EXCHANGE SPECIFIES CERTAIN STANDARDIZED FEATURES OF THE CONTRACT . THE EXCHANGE MAY ALSO PROVIDE FOR GUARANTEE MECHANISM TO ENSURE THAT EA CH PARTY TO THE CONTRACT MEETS ITS OBLIGATIONS AND, CONSEQUENTLY, RISK FR OM DEFAULT BY PARTIES IS MINIMIZED. 6. THE AO FURTHER HELD, THAT ANY CONTR ACT TO ACQUIRE A DERI VATIVE AT A FUTURE DATE IS A FORWARD CONTRACT TO ACQUIRE A COMMODITY. THIS CONTRACT AS SUCH IS NOT A STOCK IN TRADE AND HENCE IT CANNOT BE VA LUED AT THE TIME OF PREPARATION OF BALANCE SHEET AS STOCK IN TR ADE. EVEN FOR THE ARGUMENT SAKE, IF IT IS ASSUMED THAT THE FUTURE CONTRACT FOR THE DERIVATIVE IS ITSELF A STOCK IN TRADE AND CAN BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER, IN CASES WHERE MARK TO MARKET RESULTS IN A LOSS, THE COST OF ACQUISITIO N BEING NIL, THE VALUATION OF SUCH A CONTRACT WILL BE A NEGATIVE FIGURE. BY ITS VERY NATURE THE VALUE OF STOCK IN TRADE CANNOT BE NEGATIVE. HENCE THIS ARGUMENT IS NOT CORRECT. TH E MARK TO MARKET LOSS AT BEST CAN BE AN UNASCERTAINED LIABILITY OR A PROVISION FOR LOSS WHICH MAY OR MAY NOT INCUR AT THE TIME OF SETTLEMENT OF THE CONTRACT AT A FUTURE DATE. 7. THE AO WHILE REFERRING TO SEVERAL CA SE LAWS, FINALLY REFERRED TO THE CASE OF CIT VS. KAMANI METAL & ALLOYS LI MITED, (BOMBAY), RE PORTED IN 208 ITR 1017, WHEREIN THE HONBLE BOMBAY HIGH CO URT HELD THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM ANY ANTICIPA TORY LOSS. THE AO, FINALLY HELD THAT THE PROVISION FOR LOSS MADE IN THE BOOKS MAY OR MAY NOT ACTUALLY OCCUR WHEN SETTLEMENT TAKES PLACE, THUS IT IS NOT AN ASCERTAINED LIAB ILITY OR EXPENDITURE. ACCORDINGLY, THE AO ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 4 DISALLOWED THE PROVISION ON ACCOUNT OF LOSS IN OPEN FUTURE CONTRACTS DEBITED IN THE PROFIT & LOSS ACC OUNT AND ADDED IT BACK. 8. BEFORE THE CIT(A), TH E ASSESSEE CONTESTED THIS ISSUE AND THE CIT(A) UPHELD THE DISALLOWANCE MADE BY THE AO. NOT SATISFIED, THE MATTER IS BEFORE THE ITAT. 9. BEFORE US, THE AR OF THE ASSES SEE COMPANY AT THE OUTSET, DREW OUR ATTENTION TO THE GUIDANCE NOTE ISSUED BY ICAI WHICH PROV IDES THE ACCOUNTING TREATMENT TO BE FOLLOWED IN THE CASES ON EQUITY INDEX AND EQ UITY STOCK FUTURES & OPTIONS. 