DCIT CIR 3(1), MUMBAI V. ECL FINANCE LTD, MUMBAI

ITA 5405/MUM/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 3735 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 27-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.5405/M/2014 ASSESSMENT YEAR: 2010-11 DCIT, CIRCLE 3(1), ROOM NO.607, 6 TH FLOOR, AAYAKAR BHAVAN, MUMBAI 400 020 VS. M/S. ECL FINANCE LTD., 14 TH FLOOR, EXPRESS TOWER, NARIMAN POINT, MUMBAI 400 021 PAN: AABCE 4916D (APPELLANT) (RE SPONDENT) PRESENT FOR: ASSESSEE BY : SHRI RAVIKANT PATHAK, A.R. REVENUE BY : SHRI V. JUSTIN, D.R. DATE OF HEARING : 20.06.2018 DATE OF PRONOUNCEMENT : 10.08.2018 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE REVEN UE AGAINST THE ORDER DATED 09.05.2014 OF THE COMMISSIONE R OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS TH E CIT(A)] RELEVANT TO ASSESSMENT YEAR 2010-11. 2. THE ONLY ISSUE RAISED BY THE REVENUE IS AGAINST THE DELETION OF RS.1,25,73,083/- BY LD. CIT(A) AS MADE B Y THE AO TOWARDS DISALLOWANCE OF MARKED TO MARKET LOSS CLAIM ED BY THE ASSESSEE ON TRADING IN DERIVATIVE TRANSACTIONS ON T HE GROUND THAT THE SAID LOSSES WERE MERELY NOTIONAL LOSSES AN D THE ACTUAL LOSS OR THE PROFIT IN RESPECT OF SUCH DERIVATIVE TR ANSACTIONS WOULD GET CRYSTALLIZED ONLY AT THE TIME OF SETTLEME NT. ITA NO.5405/M/2014 M/S. ECL FINANCE LTD. 2 3. THE FACTS IN BRIEF ARE THAT THE AO, DURING THE C OURSE OF ASSESSMENT PROCEEDINGS, OBSERVED THAT ASSESSEE CHARG ED TO THE P & L ACCOUNT DURING THE YEAR A SUM OF RS.1,25,73,0 83/- ON ACCOUNT OF MARK TO MARKET LOSS ON NCDS AND ACCOR DINGLY ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE AS TO WH Y THE SAME SHOULD NOT BE DISALLOWED. THE ASSESSEE SUBMIT TED BEFORE THE AO THAT ASSESSEE IS ENGAGED IN THE BUSIN ESS OF NON BANKING FINANCE ACTIVITIES AFTER OBTAINING DUE REGI STRATION WITH THE RBI AND IS ENGAGED PRIMARILY IN THE BUSINESS OF FINANCING AND CORPORATE LENDING AGAINST SECURITY OF SHARES, ST OCK, BONDS, DEBENTURE OR OTHER SIMILAR INSTRUMENTS ON SHORT, MED IUM AND LONG TERM BASIS BESIDES TRADING IN SECURITIES AND D EBENTURES. IT WAS SUBMITTED BEFORE THE AO THAT NCDS ARE IN THE NATURE OF STOCK IN TRADE OF THE ASSESSEE AND AS PER ACCEPTED ACCOUNTING PRINCIPLE STOCK IN TRADE HAVE TO BE VALUED AT COST OF MARKET VALUE WHICHEVER IS LOWER. THE ASSESSEE ALSO SUBMIT TED THAT AS PER AS-1 (DISCLOSURE OF ACCOUNTING POLICIES) PRESCR IBED BY CBDT VIDE NOTIFICATION NO.SO 69 (E) DATED 25.01.1996 ACCOUNTING POLICIES ADOPTED BY AN ASSESSEE SHOULD B E SUCH THAT REPRESENTS A TRUE AND FAIR VIEW OF THE STATE O F AFFAIRS OF THE BUSINESS OF THE ASSESSEE. THE ASSESSEE ARGUED THAT