DCIT - CC - 1(1), MUMBAI V. EDELWEISS COMMODITIES SERVICES LTD., MUMBAI

ITA 5587/MUM/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 5355 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2012-2013
• Appeal Filed On: 03-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R MANJUNATHA SWAMY
• Assessee Lawyers: RAVI KANTH PATHAKAR
• Keywords: Business expenditure; Revised return; Futures and options; Rule 8D
• Section: 143(3); 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E MUMBAI BEFORE SHRI RAVISH SOOD (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 5587/MUM/2018 ASSESSMENT YEAR: 2012-13 DY. CIT CENTRAL CIRCLE 1(1), R. NO. 903, 9 TH FLOOR, OLD CGO (ANNEXE) M.K. ROAD, MUMBAI-400020. VS. M/S EDELWEISS COMMODITIES SERVICES LTD., 4 TH FLOOR, EDELWEISS HOUSE, OFF C.S.T. ROAD, KALINA, SANTACRUZ (EAST), MUMBAI-400098. PAN NO. AAKCS7311R APPELLANT RESPON DENT REVENUE BY : MR. R. MANJUNATHA SWAMY, DR ASSESSEE BY : MR. RAVI KANTH PATHAK,AR DATE OF HEARING : 16/09/2019 DATE OF PRONOUNCEMENT : 25/10/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE REVENUE. THE RELEVAN T ASSESSMENT YEAR IS 2012-13. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX-16, MUMBAI [IN SHORT CI T(A)] AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) R.W.S. 1 44C(1) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE 1 ST GROUND OF APPEAL WHETHER ON FACTS AND IN LAW, UNDER THE CIRCUMSTANCE S OF THE CASE THE LD. CIT(A)-16, MUMBAI WAS JUSTIFIED IN ALLOWING LOSS ON ACCOUNT OF MARK TO ITA 5587/MU M/2018 M/S. EDELWEISS CO MMODITIES SERVICES LTD. 2 MARKET TO THE TUNE OF RS.3,69,12,973/- WITHOUT APPR ECIATING THAT THE CASE LAWS RELIED UPON IN ALLOWING THIS LOSS HAS BEEN APP EALED AGAINST BEFORE THE HON'BLE BOMBAY HIGH COURT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE-COMPANY FILED ITS RETURN OF INCOME FOR THE A.Y. 2012-13 ON 29.11.2012 DECLARING TOTAL INCOME OF RS.35,43,40,796/-. SUBSEQUENTLY, IT FILED A REVISED RETURN ON 31.03.2014 DECLARING TOTAL INCOME OF RS.32,38,18 ,010/-. THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF TRA DING, SETTLEMENT AND OTHER ACTIVITIES OF COMMODITIES EXCHANGES FOR ITSEL F AND ITS CLIENTS; TRADING IN PHYSICAL COMMODITIES INCLUDING DERIVATIV E INSTRUMENTS AND ALSO EARNED RENTAL AND INTEREST INCOME. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE H AD MADE PROVISION FOR MARK TO MARKET LOSS ON TRADING IN DER IVATIVE INSTRUMENTS OF RS.3,69,12,973/-. DURING THE ASSESSMENT PROCEEDI NGS, THE ASSESSEE FILED DETAILS OF STATEMENT SHOWING PROVISION FOR MA RK TO MARKET LOSS AND ALSO SUBMITTED A DETAILED NOTE ON MARK TO MARKET LO SS ON OUTSTANDING POSITION. ASSESSEE SUBMITTED THAT IT HAD MADE PROVI SIONS FOR LOSS FOLLOWING ACCEPTED ACCOUNTING PRINCIPLES AS PER THE GUIDANCE NOTE ON ACCOUNTING FOR EQUITY INDEX & EQUITY STOCK FUTURES AND OPTIONS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND CLAIMED THE LOSS AS DEDUCTABLE BUSINESS EXPENDITURE . HOWEVER, THE ASSESSING OFFICER (AO) WAS NOT CONVINCED TO THE ABO VE EXPLANATION OF THE ASSESSEE AND HELD THAT (I) AS THE DERIVATIVE CO NTRACTS ARE NOT ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS AT THE INCEP TION THEREOF AT THE TIME OF PURCHASE, THEY DO NOT AND CANNOT FORM A PAR T OF STOCK-IN-TRADE ITA 5587/MU M/2018 M/S. EDELWEISS CO MMODITIES SERVICES LTD. 3 (II) ANY CONTRACT TO ACQUIRE A DERIVATIVE AT A FUTU RE DATE IS A FORWARD CONTRACT TO ACQUIRE A COMMODITY; THIS CONTRACT AS S UCH IS NOT A STOCK-IN- TRADE AND HENCE IT CANNOT BE VALUED AT THE TIME OF PREPARATION OF BALANCE SHEET AS STOCK-IN-TRADE. OBSERVING AS ABOVE, THE AO HELD THAT THE MARK TO M ARKET LOSS AT BEST CAN BE AN UNCERTAINED LIABILITY OR A PROVISION FOR LOSS WHICH MAY OR MAY NOT INCUR AT THE TIME OF SETTLEMENT OF THE CONT RACT AT A FUTURE DATE. FURTHER, IT IS OBSERVED BY HIM THAT THE FUTURE CONT RACTS ARE IN THE NATURE OF READY FORWARD CONTRACTS AND IN SUCH TYPE OF CONT RACTS, THE PROFIT OR LOSS CANNOT ACCRUE UNTIL AND UNLESS THE CONTRACTS A RE SETTLED. THE AO THUS DISALLOWED RS.3,69,12,973/- TREATING A S NOTIONAL LOSS. 4. IN APPEAL, THE LD. CIT(A) FOLLOWING THE DECISION IN EDELWEISS SECURITIES LIMITED V. ADDL. CIT [ITA 2193/MUM/2009], DCIT V. ECL FINANCE LIMITED [ITA 7656/MUM/2011], DCIT V. EDELWEISS SECURITIES LIMITED [ITA 7792/MUM/2012], DCIT V. EDELWEISS SECURITIES LIMITED [ITA 5939/MUM/2011], EDELWEISS CAPITAL LIMITED V. ITO [ITA 5324/MUM/2007], DELETED THE ADDITION OF RS.3,69,12, 973/- MADE BY THE AO. 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE ( DR) RELIES ON THE ORDER OF THE AO, WHEREAS THE LD. COUNSEL FOR THE AS SESSEE SUPPORTS THE ORDERS PASSED BY THE LD. CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. SIMILAR ISSUE AROSE BEFORE THE ITAT D BENCH, MUMBAI IN THE CASE OF M/S. EDEL COMMODITIES LIMITED V. DCIT [ITA ITA 5587/MU M/2018 M/S. EDELWEISS CO MMODITIES SERVICES LTD. 4 NO.3426/MUM/2016] FOR A.Y. 2011-12. THE TRIBUNAL VIDE ORDER DATED 06.04.2018, HELD AS UNDER: 32. WHEN IT IS HELD THAT THESE DERIVATIVES HELD AR E STOCK-IN-TRADE THEN THERE CANNOT BE ANY RESERVATION IN VALUATION THEREOF AS P ER THE WELL SETTLED PRACTICE OF VALUATION OF CLOSING STOCK AT MARKET VALUE OR CO ST WHICHEVER IS LOWER. NO CASE HAS BEEN MADE OUT BY THE REVENUE THAT THE VALU ATION DONE IS NOT CORRECT OR NOT PROPERLY