5.1 THE EQUITY DERIVATIVE INST RUMENT IN INDIA IS TRADED ON THE NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE. IN ORDER TO MINIMIZE THE RI SK OF FAILURE OF PARTIES TO A CONTRACT IN FULFILLING THEIR RESPECTIVE OBLIGATION UNDER THE CONTRACT, THE CLEARING CORPORATION, FROM TIME TO TIME, PRESCRIBES MARGIN REQUIRE MENT FOR CLEARING / TRADING MEMBERS. MARGINS ARE REQUIRE D TO BE PAID BY CLEARING / TRADING MEMBERS, WHO, IN TURN, COLLECTS MARGIN FROM THEIR RESPECTIVE CLIENTS. EVERY CLIENT IS REQUIRED TO PAY AN INITIAL MARGIN TO THE TRADING CLEARING MEMBER AT THE TIME OF ENTERING INTO AN CONTRACT. 5.2 THE APPELLANT SUBMITS T HAT THE PROVISION MADE ON ACCOUNT OF MARK-TO-MARKET MARG IN LOSSES ON THE DERIVATIVE POSITIONS, AT THE TIME OF CLOS ING OF BOOKS OF ACCOUNT SHOULD BE ALLOWED AS A DEDUCTION. IN THIS CONNECTION, THE APPELLANT PLACES RELIANCE ON THE GUIDAN CE NOTE ON `ACCOUNTING FOR EQUITY INDEX AND EQUITY STOCK FUTURES AND OPTIONS ISSUED BY ICAI (REFER PAPER BOOK AT PAGE NOS 163 TO 184) WHICH PROVIDES THE ACCOUNTING TR EATMENT TO BE FOLLOWED. 5.3 THE GUIDANCE NOTE ON `ACCOUNTING FOR EQUITY INDEX AND EQUITY STOCK FUTURES AND OPTIONS ISSUED BY ICAI PROVIDES THAT IN CASE OF OPEN IN TEREST IN FUTURE CONTRACTS AS ON THE BALANCE SHEET DATE, A PR OVISION SHOULD BE CREATED FOR ANTICIPATED LOSS ON THE OPEN CONTRACTS. ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 5 5.4 THE APPELLANT SUBMITS THAT IN ADDITION TO THE PAYMENT OF THE INITIAL MARGIN, BOTH THE PA RTIES TO THE FUTURES CONTRACT ARE REQUIRED TO PAY DAILY ` MARK-TO-MARKET MARGIN. FOR COMPUTATION OF MARK-TO-MAR KET MARGIN, ALL OUTSTANDING CONTRACTS, WHETHER LONG OR S HORT, OF A CLEARING MEMBER IN FUTURE CONTRACTS ARE DEEMED TO HAVE BEEN SETTLED AT THE DAILY SETTLEMENT PRICE. SUCH A MEMBER WOULD BE LIABLE TO PAY TO, OR BE ENTITLED TO COLLECT FROM, THE CLEARING HOUSE THE DIFFERENCE BETWEEN THE PRICE AT WHICH SUCH CONTRACT WAS BROUGHT OR SOLD AND THE DAILY SETTLEMENT PRICE OF THAT DAY. THE APPELLANT HAS MADE THE PROV ISION OF LOSS ON ACCOUNT OF MARK TO MARKET ON TRADING OF DERIVATIVE INSTRUMENT ON THE BASIS OF THE CLOSING RATE DETE RMINED BY THE STOCK EXCHANGES. SINCE THE SETTLEMENT PRICE IS DETERMINED BY THE RESPECTIVE STOCK EXCHANGES AT THE END OF EACH DAY, THE AMOUNT OF PROVISION IS NOT CONTI NGENT IN NATURE. 10. THE AR TOOK US THROUGH THE ACCOUN TING METHOD ADOPTED BY THE ASSESSEE COMPANY AND POINTED OUT THAT NOTES TO FINANCIAL STATEMENT S (PAGE 15 APB) SHOWED THAT MARK TO MARKET IS DONE ON DAILY BASIS, TH E RELEVANT PART OF WHICH READS AS UNDER:- I. EQUITY INDEX / STOCK - FUTURES (A) . (B) EQUITY INDEX / STOCK FU TURES ARE MARKED-TO-MARKET ON A DAILY BASIS. DEBIT OR CREDIT BALANCE DISCLOSED UNDER LOANS AND ADVANCES OR CURRENT LIABILI TIES, RESPECTIVELY, IN