AS PER AS-1 A PRUDENT PERSONS WOULD PROVIDES FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CAN N OT BE DETERMINED WITH CERTAINTY AND ONLY REPRESENTS A BES T ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION. HOWEVER, THE ASSESSEES CONTENTIONS DID NOT FIND FAVOUR WITH THE AO AND HE DISALLOWED THE CLAIM OF RS.1,25,73,083/- BY ADDING THE SAME TO THE INCOME OF THE ASSESSEE BY HOLDING THAT NOTIONAL MTM LOSS ON ITA NO.5405/M/2014 M/S. ECL FINANCE LTD. 3 NCDS HAS REDUCED ITS TRUE AND REAL INCOME AND FURTH ER OBSERVED THAT THE NCDS ARE NOT IN THE NATURE OF ST OCK IN TRADE BUT INVESTMENTS AND THE CBDT CIRCULAR NO.775 DATED 05.10.1993 WHEREBY IT IS CLARIFIED THAT IT IS FOR THE AO TO DETERMINE ON THE FACTS AND CIRCUMSTANCES OF EACH CA SE AS TO WHETHER ANY PARTICULAR SECURITIES CONSTITUTES STOCK IN TRADE OR INVESTMENT TAKING TO ACCOUNT THE GUIDELINES ISSUED BY RBI. 4. IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) ALL OWED THE APPEAL OF THE ASSESSEE AFTER HEARING THE SUBMISSION S OF THE ASSESSEE WHICH HAS BEEN INCORPORATED IN PARA 4.2 OF THE APPELLATE ORDER BY OBSERVING AND HOLDING AS UNDER: 4.3 I HAVE CONSIDERED THE ABOVE SUBMISSIONS OF THE APPELLANT AND HAVE ALSO GONE THROUGH THE CASE LAWS CITED IN THIS REGARD. IT IS SEEN THAT THIS ISSUE HAS BEEN CONSIDERED BY ITAT, MUMBAI IN THE CASES OF I) ECL F INANCE LIMITED, II) KOTAK MAHINDRA INVESTMENT LTD, III) SHRI RAMESH KUMAR DAM ANI AND IV) EDELWEISS CAPITAL LIMITED (A SISTER CONCERN OF THE APPELLANT) (ALL SU PRA), CITED BY THE APPELLANT. FOR THE ASSESSMENT YEAR 2010-11 IN THE CASE OF APPELLANTS S ISTER CONCERN NAMELY E CAP EQUITIES PRIVATE LIMITED, I HAVE DELETED THE DISALL OWANCE RELYING ON HON'BLE ITAT'S DECISION IN THE CASE OF EDELWEISS CAPITAL. H ENCE, RESPECTFULLY FOLLOWING THE DECISION OF HON'BLE ITAT IN ABOVE CASES, I DIRE CT THE AO TO DELETE THE DISALLOWANCE OF MARK TO MARKET LOSS OF RS 1,25,113, 083/-. 5. THE LD. D.R. VEHEMENTLY SUBMITTED BEFORE US THAT T HE MTM LOSS ON NCDS IS JUST A NOTIONAL LOSS AND ASSESS EE HAS REDUCED HIS TRUE INCOME BY THE MTM LOSSES WHICH IS JUST A NOTIONAL OR CONTINGENT LOSS WHEREAS THE ACTUAL LOSS WOULD BE ASCERTAINED UPON THE SETTLEMENT OF THE TRANSACTIONS AND THEREFORE THE ORDER OF LD. CIT(A) SHOULD BE REVERSED AND THAT OF THE AO DESERVED TO BE RESTORED. THE LD. D.R. ALSO REFERRED TO INSTRUCTION NO.03/2010 DATED 23.03.2010 WHEREIN I T HAS BEEN CLEARLY PROVIDED THAT THERE IS NO SALE OR NO S ETTLEMENT HAS ACTUALLY TAKEN PLACE AND THE LOSS ON MARKED T O MARKET ITA NO.5405/M/2014 M/S. ECL FINANCE LTD. 4 BASIS HAS RESULTED IN REDUCTION OF BOOK PROFITS, SUC H A NOTIONAL LOSS WOULD BE CONTINGENT IN NATURE AND CANNOT BE AL LOWED TO BE SET OFF AGAINST THE TAXABLE INCOME. 