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

ITA 6612/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1828 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 22-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 03-10-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: GIRIJA DAYAL RAJASHRI DWIVEDY
• Assessee Lawyers: RAVIKANT S PATH AK
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI I.P.BANSAL,JUDICIAL MEMBER & SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER ITA NO. 6612/MUM/11 (A.Y.2007-08) ECL FINANCE LTD. 14 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI -21. PAN:AABCE 4916D (APPELLANT) VS. THE DCIT, RANGE 3(1), AAYKAR BHAWAN, MK ROAD, MUMBAI 400 020. (RESPONDENT) ITA NO.7656/MUM/11(A.Y.2007-08) THE DCIT, RANGE 3(1), AAYKAR BHAWAN, MK ROAD, MUMBAI 400 020. (APPELLANT) VS. ECL FINANCE LTD. 14 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI -21. PAN:AABCE 4916D (RESPONDENT) ITA NO.6607/MUM/11(A.Y.2007-08) EDELWEISS CAPITAL LTD. 14 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI -21. PAN:AABCE 1461E (APPELLANT) VS. ADDL. DCIT, RANGE 3(1), AAYKAR BHAWAN, MK ROAD, MUMBAI 400 020. (RESPONDENT) ITA NO.6609/MUM/11(A.Y.2007-08) EDELWEISS FINANCE & INVESTMENTS LTD. (FORMERLY KNOWN AS CROSS BORDER INVESTMENTS PVT. LTD.) 14 TH FLOOR, EXPRESS TOWERS, NARIMAN POINT, MUMBAI -21. PAN:AAACC 2233N (APPELLANT) VS. THE DCIT, RANGE 3(1), AAYKAR BHAWAN, MK ROAD, MUMBAI 400 020. (RESPONDENT) ASSESSEE BY : SHRI RAVIKANT S. PATHAK REVENUE BY : S/SHRI GIRIJA DAYAL / RAJASHRI DWIVEDY DATE OF HEARING : 22/01/2013 DATE OF PRONOUNCEMENT : 30/01/2013 ITA NO. 6612/MUM/11 (A.Y.2007-08) ITA NO. 6609/MUM/11 (A.Y.2007-08) ITA NO. 6607/MUM/11 (A.Y.2007-08) ITA NO. 7656/MUM/11 (A.Y.2007-08) 2 ORDER PER I.P.BANSAL, J.M ITA NOS.6612/MUM/11 & 7656/MUM/11 ARE CROSS APPEAL S AND THEY ARE DIRECTED AGAINST ORDER DATED 7/7/2011 OF CIT(A)-7, MUMBAI FOR THE ASSESSMENT YEAR 2007-08. ITA NO.6607/MUM/11 & 6609 /MUM/11 ARE DIRECTED AGAINST TWO SEPARATE ORDERS DATED 7/7/201 1 PASSED BY CIT(A)-7, MUMBAI IN THE CASES OF CAPTIONED RESPECTIVE ASSE SSEES IN RESPECT OF ASSESSMENT YEAR 2007-08. GROUNDS OF APPEAL IN EA CH OF THE APPEALS READ AS UNDER: GROUNDS OF APPEAL IN ITA NO.6612/MUM/11: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN NOT ADJUDICATING THE VARIOUS CONTENTIONS OF THE APPELL ANT IN RELATION TO THE DISALLOWANCE I COMPUTED U/S. 14A OF THE INCOME TAX ACT, 1961 AND WHILE DOING SO HE AMONGST OTHERS FAILED TO APPRECIATE THA T: A. THE APPELLANT, IN THE RETURN OF INCOME FILED, HA D COMPUTED THE DISALLOWANCE U/S. 14A ON A REASONABLE AND SCIENTIFI C BASIS HAVING REGARD TO THE ACCOUNTS MAINTAINED; B. THE EXPENDITURE DISALLOWED U/S. 14A BY THE APPEL LANT IN THE RETURN OF INCOME FILED WAS AFTER CONSIDERING THE DIRECT & IND IRECT EXPENDITURE INCURRED WHICH HAD A PROXIMATE AND IMMEDIATE CONNEC TION TO THE DIVIDEND INCOME; GROUND OF APPEAL IN ITA NO.7656/MUM/11: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 