THE MARK-TO-MARKET MARGIN EQU ITY INDEX / STOCK FUTURES ACCOUNT, REPRESENTS THE NET AM OUNT PAID OR RECEIVED ON THE BASIS OF MOVEMENT IN THE PRI CES OF INDEX / STOCK FUTURES TILL THE BALANCE SHEET DATE. (C) AS ON THE BALANCE SHEET DATE, PROFIT / LOSS ON OPEN POSITIONS IN INDEX / STOCK FUTURES ARE ACCOUNTED FOR AS FOLLOWS: * CREDIT BALANCE IN THE MARK-TO-MARKET MARGIN EQUITY INDEX / STOCK FUTURES ACCOUNT, BEING ANTICIPATED PROFIT, IS IGNORED AN D NO CREDIT FOR THE SA ME IS TAKEN IN THE PROFIT AND LOSS ACCOUNT. ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 6 * DEBIT BALANCE IN THE M ARK-TO-MARKET MARGIN EQUITY INDEX / STOCK FUTURES ACCOUNT, BEING ANTICIPATED LOSS IS ADJUSTED IN THE PROFIT AND LOSS ACCOUNT. (D) ON FINAL SETTLEMENT OR SQUARING-UP OF CONTRACTS FOR EQUITY INDEX / STOCK FUTURES, THE PROFIT OR LOSS IS CALCULATED AS THE DIFFERENCE BETWEEN SETTLE MENT / SQUARING-UP PRICE AND CONTRACT PRICE. ACCORDINGL Y, DEBIT OR CREDIT BALANCE PERTAINING TO THE SETTLED / SQ UARED-UP CONTRACT IN MARK-TO- MARKET MARGIN EQUITY INDEX / STOCK FUTURES ACCOUNT,, IS RECOGNIZED IN THE PROF IT AND LOSS ACCOUNT. 11. IT WAS FURTHER POINTED OUT BY THE AR TH AT THE PROVISION IS MADE ON THE LAST DAY OF THE ACCOUNTING PERIOD, I.E. ON 31.03, I.E. IN THE CASE AT HAND ON 31.03.2005. THEREFORE, THE PROVISION, AS SUCH IS MADE ONLY ON THE LAST DAY, WHICH GETS SETTLED IN THREE MONTHS. IT WA S ALSO POINTED OUT BY THE AR THAT IN CASE THE MARKET IS GOING UP A ND ON FINAL SETTLEMENT IF TH ERE IS A GAIN, THEN THAT PROFIT IS IGNORED AND NO CREDIT IS TAKE N TO THE PROFIT & LOSS ACCOUNT. 12. WE HAVE CAREFULLY GONE THROUGH TH E FACTS OF THE CASE AS OBSERVED BY THE AO IN THE ASSESSMENT ORDER AND ALSO RECO RDED BY THE CIT(A) IN HIS ORDER AND THE REFERENCES MADE BY THE AR TO THE VARIOUS ASPECTS OF THE CASE FROM THE PAPER BOOK. ACCORDING TO THE AR, C ASE OF THE ASSESSEE ON THE ISSUE OF PROVISION FOR LOSS ON MARK TO MARKET, IS COVERED BY TH E DECISION ARRIVED AT BY THE COORDINATE BENCH OF I.T.A.T., MUMBAI IN THE ASSESS EES SISTER CONCERN, I.E. EDELWEISS CAPITAL LTD. MUMBAI IN ITA NO. 5324/M/2007 DATED 10.10.2010, WHEREIN THE HONBLE COORDINATE BE NCH HELD AS UNDER:- THE AFORESAID NOTE GIVES A FAIR PI CTURE OF THE NATURE OF PROVISION. THE PROVISION IN SUBSTANCE HAS BEEN MADE TO COVER THE ANTICIPATED LOSS IN THE DERIVATIVES TRADING. TH ERE IS NO DISPUTE THAT THE ASSESSEE HOLDS DERIVATIVES AS ITS STOCK-IN-TR ADE AND THERE IS ALSO NO DISPUTE THAT IT FOLLOWS THE