ESTEE ADVISORS P.LTD,GURGAON vs. DCIT, CIRCLE-1(1), GURGAON

Brief facts of the case are that the assessee is a company and engaged in the stock broking business. For theAssessment Year 2015-16, they have filed their return of income on 27/11/2015 declaring nil income, however it is submitted that minimum alternate tax (mat) of Rs.47,07,305/-was paid under section 115 JB of the Income Tax Act, 1961 (for short “the Act”) on book profits.

During the course of assessment proceedings, learned Assessing Officer on a perusal of the profit and loss account (“P&L account”), noticed that the assessee had claimed deduction of mark to market losses (MTM). It was explained before the Assessing Officer that the assessee being a stockbroker and engaged in the business of trading in derivative segment by entering into future and options contracts, some of the future and options contracts could not be squared up at the end of the financial year and, therefore, the assessee booked the expected loss in such contracts on Mark to market basis. It was further submitted that the likelihood of profit was ignored and the assessee claimed a loss of Rs.6,73,566/-as calculated on Mark to market basis claiming that he was following this practice continuously year after year and further that the same was as per recognised accounting standards. According to the assessee the future and option contracts or in the nature of forward contracts and profit or loss in such contracts cannot accrue until and unless the contracts are settled.

Assessee further explained that since the MTM losses arises out of contractual obligation existing as on the reporting date, the same cannot be regarded as contingent or notional in nature and such MTM losses would not convert into contingent on merely because the liability is to be discharged at a future date. It was further contended that MTM losses recognised in the books of accounts or in-line with the regular accounting principles which also meets the provisions of section 145 of the Act and accordingly it cannot be said to have accrued as the balance sheet for the purpose of claiming deduction.

Learned Assessing Officer, however, did not agree with the submissions of the assessee and observed that on one hand the assessee is following the Mercantile system of accounting wherein the revenue and liabilities are recognised as and when they accrue and on the other hand the assessee claimed deduction for losses which are not accrued as the contracts remain unsettled. He further observed that under the Income-tax Act, 1961, the assessee can claim the deduction for actual business losses or expenses as per different provisions and expected or notional losses/expenses cannot be allowed. Learned Assessing Officer further relied on the CBDT instruction dated 23/3/2010 and ultimately held that the MTM losses claimed by the assessee are not to be disallowed and added back to the income of the assessee.

In the appeal preferred by the assessee, Ld. CIT(A) while considering the issue as to whether such MTM losses are allowable as expenditure or the how to be disallowed on the ground that these were notional losses, observed that such an issue was squarely covered by the CBDT instruction dated 23/3/2010 relied upon by the learned Assessing Officer and under such an instruction such losses or notional losses are required to be added back to the taxable income of the assessee. By placing reliance on the decision of the Amritsar ITAT in the case of LallyMotors vs. CIT in (Asr)/2017 that CBDT instruction are binding on the Revenue authorities, Ld. CIT(A) held that the loss claimed by the assessee was notional loss. On that premise, Ld. CIT(A) dismissed the appeal preferred by the assessee.

Aggrieved by the decision of the Ld. CIT(A), assessee preferred this appeal contending that market to market loss arises out of contractual obligation existing as on the reporting date, the same cannot be regarded as continent or notional in nature; that such MTM loss would not convert into contingent one merely because the liability has to be discharged at a future date and, therefore, the same cannot be disallowed. Ld. AR submitted that the market to market loss recognised in the books of accounts are in line with the regular accounting principles which also made the provisions under section 145 of the Act and accordingly it cannot be said to have accrued at the balance sheet date for the purpose of claiming deduction. He placed reliance on the decision in the case of Kotak Securities Ltd, Mumbai, I.T.A. No.2096/Mum/2014of the Mumbai Bench of the Tribunaland prayed to delete the addition of Rs.6,73,566/-made by the learned Assessing Officer.

Per contra, Ld. DR submits that as rightly observed by the Ld. CIT(A) based on the decision of the Tribunal in Lally Motors (supra), CBDT instructions are binding on the Revenue authorities and since both the authorities below reached a conclusion that the claim of the assessee in respect of the MTM losses is only a notional loss and cannot be allowed, basing on the CBDT circular dated 23/3/2010, the impugned orders cannot be found fault with.