6. THE LD. A.R., ON THE OTHER HAND, RELIED ON SERIES OF DECISIONS AND THE ORDER OF LD CIT(A). HOWEVER, HE S TRESSED ON THE DECISION OF CO-ORDINATE BENCH OF THE TRIBUNAL I N ASSESSEES OWN CASE IN ITA NO.7656/M/2011 & ORS. WHEREIN AN ID ENTICAL ISSUE HAS BEEN DECIDED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL VIDE ORDER DATED 22.01.2013 DECIDING THE MAR KED TO MARKET LOSSES AS ALLOWABLE. THE LD. A.R. ALSO SUBMITTE D THAT IN THE CASE OF GROUP COMPANY NAMELY EDELWEISS CAPIT AL LTD. VS. ITO IN ITA NO.5423/M/2007 THE SIMILAR ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE AND THE ORDER OF THE TRIB UNAL HAS NOT BEEN CHALLENGED BEFORE THE HIGH COURT AND HAS ATTAI NED FINALITY. THE LD. COUNSEL PRAYED BEFORE THE BENCH TH AT IN VIEW OF THE SAID FACT, THE APPEAL OF THE REVENUE SHOULD BE DISMISSED. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIND FROM THE PERUSAL OF THE ORDER OF CO-ORDINATE BENCH OF THE TRIBUNAL I N ASSESSEES OWN CASE IN ITA NO.7656/M/2011 THAT AN IDENTICAL IS SUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE WHEREIN MARK ED TO MARKET BASIS WERE HELD TO BE ADMISSIBLE UNDER LAW. THE OPERATIVE PART IS REPRODUCED AS UNDER: 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ON IN THE LIGHT OF MATERIAL PLACED BEFORE US. THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF EDELWEISS CAPITAL LTD. VS. ITO VIDE ORDER DATED 10/11/2010 IN ITA NO.5324/M/07. A COPY OF THE SAID ORDER IS PLACED ON OUR RECORD. THE ISSUE W AS DECIDED BY THE TRIBUNAL IN FAVOUR OF ASSESSEE WITH THE FOLLOWING OBSERVATIONS. ITA NO.5405/M/2014 M/S. ECL FINANCE LTD. 5 '7. WE HAVE CONSIDERED THE FACTS AND THE RIVAL CONT ENTIONS. IN THE SCHEDULE ANNEXED TO AND FORMING PART OF THE BALANCE SHEET AN D PROFIT & LOSS ACCOUNT FOR THE YEAR UNDER APPEAL (PAGE 13 OF THE PAPER BOO K), THE ASSESSEE HAS MADE THE FOLLOWING NOTE: - 'H. EQUITY FUTURES -- INDEX / STOCK (A) 'INITIAL MARGIN-EQUITY DERIVATIVE INSTRUMENTS', REPRESENTING INITIAL MARGIN PAID, AND 'MARGIN DEPOS ITS', REPRESENTING ADDITIONAL MARGIN OVER AND ABOVE INITI AL MARGIN, FOR ENTERING INTO CONTRACTS FOR EQUITY INDEX / STOC K FUTURES, WHICH ARE RELEASED ON FINAL SETTLEMENT / SQUARING-U P OF UNDERLYING CONTRACTS, ARE DISCLOSED UNDER LOANS AND ADVANCES. (B) EQUITY INDEX / STOCK FUTURES ARE MARKED-TO-MARK ET ON A DAILY BASIS. DEBIT OR CREDIT BALANCE DISCLOSED UNDE R LOANS AND ADVANCES OR CURRENT LIABILITIES, RESPECTIVELY, IN T HE MARK-TO- MARKET MARGIN - EQUITY INDEX / STOCK FUTURES ACCOUN T', REPRESENTS