EXPLAINED. IN THESE SITUATIONS, THE DECISIONS OF THE HONBLE APEX COURT RELIED UPON HEREINABOVE IN THE CASE OF C HAINRUP SAMPATRAM VS. COMMISSIONER OF INCOME TAX, WEST BENGAL (1953) 24 I TR 481 (SC), IS QUITE GERMANE. FURTHERMORE, WE FIND THE ASSESSING OFFICER HAS TOTALLY ERRED IN PLACING RELIANCE UPON THE DECISION OF THE HONBLE A PEX COURT IN THE CASE OF M/S. SANJEEV WOOLEN MILLS VS COMMISSIONER OF INCOME -TAX (IN CIVIL APPEAL NO. 6735- 6736/2003 VIDE ORDER DATED 24.11.2005). I N THE SAID DECISION, THE HONBLE APEX COURT HAS ANALYZED THE ENTIRE GAMUT OF DECISIONS ON THE ISSUE OF VALUATION OF THE STOCK. IT HAS CATEGORICALLY HELD T HAT RECOGNIZED AND SETTLED ACCOUNTING PRACTICE OF ACCOUNTING FOR THE CLOSING S TOCK IN THE ACCOUNTS IS THAT IT HAS TO BE VALUED ON THE COST BASIS OR AT THE MAR KET VALUE BASIS IF THE MARKET VALUE OF THE STOCK IS LESS THAN THE COST VALUE. IT WAS ALSO EXPOUNDED THAT THE ESTABLISHED AND WELL SETTLED PRACTICE IN THIS REGAR D SHOULD NOT BE DISTURBED. SIMILAR VIEW WAS EXPRESSED BY THE HONBLE APEX COUR T IN THE CASE OF CIT VS. WOODWARD GOVERNOR 294 ITR 451 (SC). IN THIS DECISIO N, THE HONBLE APEX COURT HAS HELD THAT THE ACCOUNTS AND THE ACCOUNTING METHOD FOLLOWED BY AN ASSESSEE CONTINUOUSLY FOR A GIVEN PERIOD OF TIME NE EDS TO BE PRESUMED TO BE CORRECT TILL THE ASSESSING OFFICER COMES TO THE CON CLUSION FOR REASONS TO BE GIVEN THAT THE SYSTEM DOES NOT REFLECT TRUE AND COR RECT PROFITS. IN THE SAID CASE, THE HONBLE APEX COURT HAS HELD THAT THE LOSS ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE HAS TO BE ALLOWED AND THE S AME HAS TO BE COMPUTED AT EACH BALANCE SHEET DATE, PENDING ACTUAL PAYMENT OF THE LIABILITY. HENCE, THIS DECISION ALSO SUPPORTS THE PROPOSITION THAT EVEN TH OUGH THE LOSS HAS NOT ITA 5587/MU M/2018 M/S. EDELWEISS CO MMODITIES SERVICES LTD. 5 FINALLY CRYSTALLIZED IF AS PER PRUDENT AND REGULAR SYSTEM OF ACCOUNTING, THE LOSS HAS TO BE ACCOUNTED FOR, THE SAME SHOULD BE AL LOWED. HENCE, IN THE BACKGROUND OF THE AFORESAID DISCUSSION AND PRECEDEN T FROM THE HONBLE APEX COURT DECISION, WE FIND THAT THE AFORESAID CBDT CIR CULAR IS IN CONTRADICTION OF HONBLE APEX COURT DECISION. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS). WE UPHOLD THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) THAT THE M ARK TO MARKET LOSS IN THIS CASE IS ALLOWABLE. 6.1 FACTS BEING IDENTICAL, WE FOLLOW THE ORDER OF T HE CO-ORDINATE BENCH AND CONFIRM THE ORDER OF THE LD. CIT(A). THUS, THE 1 ST GROUND OF APPEAL IS DISMISSED. 