PRINCIPLE COST OR MARKET PRICE, WHICHEVER IS LOWER IN VALUING THE DERIVATIVES. WHEN THE DERIVATIVES ARE HELD AS STOCK-IN-TRADE THEN WHATEVER RUL ES APPLY TO THE VAL UATION OF STOCK- IN-TRADE WILL HAVE TO BE NECESSARILY APPLY TO THEIR VALUATION ALSO. IT ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 7 IS A WELL SETTLED POSITION IN LAW THAT WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT IN VALUING THE CLOSING STOCK, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALU E OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDE NT TRADER WOULD CARE TO SHOW INCREASED PROFIT BEFORE ITS REALIZA TION. THIS IS THE THEORY UNDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS THE LOWER, AND IT IS NOW GE NERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACC OUNTANCY. THIS IS WHAT THE SUPREME COURT HELD IN THE CASE OF CHAINRUP SAMPATRAM VS. COMMISSIONER OF IN COME TAX, WEST BENGAL (1953) 24 ITR 481 (SC), SPEAKING THR OUGH HONBLE JUSTICE PATANJALI SASTRI, THE THEN CHIEF JUSTICE OF INDIA (PAGE 485 486 OF THE REPORT). AT PAGE 486 THE SUPREME COURT FURTHER OBSERVED THAT LOSS DUE TO A FALL IN PRICE BELOW CO ST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REALIZED. QUOTING FROM THE CASE OF WHIMSTER & CO. VS. COMMISSIONERS OF INLAND REVENUE (1926) 12 TAX CASES 813, THE SUPREME COURT OBSERVED THAT THE PROFITS THAT ARE CHARGEABLE TO TAX ARE THOSE RE ALIZED IN THE YEAR AND THAT AN EXCEPTION IS RECOGNIZED WHERE A TRADER PURCHASED AND STILL HOLDS GOODS WHICH ARE FALLEN IN VALUE IN WHICH CSE THOUGH NO LOSS HAS BEEN REALIZED NOR IT HAS OCCURRED , NEVERTHELESS AT THE CLOST OF THE YEAR HE IS PERMITTED TO TREAT THESE GOODS AS OF THEIR MARKET VALUE. THE DECISION OF THE SUPREME COURT GOVERNS THE FACTS OF THE PRESENT CASE. IT IS TO THE ASSESSEES STRE NGTH THAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN ITS GUIDE LINES HAVE ALSO APPROVED OF THE RULE OF PRUDENCE WHICH REALLY MEAN S THAT WHILE ANTICIPATED LOSSES CAN BE TAKEN NOTE OF WHILE VALUI NG THE CLOSING STOCK, ANTICIPATED PROFITS CANNOT BE RECOGNIZED. THE ANT ICIPATED LOSS, IN THE LIGHT OF THE JUDGMENT OF THE SUPREME COURT CITED ABOVE, CANNOT BE TREATED AS A CONTINGENT LIABILITY. 8. THE LEARNED DR POINTED OUT THAT THE ASSESSEE HAS VALUED EACH SCRIP OF THE DERIVATIVES AS AT THE END OF THE YEAR. WE DO NOT SEE HOW THIS CAN MAKE ANY DIFFERENCE TO THE LEGAL PRINCIPLE. IF THE DERIVATIVES HAVE BEEN TREATED AS STOCK-IN-TRADE THEN THERE IS NOTHING UNUSUAL IN THE ASSESSEE VALUING EACH DERIVATIVE BY APPLYING THE RULE COST OR MARKET WHICHEVER IS LOWER. 9. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO ALLOW THE PROVISION AS REFLECTING IN SUBSTANCE THE LOSS AR ISING ON ACCOUNT OF VALUATION OF THE CLOSING ST OCK. THE GROUND IS ALLOWED. ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 8 13. BESIDES THE CASE OF TH E ASSESSEES SISTER CONCERN, THE AR ALSO CITED THE CASES OF BANK OF BAHRAIN & KUWAIT, RE PORTED IN 41 SOT 290 (MUM-SB) AND THE CASE OF HONBLE SUPREME COURT IN W OODWORD GOVERNOR INDIA PVT. LTD., REPORTED IN 312 ITR 254. IT WAS POINTED OUT BY THE AR THAT TH E CASE SO HEAVILY RELIED UPON BY THE AO AND THE CIT(A), I.E. THE CASE OF CIT VS. KAMANI METAL AND ALLOYS LTD. 208 ITR 1017 (BOMBAY) HA D BEEN DISTINGUISHED ON FACTS. THE DR, AFTER THE BENCH, SUBMITTED ON UNTITLE D EXTRACT WHEREIN IT MENTIONED THAT WHERE SUCH MONEY IS STOCK IN TRADE, TH E LOSS HAD TO BE ACCOUNTED FOR AS PER ACCORDING STANDARDS. 14. WE FIND THAT THE CASE SO HEAVILY RELIED UPON BY THE REVENUE AUTHORITIES HAVE FACTS WHICH ARE NO DIFFERENT FOOTINGS . IN THAT CASE, WHERE THE CONTRACT WAS BETWEEN THE ASSESSEE AND MMTC, NO RAW MATERIAL WAS PURCHASED DURING THE RELEVANT ACCOUNTING YEAR. THE RAW MATERIAL WAS RECEIVED IN THE NEXT ACCOUNTING YEAR. THE HONBLE HIGH COURT, ON THESE FACTS HELD THAT SINCE THERE WAS NO MATERIAL EXCEPT THE PAPER CONTRACT, THE MATERIAL SO CONTRACTED COULD NOT BE REGARDED AS ASSESSEES STOCK IN TRADE. 15. IN THE CASE AT HAND, THE ASSESSEE HAD BEEN ENGAGING IN MARKED TO MARKET ON DAILY BASIS AND ON THE LAST DAY OF THE FINANCIAL YEAR , PROVISION IS MADE IN THE PROFIT & LOSS ACCOUNT AGAI NST ANTICIPATED LOSS. 16. WE HAVE ALSO FOLLOWED THE GUIDAN CE NOTE ON ACCOUNTING FOR EQUITY INDEX AND EQUITY STOCK FUTURES AND OPTIONS ( AS PLACED IN THE APB), AS TO HOW THE ICAI HAS DEALT WITH THE ISSU E. WE HAVE ALSO SEEN THAT THE ICAI HAS PRESCRIBED THE ACCOUNTING TREATMENT TO BE FOLLOWED BY THE PERSONS ENGAGED IN MARK TO MARKET ON EQUITY INDEX / STOC K FUTURES. IT IS ALSO IMPE RATIVE FOR THE COMPANIES TO STRICTLY FOLLOW THE STANDARD AND GUIDELINE FIXED BY ICAI. ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 9 17. TAKING INTO ACCOUNT THE DETAILS AND THE EXPLANATIONS SUBMITTED BY THE AR AND TAKING INTO ACCOUNT THE GUIDANCE NOT E ISSUED BY ICAI, WHICH THE COMPANIES HAVE TO FOLLOW, BESIDES THE SEVERAL CAS E LAWS CITED BY THE REVENUE AUTHORITIES AND BY THE AR, WE ARE OF THE OPINION TH AT THE ASSESSEE HAS RIGHTLY CLAIMED THE PROVISION IN THE PROF IT & LOSS ACCOUNT. 