THE NET AMOUNT PAID OR RECEIVED ON THE B ASIS OF MOVEMENT IN THE PRICES OF INDEX / STOCK FUTURES TIL L THE BALANCE SHEET DATE. AMOUNT PAID TO BROKERS IN ADDIT ION TO MARK-TO-MARKET MARGINS IS DISCLOSED AS 'MARGIN DEPO SITS' UNDER LOANS AND ADVANCES. (C) AS ON THE BALANCE SHEET DATE, PROFIT/LOSS ON OP EN POSITIONS IN INDEX / STOCK FUTURES ARE ACCOUNTED FOR AS FOLLOWS: CREDIT BALANCE IN THE 'MARK-TO MARKET MARGIN -- E QUITY INDEX / STOCK FUTURES ACCOUNT, BEING ANTICIPATED PR OFIT, IS IGNORED AND NO CREDIT FOR THE SAME IS TAKEN IN THE PROFIT AND LOSS ACCOUNT. DEBIT BALANCE IN THE 'MARK-TO-MARKET MARGIN -- EQ UITY INDEX / STOCK FUTURES ACCOUNT', BEING ANTICIPATED L OSS, 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 CALCUL ATED AS THE DIFFERENCE BETWEEN SETTLEMENT / SQUARING-UP PRICE A ND CONTRACT PRICE. ACCORDINGLY, DEBIT OR CREDIT BALANC E PERTAINING TO THE SETTLED / SQUARED-UP CONTRACT IN 'MARK-TO- M ARKET MARGIN - EQUITY INDEX / STOCK FUTURES ACCOUNT' IS R ECOGNIZED IN THE PROFIT AND LOSS ACCOUNT.' THE AFORESAID NOTE GIVES A FAIR PICTURE OF THE NATU RE OF THE PROVISION. THE PROVISION IN SUBSTANCE HAS BEEN MADE TO COVER THE A NTICIPATED LOSS IN THE DERIVATES TRADING. THERE IS NO DISPUTE THAT THE ASS ESSEE HOLDS DERIVATIVES AS ITS STOCK-IN-TRADE AND THERE IS ALSO NO DISPUTE THA T IT FOLLOWS THE PRINCIPLE ITA NO.5405/M/2014 M/S. ECL FINANCE LTD. 6 'COST OR MARKET PRICE, WHICHEVER IS LOWER' IN VALUI NG THE DERIVATIVES. WHEN THE DERIVATIVES ARE HELD AS STOCK-IN-TRADE THEN WHA TEVER RULES APPLY TO THE VALUATION OF STOCK-IN-TRADE WILL HAVE TO BE NECESSA RILY APPLY TO THEIR VALUATION ALSO. IT IS A WELL SETTLED POSITION IN LA W THAT 'WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT IN VALUING THE CLOSING STOCK, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW IN CREASED PROFIT BEFORE ITS REALIZATION. 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 GENERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMER CIAL PRACTICE AND ACCOUNTANCY'. THIS IS WHAT THE SUPREME COURT HELD I N THE CASE OF CHAINRUP SAMPATRAM VS. COMMISSIONER OF INCOME TAX, WEST BENG AL (1953) 24 ITR 481 (SC), SPEAKING THROUGH HON'BLE JUSTICE PATANJALI SA STRI, THE THEN CHIEF JUSTICE OF INDIA (PAGE 485 -- 486 OF THE REPORT). AT PAGE 4 86 THE SUPREME COURT FURTHER OBSERVED THAT 'LOSS DUE TO A FALL IN PRICE BELOW COST 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 TH AT ARE CHARGEABLE TO TAX ARE THOSE REALIZED IN THE YEAR AND THAT AN EXCEPTIO N IS RECOGNIZED WHERE A TRADER PURCHASED AND STILL HOLDS GOODS WHICH ARE FA LLEN IN VALUE IN WHICH CASE THOUGH NO LOSS HAS BEEN