7. THE 2 ND GROUND OF APPEAL WHETHER ON FACTS AND IN LAW,UNDER THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A)-16, MUMBAI, WAS JUSTIFIED IN DIRECTING THE A SSESSING OFFICER TO COMPUTE THE DISALLOWANCE U/S 14A OF -THE INCOME TAX ACT, 1961, READ WITH RULE 8D(2)(III) OF THE INCOME TAX RULES, 1962, BY N ETTING -OFF THE INTEREST RECEIVED/ RECEIVABLE AGAINST THE INTEREST PAID/ PAY ABLE, AND FURTHER HOLDING THAT NO DISALLOWANCE IS CALLED FOR AS INTEREST RECE IVED /RECEIVABLE IS MORE THAN THE INTEREST PAID/ PAYABLE, AND FURTHER RELYIN G ON THE DECISION OF CIT V/S JUBILIANT ENTERPRISES LIMITED AND ADITYA BIRLA FINA NCE LTD. V/S ACIT, WHEREIN APPEALS AGAINST THE RELIED UPON DECISIONS ARE PENDI NG BEFORE THE HON'BLE BOMBAY HIGH COURT. 8. IN THE ASSESSMENT ORDER, THE AO DETERMINED THE D ISALLOWANCE U/S. 14A R.W. RULE 8D OF THE INCOME TAX RULES, 1962(THE RULES) AT RS.19,60,69,838/-. AS THE ASSESSEE HAD MADE A SUO-MOTU DISALLOWANCE OF RS.2,28,809/-, THE AO BROUGHT TO TAX THE DIFFERENTI AL AMOUNT OF RS.19,58,41,069/-. ITA 5587/MU M/2018 M/S. EDELWEISS CO MMODITIES SERVICES LTD. 6 9. IN APPEAL, THE LD. CIT(A) FOLLOWED THE ORDER OF THE ITAT IN THE CASE OF THE HOLDING COMPANY OF THE ASSESSEE NAMELY M/S. EDLEWEISS FINANCIAL SERVICES LIMITED [ITA NO. 4329/MUM/2014] WHEREIN IT HAS BEEN HELD THAT FOR COMPUTING THE DISALLOWANCE UNDER RULE 8D(2 )(II) OF THE RULES, NET INTEREST IS TO BE CONSIDERED. SIMILAR, PRINCIPL E LAID DOWN BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V. JUBILIANT ENTERPRISES LIMITED [ITA NO. 1512/2014] HAS BEEN FOLLOWED BY THE ITAT IN THE CASE OF M/S. ADITYA BIRLA FINANCE LIMITED V. ACIT [ITA N O. 5732/MUM/2011]. FOLLOWING THE ABOVE DECISIONS, THE LD. CIT(A) HELD THAT THE NET INTEREST IS AN INCOME OF RS. 2,34,28,029/- [INTERES T EXPENSES OF RS.294,99,95,912/- AND INTEREST INCOME OF RS.297,34 ,23,941/-]. OBSERVING THAT THERE WOULD NOT BE ANY DISALLOWANCE UNDER RULE 8D(2)(II), HE DIRECTED THE AO TO DELETE THE DISALLO WANCE MADE U/S.14A OF THE ACT. 10. BEFORE US, THE LD. DR RELIES ON THE ORDER OF TH E AO. ON THE OTHER HAND, THE LD. COUNSEL SUBMITS THAT NE T INTEREST IS TO BE CONSIDERED FOR MAKING A DISALLOWANCE AS PER RULE 8D(2)(II) OF THE RULES. IN THIS REGARD, RELIANCE IS PLACED BY HIM ON THE DECISION IN PCIT V. NIRMA CREDIT & CAPITAL (P) LTD [85 TAXMANN.COM 72 (GUJ)], DCIT V. EDELWEISS CAPITAL LIMITED [ITA 7654/M/11], ITO V. KARNAVATI PETROCHEM PVT. LTD [ITA 2228/AHD], DCIT V. BETTER VALUE LEASING & FINANCE LTD [ITA 2228/M/14], CIT V. JUBILIANT ENTERPRISES LTD [ITA 1512/2014 BOM] AND ADITYA BIRLA FINANCE LTD V. ACIT [ITA 5732/M/11]. ITA 5587/MU M/2018 M/S. EDELWEISS CO MMODITIES SERVICES LTD. 7 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE CASE OF NIRMA CREDIT & CAPITAL (P) LTD (SUPRA), IT IS HELD BY THE HONBLE GUJARAT HIGH COURT THAT F OR THE PURPOSE OF APPLYING FACTORS CONTAINED IN CLAUSE (II) OF SUB-RU LE (2) OF RULE 8D, PRIOR TO ITS AMENDMENT W.E.F 02.06.2016, AMOUNT OF EXPEND ITURE BY WAY OF INTEREST WOULD BE INTEREST PAID BY ASSESSEE ON BORR OWINGS MINUS TAXABLE INTEREST EARNED DURING FINANCIAL YEAR. