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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & SHRI AMARJIT SINGH, AM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the revenue against the order of the Ld. CIT(A)/NFAC, Delhi, dated 05.09.2022 for the AY. 2014-15.
The main issue that has been raised by the revenue is against the action of the Ld. CIT(A) deleting the addition made by the AO of Rs.2,06,68,983/- on account of mark to market loss on trading of derivative by treating it as notional loss.
Brief facts the AO noted is that the assesse had filed its return of income on 29.11.2014 declaring loss at Rs.6,59,05,112/-. Later on the case was selected for scrutiny and the AO noted inter-alia that the assessee has claimed loss on trading in currency derivative instruments (net) amounting to Rs.3,85,83,348/- which included unrealized loss of Rs.2,06,68,983/-. According to AO, the same being a contingent
M/s. Lichen Metals Pvt. Ltd. liability it cannot constitute a deductible expenditure for the purpose of Income Tax Act. And the assessee was directed to explain as to why the same should not be treated as speculative loss. Pursuant thereto, the assessee replied that the assessee has entered into transaction for purchase and sale of derivative futures on stock exchanges. And that the transactions are settled during the year and the difference between contract price and settled price being profit/loss are recognized in the books of accounts maintained by the assessee. And the outstanding derivative contracts in the nature of futures are measured at fair value as on the date on which balance sheet is drawn and the fair value is determined using quoted market prices in an actively traded market for the instrument wherever available as the best evidence of fair value. In the absence of quoted market prices in an actively traded market a valuation method is used to determine the fair value. The assessee company also explained that it has accounted for unrealized loss/gain from derivative following the principles laid down in Accounting Standard 30-Financial Instruments. Recognition and Measurement (AS-30) and Guidance Note on accounting for Equity Index and Equity Stock Futures and Options issued by the Institute of Chartered Accountant of India (ICAI) Guidance Note). According to assessee, AS 30 and the Guidance Note provide that in case of future contracts/option contracts as on the balance-sheet date, a provision need be created for anticipated loss on the open contracts. And that the derivatives are initially recognized at cost subsequent to initial recognition, the derivatives are measured at fair value prevailing on the M/s. Lichen Metals Pvt. Ltd. last day of the financial year and any changes therein are accounted in profit and loss account. And referring to Section 145 of the Income Tax Act, 1961 (hereinafter “the Act”) the assessee submitted that it follows the accounting standard so that it give true and fair view of the financials which formed the basis of determining taxable profit (unless there is an overriding provision in the tax laws that warrant a different method of computing the income). And further the assessee submitted that one has to keeping mind the ‘prudence concept’ as a consideration for the preparation of financial statements and the provision for the anticipated loss in respect of open future contracts was made in accordance with the Accounting Standard-1 on Disclosure of Accounting policies. The assessee further submitted that under the mercantile system of accounting, a revenue loss or expenditure incurred as result of devaluation is allowable in the year in which such devaluation takes place and therefore relying on the said ratio, mark-to market margin losses, according to assessee are rational and not contingent in nature and therefore, pleased that it should be allowed as business deduction. It was further submitted that in the present case the assessee is dealing in derivative instruments/forward contracts that represent stock in trade. And that the derivative instrument dealt by the assessee is akin to stock in trade. And being stock in trade, they had to be valued at cost or market value whichever is lower. And that the derivative future have to be valued on a daily basis so that if there is any diminution in the value of the derivative on the end of the day the same is accounted for in the books of accounts to reflect the true and M/s. Lichen Metals Pvt. Ltd. fair value. The assessee placed reliance on Circular No. 599 dated April 24, 1991 issued by the Central Board of Direct Taxes, which circular state that securities held by the banks would constitute their stock in trade and consequently any loss claimed by the banks on the valuation of the securities would be allowed as a deduction in computing their taxable profit. The assessee submitted before the AO that the derivative instruments are akin to of stock in trade and therefore the loss incurred on valuation of the stock in trade has to be allowed as deduction.
The assessee also cited the decision of sister concern M/s. Edelweiss Capital Limited for the AY. 2004-05 and M/s. Edelweiss Securities Ltd. for AY. 2008-09 and 2010-11 wherein Tribunal has deleted similar disallowance of provision for mark-to-market margin. However, the AO did not accept the same and for that he relied on the CBDT Instruction dated 23.03.2010 which held that marked to market losses are notional losses and therefore not allowable. Therefore, he was pleased to add Rs.2,06,68,983/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) and the Ld. CIT(A) was pleased to delete the addition by relying on several judicial precedent as well as that of ITAT and reproduced the relevant/operating portion of the order of Tribunal in M/s Edel Commodities Limited wherein the Tribunal has held as under: - “31. Now we examine the present case on the touch stone of the above said decision. We find that the facts are identical. Thus, the same are held to be as stock-in-trade by the assessee and the M/s. Lichen Metals Pvt. Ltd. Revenue does not dispute that. It is also not disputed that these have been valued on the principle of cost or market value, whichever is less. In such scenario, the Revenue’s only ground is that the CBDT vide its Instruction No. 3/2014 as noted above has directed that these losses should not be allowed. We agree with the ITAT wherein the ITAT in assessee’s group cases in vide order dated 30.01.2013 had opined that the CBDT Instructions though may be binding upon the Revenue authority but are not binding upon the appellate authority. We find ourselves in agreement with the co-ordinate Bench that these instructions are not binding in light of the ratios emanating from the Hon’ble Apex Court decision on the issue of the valuation of stock.
When it is held that these derivatives held are stock-in-trade then there cannot be any reservation in valuation thereof as per the well settled practice of valuation of closing stock at market value or cost whichever is lower. No case has been made out by the Revenue that the valuation done is not correct or not properly explained. In these situations, the decisions of the Hon’ble Apex Court relied upon hereinabove in the case of Chainrup Sampatram vs. Commissioner of Income Tax, West Bengal (1953) 24 ITR 481 (SC), is quite germane. Furthermore, we find the Assessing Officer has totally erred in placing reliance upon the decision of the Hon’ble Apex 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). In the said decision, the Hon’ble Apex Court has analyzed the entire gamut of decisions on the issue of valuation of the stock. It has categorically held that recognized and settled accounting practice of accounting for the closing stock in the M/s. Lichen Metals Pvt. Ltd. accounts is that it has to be valued on the cost basis or at the market 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 regard should not be disturbed. Similar view was expressed by the Hon’ble Apex Court in the case of CIT vs. Woodward Governor 294 ITR 451 (SC). In this decision, the Hon’ble Apex Court has held that the accounts and the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. In the said case, the Hon’ble Apex Court has held that the loss on account of fluctuation in the rate of exchange has to be allowed and the same has to be computed at each balance sheet date, pending actual payment of the liability. Hence, this decision also supports the proposition that even though the loss has not finally crystallized if as per prudent and regular system of accounting, the loss has to be accounted for, the same should be allowed. Hence, in the background of the aforesaid discussion and precedent from the Hon’ble Apex Court decision, we find that the aforesaid CBDT Circular is in contradiction of Hon’ble 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 mark to market loss in this case is allowable.”
Since no change in facts or law could be pointed out by the Ld. DR, we respectfully following the ratio of the order of the Tribunal on M/s. Lichen Metals Pvt. Ltd. this issue, we confirm the impugned action of Ld.CIT(A) and dismiss the appeal of the revenue.
In the result, the appeal of the revenue stands dismissed. Order pronounced in the open court on this 10/02/2023.