21,21,248/-, MADE BY DISALLOWING THE MARK-TO-MARKET LOSS CLAIMED ON ACCO UNT OF TRADING IN DERIVATIVE TRANSACTIONS, WITHOUT APPRECIATING THE F ACT THAT THE LOSS CLAIMED ON THE BASIS OF VALUE OF DERIVATIVE AS ON 31ST MARC H IS MERELY A NOTIONAL LOSS AND THE ACTUAL LOSS OR THE PROFIT IN RESPECT O F SUCH DERIVATIVE TRANSACTIONS WOULD GET CRYSTALLIZED ONLY AT THE TIM E OF SETTLEMENT OF SUCH TRANSACTION. GROUNDS OF APPEAL IN ITA NO.6607/MUM/11: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN NOT ADJUDICATING THE VARIOUS CONTENTIONS OF THE APPELLA NT IN RELATION TO THE DISALLOWANCE COMPUTED U/S. 14A OF THE INCOME TAX AC T, 1961 AND WHILE DOING SO HE AMONGST OTHERS FAILED TO APPRECIATE THA T: ITA NO. 6612/MUM/11 (A.Y.2007-08) ITA NO. 6609/MUM/11 (A.Y.2007-08) ITA NO. 6607/MUM/11 (A.Y.2007-08) ITA NO. 7656/MUM/11 (A.Y.2007-08) 3 A. THE APPELLANT, IN THE RETURN OF INCOME FILED, HA D COMPUTED THE DISALLOWANCE U/S. 14A ON A REASONABLE AND SCIENTIFI C BASIS HAVING REGARD TO THE ACCOUNTS MAINTAINED; B. THE EXPENDITURE DISALLOWED U/S. 14A BY THE APPEL LANT IN THE RETURN OF INCOME FILED WAS AFTER CONSIDERING THE DIRECT & IND IRECT EXPENDITURE INCURRED WHICH HAD A PROXIMATE AND IMMEDIATE CONNEC TION TO THE DIVIDEND INCOME; C. THE FUNDS OBTAINED ON ISSUANCE OF FULLY CONVERTI BLE DEBENTURES TO LEHMAN BROTHERS BV WERE ENTIRELY DEPLOYED IN ADVANC ING INTEREST BEARING LOANS TO THE SUBSIDIARY COMPANIES AND HENCE THE INT EREST PAID ON DEBENTURES WAS NOT AN EXPENDITURE INCURRED IN RELAT ION TO EARNING OF INCOME NOT CHARGEABLE TO TAX. GROUNDS OF APPEAL IN ITA NO.6607/MUM/11: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN NOT ADJUDICATING THE VARIOUS CONTENTIONS OF THE APPELL ANT IN RELATION TO THE DISALLOWANCE I COMPUTED U/S. 14A OF THE INCOME TAX ACT, 1961 AND WHILE DOING SO HE AMONGST OTHERS FAILED TO APPRECIATE THA T: A. THE APPELLANT, IN THE RETURN OF INCOME FILED, HA D COMPUTED THE DISALLOWANCE U/S. 14A ON A REASONABLE AND SCIENTIFI C BASIS HAVING REGARD TO THE ACCOUNTS MAINTAINED; B. THE EXPENDITURE DISALLOWED U/S. 14A BY THE APPEL LANT IN THE RETURN OF INCOME FILED WAS AFTER CONSIDERING THE DIRECT & IND IRECT EXPENDITURE INCURRED WHICH HAD A PROXIMATE AND IMMEDIATE CONNEC TION TO THE DIVIDEND INCOME; 2. SINCE COMMON ISSUES WERE INVOLVED AND THESE APPE ALS WERE REPRESENTED BY COMMON REPRESENTATIVE, FOR THE SAKE OF CONVENIEN CE ALL THESE APPEALS ARE DISPOSED OF BY THIS CONSOLIDATED ORDER. IT MAY AL SO BE MENTIONED HERE THAT BENCH REQUIRED BOTH THE PARTIES TO INFORM WHETHER T HERE IS ANY CROSS APPEALS IN RESPECT OF ITA NO.6607 & 6609/MUM/11. BOTH PART IES INFORMED THAT THERE IS NO CROSS APPEALS IN RESPECT OF THOSE APPEALS. 