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE BOMBAY HIGH COURT IN JUBILIANT ENTERPRISES LIMITED (SUPRA), WHICH HAS BEEN FOLLOWED BY THE TRIBUNAL IN THE CASE OF M/S. ADITYA BIRLA FINANCE LIMITED (SUPRA). FACTS BEING IDENTICAL, WE FOLLOW THE ABOVE DECISIO NS AND CONFIRM THE ORDER OF THE LD. CIT(A). THUS, THE 2 ND GROUND OF APPEAL IS DISMISSED. 12. THE 3 RD GROUND OF APPEAL WHETHER ON FACTS AND IN LAW, UNDER THE CIRCUMSTANCE S OF THE CASE THE LD. CIT(A)-16, MUMBAI, WAS JUSTIFIED IN DELETING THE AD DITION MADE TO BOOK PROFIT COMPUTED U/S 115JB OF THE INCOME TAX ACT, 19 61, ON ACCOUNT OF DISALLOWANCE MADE U/S 14A OF THE INCOME TAX ACT, 19 61, DISREGARDING THE CLEAR PROVISIONS UNDER EXPLANATION (1)(F) TO SECTIO N 115JB OF THE INCOME TAX ACT, 1961, WHICH DOES NOT PRESCRIBE ANY PARAMETERS FOR COMPUTING EXPENDITURE ATTRIBUTABLE TO EXEMPTED INCOME. 13. AS MENTIONED EARLIER, THE AO DETERMINED THE DIS ALLOWANCE U/S. 14A R.W RULE 8D AT RS.19,58,41,069/-. WHILE COMPUTI NG THE BOOK PROFIT U/S. 115JB, THE AO MADE AN ADDITION OF RS.20,84,72, 118/-. IN APPEAL, THE LD. CIT(A), FOLLOWING THE ORDER OF THE SPECIAL BENCH ITA 5587/MU M/2018 M/S. EDELWEISS CO MMODITIES SERVICES LTD. 8 OF THE TRIBUNAL IN ACIT V. VIREET INVESTMENT PVT. LTD 165 ITR 27 (DEL-SB), DELETED THE ABOVE DISALLOWANCE MADE BY THE AO. 14. BEFORE US, THE LD. DR RELIES ON THE ORDER OF TH E AO. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE RELYING ON T HE DECISION IN VIREET INVESTMENT PVT. LTD (SUPRA) SUPPORTS THE ORDER PASSED BY THE LD. CIT(A) . 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE CASE OF VIREET INVESTMENT (P) LTD (SUPRA), IT IS HELD THAT COMPUTATION UNDER CLAUSE (F) OF EXPLANATI ON 1 TO SECTION 115JB(2) IS TO BE MADE WITHOUT RESORTING TO COMPUTA TION AS CONTEMPLATED U/S.14A R.W. RULE 8D. FOLLOWING THE ABOVE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL, WE UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS THE 3 RD GROUND OF APPEAL. 16. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25.10.2019 SD/- SD/- (RAVISH SOOD) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; DATED: 25.10.2019 S. SAMANTA P.S.(ON TOUR) COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT ITA 5587/MU M/2018 M/S. EDELWEISS CO MMODITIES SERVICES LTD. 9 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (ASSISTANT REGISTRAR) ITAT, MUMBAI