We have gone through the record in the light of the submissions made on either side. There is no dispute that the assessee is engaged in stockbroking business. It is also not in dispute that the assessee also engaged in the business of trading in derivatives segment and entered into the future and options contract, some of which could not be squared up at the end of the financial year and, therefore, the assessee booked the expected loss in such contracts on Mark to market basis. Assessee claimed a loss of Rs.6,73,566/-as calculated on Mark to market basis claiming that he was following this practice continuously year after year and according to the assessee, the same was as per recognised accounting standards. 10. Contention of the assessee has been that since the MTM losses arise out of contractual obligation existing as on the reporting date, the same cannot be regarded as contingent or notional loss in nature. As rightly considered by the Ld. CIT(A), the question involved in this matter is whether such MTM losses are allowable as expenditure or how to be disallowed on the ground that these were notional losses. The authorities below, however, placing reliance on the circular dated 23/3/2010, decided the issue against the assessee. According to the Ld. AR this issue is no longer res Integra. Assessee placed reliance on the decision reported in Kotak Securities Ltd, Mumbai (supra) in support of this contention. Further, the applicability of the circular dated 23/3/2010 was considered by the Hon’ble Bombay High Court in the case of PCIT vs International Gold Company Ltd.,ITA No. 1827 of 2016 dated 27.02.2019. 11. In Kotak Securities Ltd, Mumbai (supra),the Mumbai Bench of the Tribunal considered the issue in question and a observed that,-

10.Next issue is about marked to market losses (MTM). The DR and the AR, agreed that identical issue had arisen in the earlier years and the tribunal had decided the issue in favour of the assessee, that the FAA had followed the order of the tribunal. We are reproducing the order of the tribunal and it reads as under“We have heard both the parties and perused the orders of the revenue authorities as well as cited decision of the tribunal and the relevant material placed before us. It is an undisputed fact that the derivatives, which are the subject matter of impugned MTM loss, are commodities of trading account. The same are treated on exchange on par with shares and stock options and futures. The losses are held allowable against the profits of the assessee while the related profit on account of MTM is being ignored considering the consistent method of accounting followed by the assessee.The same is in accordance with guidance note/and accounting standard issued by the ICAI. It is the claim of the assessee that the same consistently accepted by the Department as well. We have also perused the order of the tribunal in the case of Kotak Mahindra investment Ltd (supra), which was decided based on the other decision of the tribunal of Bombay benches we find para three of the said order of the tribunal in the case of Kotak Securites Kotak Mahindra investment Ltd (supra) is relevant and the facts are comparable to the instant case

After reproducing the order of Kotak Mahindra investment Ltd. the Tribunal further held as under: "The facts pertaining to decision of the Tribunal in the above mentioned case include that the derived case which is the subject matter of impugned MTM losses was held as stock in trade in the books of accounts in the present case. The profits were not accounted for in the books. On these facts, tribunal held that the MTM loss is liable to be allowed.”

Further, in PCIT vs International Gold Company Ltd.,ITA No. 1827 of 2016 dated 27.02.2019, it was held that loss on forward contracts is not a notional loss and, therefore, need be allowed. In this case, it is the contention of the department that such loss is a notional loss was decided against the department on the ground that in case of export and import business hedging of risk in foreign exchange is a normal course of business activity and such loss need to be allowed. In this case, Hon’ble Bombay High Court referred to instruction No.03/2010 dated 23.03.2010 to confirm that such loss is business loss allowable under the Act and held that CBDT circular/instruction has no applicability.

In view of the above settled position of law, we are of the considered opinion that the MTM losses arising out of contractual obligation existing on the reporting date cannot be regarded as contingent or notional in nature and merely because the liability has to be discharged at a future date, the same cannot be regarded so. With this view of the matter, we find it difficult to sustain the addition and accordingly set aside the impugned order and direct the assessing officer to delete the addition made in this regard. 15. In the result, appeal of the assessee is allowed. Order pronounced in the Open Court on 30th October, 2019.