3. THE SINGLE ISSUE INVOLVED IN ITA NO.6612/MUM/11, 6607/MUM/11 AND 6609/MUM/11 IS REGARDING DISALLOWANCE MADE UNDER SE CTION 14A. THE GROUNDS OF APPEAL HAVE ALREADY BEEN REPRODUCED. TH E AO WHILE FRAMING ASSESSMENT ORDER HAS RESORTED TO RULE 8D FOR MAKING THE DISALLOWANCE UNDER SECTION 14A. BEFORE LD. CIT(A) IT WAS THE CONTENTI ON OF THE ASSESSEES THAT IN RESPECT OF ASSESSMENT YEAR 2007-08, RULE 8D COULD N OT BE APPLIED. LD. CIT(A) ACCEPTED SUCH CONTENTION OF THE ASSESSEE ON THE BAS IS OF DECISION OF HONBLE ITA NO. 6612/MUM/11 (A.Y.2007-08) ITA NO. 6609/MUM/11 (A.Y.2007-08) ITA NO. 6607/MUM/11 (A.Y.2007-08) ITA NO. 7656/MUM/11 (A.Y.2007-08) 4 BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MAN UFACTURING CO. LTD. VS. DCIT, 328 ITR 81 (BOM). THE LANGUAGE OF THE ORDER O F LD. CIT(A) IN ALL THESE APPEALS IS COMMON AND HE HAS DIRECTED THE AO TO WO RK OUT THE DISALLOWANCE IN ACCORDANCE WITH THE DECISION OF JURISDICTIONAL H IGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD (SUPRA). FOR THE SAKE OF CONVENIENCE CONCLUDING OBSERVATION OF LD. CIT(A) ARE REPRODUCED BELOW: 9.5 THUS, I FIND THAT THE HONBLE BOMBAY HIGH COUR T IN THE CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS. DCIT (SUPRA) H AS HELD THAT FOR THE PURPOSE OF DETERMINING THE EXPENDITURE WHICH IS INC URRED IN RELATION TO EXEMPT INCOME, WHICH DOES NOT FORM PART OF THE TOTA L INCOME, THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE SUCH EXPENDITURE AFTER AFFORDING A REASONABLE OPPORTUNITY TO THE APPELLANT. FOR THE SA ME, THE ASSESSING OFFICER HAS TO DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIV IDEND INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A OF THE ACT, IN THE R ATIO OF JURISDICTIONAL HIGH COURT DECISION AS DETAILED IN PARA (VII) EXTRA CTED ABOVE. HENCE I CONSIDER IT PROPER AND APPROPRIATE TO DIRECT THE A. O. TO PROVIDE A REASONABLE OPPORTUNITY TO THE APPELLANT AND TAKING NOTE OF THE DECISION OF JURISDICTIONAL HIGH COURT WHEREIN THE HONBLE HIGH COURT HAS SPECIFICALLY LAID DOWN THE PRINCIPLE TO WORK OUT THE DISALLOWANC E OF EXPENDITURE DIRECT AS WELL AS INDIRECT IN ITS DECISION. THE A.O. SHOUL D ACCORDINGLY WORKOUT SUCH DISALLOWANCE OF EXPENDITURE DIRECT! INDIRECT I N THE SPIRIT OF THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT OF GODREJ & BOYCE MANUFACTURING CO. LTD. WHILE DOING SO, THE A.O. SHOULD TAKE NOTE OF THE AFORESAID OBSERVATION OF THE JURISDICTIONAL HIGH COURT ON THE ISSUE INVOLVED IN THIS GROUND OF APPEAL. WITH THIS OBSERVATION, THE APPELL ANT THIS GROUND OF APPEAL IS PARTLY ALLOWED. 9.6 IN VIEW OF THE AFORESAID PROPOSITION OF JURISDI CTIONAL HIGH COURT, THE OTHER CONTENTION RAISED BY THE APPELLANT COMPANY IN THE PRESENT APPEAL BARE NOT ADJUDICATED HERE AS THE A.O. HAS TO TAKE N OTE OF THE APPELLANTS CASE WHILE WORKING OUT THE SAID DISALLOWANCE IN REL ATION TO EXEMPT INCOME IN THE RATIO OF THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT 328 ITR 81 . WITH THIS OBSERVATION, THE APPELLANT THIS GROUND OF APPEAL IS ADJUDICATED. 