18. WE ARE OF THE CONSIDERED VIEW TH AT THE ASSESSEE HAS A STRONG CASE TO MAKE PROVISION FOR LOSS ON MARK-TO-MARKET BASIS. WE THEREFORE DELETE THE DISALLOWANCE MADE BY THE REVENUE AUTHORITIES. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ASSESSMENT YEAR 2005-06 ITA NO.2452/MUM/2009 (D EPARTMENTAL APPEAL) 19. THE DEPARTMENT IS IN APPEAL ON ACC OUNT OF DELETION OF DISALLOWANCE MADE IN RESPECT OF V-SAT CHARGES AT RS. 1, 28,393 AND DISALLOWANCE MADE IN RESPECT OF LEASE LINE CHARGES AT RS. 9,03,064. 20. THE CIT(A) IN HIS OR DER HAS OBSERVED THAT VSAT AND LEASELINE CHARGES ARE REIMBURSEMENT CHARGES PAID BY THE ME MBERS OF THE STOCK EXCHANGE IN LIEU OF INFRASTRUCTURE AND TR ADING FACILITIES PROVIDED BY THE STOCK EXCHANGE. THE DOT HAS GRANTED LICENSE TO ITS STOCK EXCH ANGE FOR INSTALLATION AND SETTING UP OF A CLOSE USER GROUP TELECOMMUNICATIONS NETWORK BASED ON VS ATS AND LEASED LINES AND A STOCK EXCHANGE COLLECTS THE VSAT AND LEASE LINE CHARGES FROM THE MEMBERS AND PASS THE SAME TO THE SERV ICE PROVIDER. THE VSAT AND LEASE LINE CHARGES ARE NOT PAYMENTS WH ICH COME WITHIN THE DOMAIN OF `FEE FOR TECHNICAL SERVICES AND THEY ARE ALSO NOT FOR `A NY WORK DONE BY NSE FOR THE MEMBER BROKER. THE TDS IS, THEREFORE, NOT DEDU CTIBLE ON THE SAME. THE CIT(A) FURTHER OBSERVED THAT INSOFAR AS THE DEDUCTIB ILITY OF TDS ON TRANSACTION CHARGES ARE CONCERNED, THE I.T.A.T, MUMBAI IN ITA NO.1955/MUM/08 FOR A.Y. 05-06 IN CASE OF KOTAK SECURITIES VS. ADDL.CIT-4 (3) ORDER DATED 26.08 .2008 HAS HELD THAT ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 10 THE STOCK EXCHANGE DOES NOT PROVIDE MA NAGERIAL SERVICES AND THE FEES PAID BY THE MEMBER TO THE STOCK EXCHANGE IS NOT FOR ANY TECHNICAL SER VICES RENDERED, SO TDS IS NOT DEDUCTIBLE ON THE SAME. 21. THE AR OF THE ASSESSEE SUBMITTED THAT IN ANY CASE THE IS SUE IS COVERED BY THE DECISION OF THE STOCK AND BOND TRADING CO., ITA NO. 4117 OF 2010 (BOMBAY), CASE OF ANGEL CAPITAL & DE BIT MARKET LTD. ITA NO. 475 OF 2011 (BOMBAY), VINOD K.NEVATIA 49 DTR 16 (MUMBAI), PHOENI X SHARES & STOCK BROKERS (P) LTD. 131 ITD 359 (MUMBAI) AND SONAL SHARES AND STOCK BROKERS PRIVATE LIMITED 38 SOT 150 (MUMBAI). 22. ON THE OTHER HAND, DR STRONGLY RE LIED ON THE VIEW TAKEN BY THE A.O. 23. WE HAVE GIVEN A VERY CAREFUL THOUGHT ON THE TWO IMPUGNED ISSUES AND WE FIND THAT THE CASE LAWS CITED BY THE AR AND THE VIEW TAKEN BY THE CIT(A) ARE WELL FOUNDED. WE, THEREFORE, REFRAIN OUR SELVES TO TAKE ANY ADVERSE VIEW ON THE VIEW TAKEN BY THE CIT(A), WE UPHOLD TH E ORDER OF THE CIT(A) ON BOTH THESE ISSUES. 24. THE AO HAS ALSO DISPUTED TH E DISALLOWANCE MADE ON ACCOUNT OF TRANSACTION CHARGES. THE AR DREW OUR ATTE NTION TO THE CASE OF I.T.A.T MUMBAI BENCH IN THE CASE OF KOTAK SECURITIES VS. ADDL.CIT IN ITA NO.1955/M/08 WHEREIN THE COORDINATE BENCH HELD THAT SINCE STOCK EXCHANGE DOES NOT PROVIDE MANAGERIAL SERVICES AND TH E FEE PAID BY THE MEMBER IS NOT FOR ANY TECHNICAL SERVICES, SO TDS IS NOT DEDUCTIBLE ON THE SAME AND ON THE BASIS OF THIS DECISION, THE CIT(A) ALLOWED THE ASSESSEES APPEAL. 25. THE DR ONCE AGAIN STRONGLY RELIED A ND SUPPORTED THE ORDER OF THE A.O. 26. ON GOING THROUGH THE ARGUMENT WE DO NOT INTEND TO DISTURB THE FINDING AND DECISION OF THE CIT( A) AND WE UPHOLD HIS VIEW. ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 11 27. THE REVENUE HAS ALSO DISPUTED TH E DELETION OF ADDITION MADE ON ACCOUNT OF PENALTY PAYMENT TO STOCK EXCHANGES. 28. BEFORE US, THE AR POINTED OUT THAT THE PENALTY IS NOT A PENALTY PER SE, BUT THESE ARE THE AMOUNTS PAID TO THE STOC K EXCHANGE FOR LAPSE OF PROCEDURAL REQUIREMENTS AND NOT FOR ANY VIOLATION OF ANY LAW OR ANY OF FENSE. THE CIT(A) OBSERVED THAT IT WAS NOT CORRECT TO INVOKE EXPLANATION TO SECTION 37 AS THESE PAYMENTS WERE NOT MADE FOR ANY INFRACTION OF LAW. 29. ON GOING INTO THE FACTS, WE FI ND OURSELVES IN AGREEMENT WITH THE OBSERVATION OF THE CIT(A) AND REFRAIN OURSE LVES TO TAKE ANY DIFFERENT VIEW THAN THE CIT(A). WE UPHOLD THE DE LETION MADE BY THE CIT(A). IN THE RESULT, THE AP PEAL FILED BY THE RE VENUE IS DISMISSED. ITA NO.2193/MUM/2009 : BY THE ASSESSEE. 30. ASSESSMENT YEAR 2006-2007 COVERS SI MILAR GROUNDS OF APPEAL. THE ONLY EFFECTIVE GROUND TAKEN BY THE ASSESSEE IS DISALLOWANCE OF PROVISION FOR LOSS ON MARK-TO-MARKET. THE FACT S AND THE ACCOUNTING TREATME NT REMAINS THE SAME AS IN THE IMMEDIATELY PRECEDING YEAR. THE AR PRAYED THAT SIN CE THE DISALLOWANCE HAS BEEN MADE ON THE SAME FACTS, THE DECISION, IN ANY CASE, SHALL BE BINDING FOR THIS YEAR TOO. IN THE SYNOPSIS FILED, TH E AR REITERATED THE FACTS AND THE CASE LAWS RELIED UPON. THE DR ON TH E OTHER HAND TOO SUBMITTED TH AT SINCE THERE ARE NO NEW FACTS, DETAILED ARGUMENTS NEED NOT BE MADE. ASSESSMENT YEAR : 2006-2007 ITA NO.2193/MUM/2009 : BY THE ASSESSEE. ITA NO.2453/MUM/2009 : BY THE DEPARTMENT. ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 12 31. ON CONSIDERING ALL FACTS, WE WILL FOLLOW THE DECISION THAT WE HAVE TAKEN IN THE IMMEDIATE PRECEDING YEAR A ND ALLOW THE GROUND OF APPEAL, THE DISALLOWANCE IS DELETED. IN THE RESULT, THE AP PEAL FILED BY THE ASSESSEE IS ALLOWED. ITA NO.2453/MUM/2009 : BY THE DEPARTMENT. 32. THE DEPARTMENT TOO IS IN APPEAL IN THIS YEAR. THE DISALLOWANCE MADE HAS BEEN DELETED BY THE CIT(A) ON ACC OUNT OF V-SAT CHARGES AND LEASE LINE CHARGES. AS WE HAVE UPHELD THE DECISI ON OF THE CIT(A) IN THE IMMEDIATELY PRECEDING YEAR, WE FOLLOW THE SAME AND WE ARE NOT INCLINED TO DISTURB THE CIT(A)S FINDING, WE THEREFORE DISMISS TH E APPEAL OF THE DEPARTMENT ON THIS GROUND. 33. THE DEPARTMENT HAS DISPUTED THE DE LETION OF TRANSACTION CHARGES, WHICH HAS BEEN DELETED BY THE CIT(A). AT THE TIM E OF HEARING, THE AR OF THE ASSESSEE COMPANY CONCEDED THAT TH E ALLOWABILITY OF TRANSAC TION CHARGES WAS ONLY UPTO 2005-06 AND FROM 2006-07, THE TRANSA CTION CHARGES ARE DEEMED TO BE DISALLOWED, WHICH HE SUBMITTED THAT AN APPROPRIATE VIEW MAY BE TAKEN. 34. AS THE DISALLOWANCE MADE BY THE AO HAS VIRTUALLY BEEN CONCEDED, WE ALLOW THE DEPARTMENTS APPEAL AND UPHOLD THE VIEW TAKEN BY THE AO, BY REVERSING THE DECISION OF TH E CIT(A) ON THIS ISSUE. 35. THE CIT(A) HAS ALLOWED THE ASSES SEES CONTENTION ON PENALTY PAID TO STOCK EXCHANGE, AS THIS IS NOT THE PENALTY FOR ANY INFR ACTION OF LAW BUT PAYMENTS MADE ON PROCEDURAL DELAYS. WE HAVE ACCEPTED THE VIEW TAKEN BY THE CIT(A) BY NOT DISTURBING HIS VIEW IN THE PRECEDING Y EAR, WE WOULD FOLLOW THE SAME IN THE CURRENT YEAR AS WELL. WE, THEREFORE DI SMISS THE GROUND TAKEN BY THE DEPARTMENT ON THIS ISSUE AND UPHOLD TH E DECISION OF CIT(A). ITA NO.2194/MUM/2009 & ORS. M/S.EDELWEISS SECURITIES LIMITED. 13 36. TAKING INTO ACCOUNT ALL FACTS AND TAKING INTO ACCOUNT ALL JUDICIAL PRONOUNCEMENTS, WE ALLOW THE ASSESSEES APPEAL. 37. ON THE FACTS AND CIRCUMSTANCES TH E APPEAL FILED BY THE DEPARTMENT IS ALLOWED IN PART. 38. THE FINAL CONCLUSION FOR ALL TH E FOUR APPEALS ARE AS FOLLOWS : ITA NO. 2194/MUM/2009, ASSESSMENT YEAR 2005-06 PARTLY ALLOWED. ITA NO. 2452/MUM/2009, ASSESSM ENT YEAR 2005-06 DISMISSED. ITA NO. 2193/MUM/2009, ASSESSM ENT YEAR 2006-07 ALLOWED. ITA NO. 2453/MUM/2009, ASSESSMENT YEAR 2006-07 PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 28 TH DAY OF MARCH, 2012. SD/- (G.E.VEERABHADRAPPA) SD/- (VIVEK VARMA) PRESIDENT JUDICIAL MEMBER MUMBAI : 28 TH MARCH, 2012. RASIKA COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - IV, MUMBAI 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.