REALIZED NOR IT HAS OC CURRED, NEVERTHELESS AT THE CLOSE OF THE YEAR HE IS PERMITTED TO TREAT THES E GOODS AS OF THEIR MARKET VALUE. THIS DECISION OF THE SUPREME COURT GOVERNS T HE FACTS OF THE PRESENT CASE. IT IS TO THE ASSESSEE'S STRENGTH THAT THE INS TITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN ITS GUIDELINES HAVE ALSO AP PROVED OF THE RULE OF PRUDENCE WHICH REALLY MEANS THAT WHILE ANTICIPATED LOSSES CAN BE TAKEN NOTE OF WHILE VALUING THE CLOSING STOCK, ANTICIPATE D PROFITS CANNOT BE RECOGNIZED. THE ANTICIPATED LOSS, IN THE LIGHT OF T HE JUDGMENT OF THE SUPREME COURT CITED ABOVE, CANNOT BE TREATED AS A C ONTINGENT 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 SE E HOW THIS CAN MAKE ANY DIFFERENCE TO THE LEGAL PRINCIPLE. IF THE DERIVATIV ES HAVE BEEN TREATED AS STOCK-IN- TRADE THEN THERE IS NOTHING UNUSUAL IN TH E ASSESSEE VALUING EACH DERIVATIVE BY APPLYING THE RULE COST OR MARKET WHIC HEVER IS LOWER. 9. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO A LLOW THE PROVISION AS REFLECTING IN SUBSTANCE THE LOSS ARISING ON ACCOUNT OF VALUATION OF THE CLOSING STOCK. THE GROUND IS ALLOWED.' 9. THE ONLY OBJECTION RAISED BY LD. DR IS THAT IN T HE INSTRUCTION NO.3/2010 DATED 23/3/2010 CBDT HAS INSTRUCTED INCOME TAX AUTHORITIE S TO ADD BACK SUCH AMOUNT WHILE COMPUTING TAXABLE INCOME OF AN ASSESSEE. SUCH CONTENTION OF LD. DR CANNOT BE ACCEPTED FIRSTLY ON THE GROUND THAT INSTRUCTIONS ISSUED BY CBDT THOUGH MAY BE BINDING UPON INCOME TAX AUTHORITIES BUT ARE NOT BIN DING ON APPELLATE AUTHORITIES. THE DATE OF ASSESSMENT ORDER IN THE PRESENT CASE IS 31/12/2009 WHEN SUCH INSTRUCTIONS WERE NOT EVEN EXISTED. FURTHER, WHEN T RIBUNAL HAD DECIDED THE ISSUE IN THE CASE OF EDELWEISS CAPITAL LTD. (SUPRA) THE INST RUCTIONS WERE EXISTING BUT NOT PLEADED BY THE DEPARTMENT. THE TRIBUNAL HAS CONSIDE RED EACH AND EVERY ASPECT IN ITA NO.5405/M/2014 M/S. ECL FINANCE LTD. 7 DETAILS WHICH IS CLEAR FROM THE OBSERVATIONS REPROD UCED IN THE EARLIER PART OF THIS ORDER. TAKING THE CONSISTENT VIEW AS TAKEN BY THE C O-ORDINATE BENCH, WE SEE NO INFIRMITY IN THE GRANTED BY LD. CIT(A). WE DECLINE TO INTERFERE IN THE RELIEF GRANTED BY HIM AND DEPARTMENTAL APPEAL IS DISMISSED. 8. WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISIO N OF THE CO-ORDINATE BENCH OF THE TRIBUNAL, DISMISS THE APPE AL OF THE REVENUE BY AFFIRMING THE ORDER OF LD. CIT(A). ORDER PRONOUNCED IN THE OPEN COURT ON 10.08.2018. SD/- SD/- (C.N. PRASAD) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 10.08.2018. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY /ASSTT. REGISTRAR, ITAT, MUMBAI.