4. WE HAVE HEARD BOTH PARTIES ON THIS ISSUE. THE TRIBUNAL HAS TAKEN A CONSISTENT VIEW IN RESPECT OF ASSESSMENT YEARS EAR LIER TO A.Y. 2008-09 THAT DISALLOWANCE SHOULD BE MADE BY KEEPING IN VIEW THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & B OYCE MANUFACTURING ITA NO. 6612/MUM/11 (A.Y.2007-08) ITA NO. 6609/MUM/11 (A.Y.2007-08) ITA NO. 6607/MUM/11 (A.Y.2007-08) ITA NO. 7656/MUM/11 (A.Y.2007-08) 5 COMPANY LTD. (SUPRA). THEREFORE, WE DO NOT FIND AN Y INFIRMITY IN THE DIRECTIONS GIVEN BY LD. CIT(A) TO AO. WE DECLINE TO INTERFERE AND THE APPEALS FIELD BY THE ASSESSEE WHICH INVOLVE THIS SINGLE ISSUE ARE DISMIS SED. 5. NOW WE ARE LEFT WITH THE DEPARTMENTAL APPEAL I.E . ITA NO.7656/MUM/11. THE AO HAD DISALLOWED MARK- TO- MARKET LOSS CLAIMED ON ACCOUNT OF TRADING IN DERIVATIVE TRANSACTIONS OF RS.21,21,248/-. THE REA SON ASSIGNED BY THE AO WAS THAT LOSS ON THE LAST DATE OF FINANCIAL YEAR WAS I N THE NATURE OF NON- CRYSTALLIZED LOSS. BEFORE LD. CIT(A) IT WAS SUBMI TTED THAT IN THE CASE OF HOLDING COMPANY NAMELY EDELWEISS CAPITAL LTD. VS. ITO IN I TA NO.5423/M/2007 FOR A.Y 2004-05, VIDE ORDER DATED 10/11/2010 SIMILAR I SSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. ACCORDINGLY LD. CIT(A) DEC IDED THIS ISSUE IN FAVOUR OF ASSESSEE. THE DEPARTMENT IS AGGRIEVED BY SUCH DELE TION AND HAS PREFERRED THE APPEAL AS PER GROUNDS NARRATED ABOVE. 6. LD. DR THOUGH NOT DISPUTED THAT THIS ISSUE IS CO VERED BY THE AFOREMENTIONED DECISION OF TRIBUNAL IN THE CASE OF HOLDING COMPANY OF THE ASSESSEE, HAS SUBMITTED BEFORE US THAT IN THE AFORE MENTIONED DECISION TRIBUNAL DID NOT CONSIDER INSTRUCTION NO.3/2010 DATED 23/3/2 010 ISSUED BY CBDT, IN WHICH IT HAS BEEN INSTRUCTED THAT SUCH LOSS SHOULD BE ADDED BACK FOR THE PURPOSE OF COMPUTING TAXABLE INCOME OF AN ASSESSEE. THE RELEVANT TEXT IS AS UNDER: MARK TO MARKET IS IN SUBSTANCE A METHODOLOGY OF A SSIGNING VALUE TO A POSITION HELD IN A FINANCIAL INSTRUMENT BASED ON IT S MARKET PRICE ON THE CLOSING DAY OF THE ACCOUNTING OR REPORTING RECORD. ESSENTIALLY, MARKET TO MARKET IS A CONCEPT UNDER WHICH FINANCIAL INSTRUMEN TS ARE VALUED AT MARKET RATE SO AS TO REPORT THEIR ACTUAL VALUE ON T HE REPORTING DATE. THIS IS REQUIRED FROM THE POINT OF VIEW OF TRANSPARENT ACCO UNTING PRACTICES FOR THE BENEFIT OF THE SHARE HOLDERS OF THE COMPANY AND ITS OTHER STAKEHOLDERS. WHERE COMPANIES MAKE SUCH AN ADJUSTMENT THROUGH THE IR TRADING OR PROFIT/LOSS ACCOUNT, THEY BOOK A CORRESPONDING LOSS (LE. THE DIFFERENCE BETWEEN THE PURCHASE PRICE AND THE VALUE AS ON THE VALUATION DATE) IN THEIR ACCOUNTS. THIS LOSS IS A NOTIONAL LOSS AS NO SALE/C ONCLUSION/SETTLEMENT OF ITA NO. 6612/MUM/11 (A.Y.2007-08) ITA NO. 6609/MUM/11 (A.Y.2007-08) ITA NO. 6607/MUM/11 (A.Y.2007-08) ITA NO. 7656/MUM/11 (A.Y.2007-08) 6 CONTRACT HAS TAKEN PLACE AND THE ASSET CONTINUES TO BE OWNED BY THE COMPANY. A MARK TO MARKET LOSS MAY BE GIVEN DIFFERENT ACCO UNTING TREATMENT BY DIFFERENT ASSESSEES. SOME MAY REFLECT SUCH LOSS AS A BALANCE SHEET ITEM WITHOUT MAKING ANY CORRESPONDING ADJUSTMENT IN THE P & L ACCOUNT OTHER MAY BOOK THE LOSS IN THE PROFIT AND LOSS ACCOUNT WH ICH MAY RESULT IN THE REDUCTION OF BOOK PROFIT. IN CASES WHERE NO SALE OR SETTLEMENT HAS ACTUALLY TAKEN PLACE AND THE LOSS ON MARKET TO MARKET BASIS HAS RESULTED IN REDUCTION OF BOOK PROFITS, SUCH A NOTIONAL LOSS WOU LD BE CONTINGENT IN NATURE AND CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAXABLE INCOME THE SAME SHOULD THEREFORE BE ADDED BACK FOR THE PURPOSE OF COMPUTING THE TAXABLE INCOME OF AN ASSESSEE. 7. ON THE OTHER HAND, LD. AR RELYING UPON THE AFORE MENTIONED DECISION OF TRIBUNAL SUBMITTED THAT THIS IS A COVERED ISSUED AN D THE ORDER PASSED BY LD. CIT(A) SHOULD BE UPHELD. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO N 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 O N OUR RECORD. THE ISSUE WAS DECIDED BY THE TRIBUNAL IN FAVOUR OF ASSESSEE W ITH THE FOLLOWING OBSERVATIONS. 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 BOOK), THE ASSESSEE HAS MADE THE FOLLOWING NOTE: - H. EQUITY FUTURES INDEX / STOCK (A) INITIAL MARGIN-EQUITY DERIVATIVE INSTRUMENTS, REPRESENTING INITIAL MARGIN PAID, AND MARGIN DEPOSITS, REPRESE NTING ADDITIONAL MARGIN OVER AND ABOVE INITIAL MARGIN, FOR ENTERING INTO CONTRACTS FOR EQUITY INDEX / STOCK FUTURES, WHICH ARE RELEASED ON FINAL SETTLEMENT / SQUARING-UP OF UNDERLYING CONTRACTS, ARE DISCLOSE D UNDER LOANS AND ADVANCES. (B) EQUITY INDEX / STOCK FUTURES ARE MARKED-TO-MARK ET ON A DAILY BASIS. DEBIT OR CREDIT BALANCE DISCLOSED UNDER LOAN S AND ADVANCES ITA NO. 6612/MUM/11 (A.Y.2007-08) ITA NO. 6609/MUM/11 (A.Y.2007-08) ITA NO. 6607/MUM/11 (A.Y.2007-08) ITA NO. 7656/MUM/11 (A.Y.2007-08) 7 OR CURRENT LIABILITIES, RESPECTIVELY, IN THE MARK-T O- MARKET MARGIN - EQUITY INDEX / STOCK FUTURES ACCOUNT, REPRESENTS T HE NET AMOUNT PAID OR RECEIVED ON THE BASIS OF MOVEMENT IN THE PR ICES OF INDEX / STOCK FUTURES TILL THE BALANCE SHEET DATE. AMOUNT P AID TO BROKERS IN ADDITION TO MARK-TO-MARKET MARGINS IS DISCLOSED AS MARGIN DEPOSITS 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 EQ UITY INDEX / STOCK FUTURES ACCOUNT, BEING ANTICIPATED PROFIT, IS IGNORED AND NO CREDIT FOR THE SAME IS TAKEN IN THE PROFIT AND LOSS ACCOUNT. DEBIT BALANCE IN THE MARK-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 DI FFERENCE BETWEEN SETTLEMENT / SQUARING-UP PRICE AND CONTRACT PRICE. ACCORDINGLY, DEBIT OR CREDIT BALANCE PERTAINING TO THE SETTLED / SQUARED- UP CONTRACT IN MARK-TO- MARKET MARGIN - EQUITY INDEX / STOCK FUTURES ACCOUN T IS RECOGNIZED 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 ANTICIPATED LOSS IN THE DERIVATES TRADING. THERE IS NO DISPUTE THAT THE ASSESSEE HOLDS DERIVAT IVES AS ITS STOCK-IN-TRADE AND THERE IS ALSO NO DISPUTE THAT IT FOLLOWS THE PRINCI PLE COST OR MARKET PRICE, WHICHEVER IS LOWER IN VALUING THE DERIVATIVES. WHE N THE DERIVATIVES ARE HELD AS STOCK-IN-TRADE THEN WHATEVER RULES APPLY TO THE VAL UATION OF STOCK-IN-TRADE WILL HAVE TO BE NECESSARILY APPLY TO THEIR VALUATION ALS O. IT IS A WELL SETTLED POSITION IN LAW THAT WHILE ANTICIPATED LOSS IS TAKEN INTO ACCO UNT 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 PRUDENT TRADER WOUL D CARE TO SHOW INCREASED PROFIT BEFORE ITS REALIZATION. THIS IS THE THEORY U NDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICH EVER 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 HONBLE JUSTICE PATANJALI SA STRI, THE THEN CHIEF JUSTICE OF INDIA (PAGE 485 486 OF THE REPORT). AT PAGE 486 T HE 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 C ASE OF WHIMSTER & CO. VS. COMMISSIONERS OF INLAND REVENUE (1926) 12 TAX CASES 813, THE SUPREME COURT ITA NO. 6612/MUM/11 (A.Y.2007-08) ITA NO. 6609/MUM/11 (A.Y.2007-08) ITA NO. 6607/MUM/11 (A.Y.2007-08) ITA NO. 7656/MUM/11 (A.Y.2007-08) 8 OBSERVED THAT THE PROFITS THAT ARE CHARGEABLE TO TA X ARE THOSE REALIZED IN THE YEAR AND THAT AN EXCEPTION IS RECOGNIZED WHERE A TRADER PURCHASED AND STILL HOLDS GOODS WHICH ARE FALLEN IN VALUE IN WHICH CASE THOUG H NO LOSS HAS BEEN REALIZED NOR IT HAS OCCURRED, NEVERTHELESS AT THE CLOSE OF T HE YEAR HE IS PERMITTED TO TREAT THESE GOODS AS OF THEIR MARKET VALUE. THIS DECISION OF THE SUPREME COURT GOVERNS THE FACTS OF THE PRESENT CASE. IT IS TO THE ASSESSE ES STRENGTH THAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN ITS GUIDELINES HA VE ALSO APPROVED OF THE RULE OF PRUDENCE WHICH REALLY MEANS THAT WHILE ANTICIPATED LOSSES CAN BE TAKEN NOTE OF WHILE VALUING THE CLOSING STOCK, ANTICIPATED PROFIT S CANNOT BE RECOGNIZED. THE ANTICIPATED LOSS, IN THE LIGHT OF THE JUDGMENT OF T HE 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 DERIVATIV ES 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 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 AUTH ORITIES TO ADD BACK SUCH AMOUNT WHILE COMPUTING TAXABLE INCOME OF AN AS SESSEE. SUCH CONTENTION OF LD. DR CANNOT BE ACCEPTED FIRSTLY ON THE GROUND THAT INSTRUCTIONS ISSUED BY CBDT THOUGH MAY BE BINDING UPON INCOME TAX AUTHORIT IES BUT ARE NOT BINDING ON APPELLATE AUTHORITIES. THE DATE OF ASSE SSMENT ORDER IN THE PRESENT CASE IS 31/12/2009 WHEN SUCH INSTRUCTIONS WERE NO T EVEN EXISTED. FURTHER, WHEN TRIBUNAL HAD DECIDED THE ISSUE IN THE CASE OF EDELWEISS CAPITAL LTD. (SUPRA) THE INSTRUCTIONS WERE EXISTING BUT NOT PLE ADED BY THE DEPARTMENT. THE TRIBUNAL HAS CONSIDERED EACH AND EVERY ASPECT IN DE TAILS WHICH IS CLEAR FROM THE OBSERVATIONS REPRODUCED IN THE EARLIER PART OF THIS ORDER. TAKING THE CONSISTENT VIEW AS TAKEN BY THE CO-ORDINATE BENCH, WE SEE NO INFIRMITY IN THE ITA NO. 6612/MUM/11 (A.Y.2007-08) ITA NO. 6609/MUM/11 (A.Y.2007-08) ITA NO. 6607/MUM/11 (A.Y.2007-08) ITA NO. 7656/MUM/11 (A.Y.2007-08) 9 GRANTED BY LD. CIT(A). WE DECLINE TO INTERFERE IN THE RELIEF GRANTED BY HIM AND DEPARTMENTAL APPEAL IS DISMISSED. 10. IN THE RESULT, ALL THESE APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 30 TH DAY OF JAN.2013 SD/- SD/- (N.K.BILLAIYA ) (I.P.BANSAL) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 30 TH JAN.2013 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.R E BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM.