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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI N. K. SAINI & MS SUCHITRA KAMBLE
This appeal is filed by the Revenue against the order dated 25/09/2014 passed by CIT(A)-VIII, New Delhi for Assessment Year 2011-12.
The grounds for appeal are as under:- 2.
“1. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) has erred in deleting the addition of Rs. 5,03,94,883/- made by the AO on account of disallowance of Mark to Market loss claimed by the assessee?
Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) has erred in deleting the addition of Rs. 5,03,94,883/- without appreciating the fact that mark to market loss is a loss generated through an accounting entry rather than actual sale of a security and ignoring the finding
of the Assessing Officer in this regard that no actual sale or settlement took place and loss claimed by the assessee was thus only a notional loss?
Whether on the facts and circumstances of the case & in law, the Ld.CIT(A) has erred in deleting the disallowance of RS.13,26,721/- u/s 14A r w Rule 8D?
That the order of the ld is erroneous and is not tenable on facts and in law.
That the grounds of appeal are without prejudice to each other.”
3. The assessee company is a Non Banking Finance Company and is mainly engaged in the capital market and financial services. Return declaring income of Rs 3,07,87,481/- was e-filed by the assessee company on 31.03.2013. The return was processed u/s 143(1) of the Act. As the case was selected for scrutiny, notice u/s 143(2) of the I T. Act, 1961 was issued & served upon the assessee by ITO Ward 4(2), New Delhi. The case was received on transfer and fresh notices u/s 143(2) dated 22.11.2013 of the I T. Act, 1961, was issued & served upon the assessee. Notice u/s 142(1) of the I T. Act along-with a detailed questionnaire dated 26.12.2013 was issued and served on the assessee. In response to the notice, Chartered Accountant and Authorized Representative of the assessee Company attended the proceedings from time to time and furnish the requisite details/information, books of accounts which was examined by the Assessing Officer. The Assessing Officer observed that the assessee claim mark to market loss on derivative instrument amounting to Rs. 5,03,94,885/-. The assessee was asked to show cause as to why the same should not be disallowed as actual sale or settlement did not took place. The assessee filed reply. The Assessing Officer held that the details filed by the assessee in support of its claim for loss incurred on trading in future and operations shows that no actual sale was done and the loss was only a notional loss. The Assessing Officer further held that the assessee did not produce any evidence that such notional loss was settled by making
payment or cancellation of contract. Thus, the Assessing Officer held that the loss is not admissible as per provisions of Section 43(5)(d) of the Income Tax Act and may disallowance of Rs.5,03,94,883/-. The Assessing Officer also made disallowance u/s 14A in terms of Rule 8D for Rs.13,26,721/-.
4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT (A). The CIT (A) allowed the appeal of the assessee.
5. The Ld. DR submitted that the assessee is a non banking financial institute and the Assessing Officer rightly disallowed mark to market losses by relying upon the Instruction No.03/2010 dated 23/3/2010. The Ld. DR submitted that the Assessing Officer rightly held that the notional loss is not admissible as per provisions of Section 43(3) (d) of the Act, because in the present case there was no sale conducted by the assessee. As regards Ground No. 3, the Ld. DR submitted that the Assessing Officer has rightly invoked Section 14A read with Rule 8D.
The Ld. AR submitted that the CIT (A) has extensively given the details as to why mark to market loss should not be disallowed. Thus, the Ld. AR submitted that the loss was actual component loss and the profit has been accepted by the Assessing Officer and only loss has been disallowed by the Assessing Officer which is not permissible under the Act. As regards Ground No.3, the Ld. AR submitted that there were no expenses as there was a loss in the assessee’s case. Therefore, the Ld. AR relied upon the order of the CIT(A).
We have heard both the parties and perused the material available on record. As regards Ground No.1 & 2, the CIT(A) held as under:-
“I have considered the observations/contentions given by the learned A.O. in respect of disallowance of "mark to market loss" and the written submission of the learned A.R. where he also placed on the record the written submission of letter dated 20/02/14 filed before A.O. where the statement of loss arrived on the basis of bills and contract notes issued by the stock brokers were placed on the record and F&O business account maintained by the appellant-company along with all the supported documents related to each transactions were also produced where the contract number, period of purchases and expiry period of contract and on what date the sale is effected and what profit or loss earned on each derivative transactions are covered. It have no dispute that the transactions were rendered through recognized registered brokers and notified exchange and each transactions was carried out electronically on screen basis system and the learned A.O. had failed to prove the factum that entries in respect of such transactions were sham particularly where it were stated by filing letter dated 20/02/2014 that "in case if still any clarification is required please let us know so that the same can be complied with in accordance to the law". The TO and Net Profit (Loss) of the appellant on F&O business is as under:-
Sl. No. LOSS (DR) PROFT (CR.) 1 Religare 11,80,08,211 10,11,79,392 Securities Ltd. 2 Keynet 11,70,76,575 9,03,05,181 Finance Ltd. 3 JM Financial 3,34,02,409 2,66,07,739 Services Ltd. TOTAL 26,84,87,195 21,80,92,312
Turnover of Derivative Business = Rs. (21,80,92,312 + Rs. 26,84,87,195) = Rs. 48,65,79,507/-.
Net Loss of Derivative Business u/s 43(5)(d) = Rs. 5,03,94,883/-.
Therefore, the AR should give tax audit report u/s 44AB in future, as business T.O. exceeds more than 60 lakhs. As all figures are computer generated, screen bases and time stamped, no deep audit is required.
Thus since the learned A.O. had failed to record any evidences contrary to documents filed and produced, thus, since there is no dispute to the fact that the transactions were eligible transactions in F&O segment and also carried out through recognized stock exchanges, loss in such transactions deserves to be considered as business loss and thus disallowance of Rs.5,03,94,883/- is hereby deleted.”
Thus, the CIT(A) has given a detailed finding as there was no dispute that the transactions were rendered through recognized registered brokers and notified exchange and each transactions was carried out electronically on screen basis system. This finding was not contradicted by the Ld. DR. Therefore, Ground No. 1 and 2 of the Revenue’s appeal are dismissed.
As regards Ground No.3, the CIT(A) held as under:-
“I have gone through the A.O.'s order where I do not find anywhere the finding might have been given by him for the expenses incurred by the appellant-company related to dividend income. There is no borrowed money utilised for such investment. Hence, no interest paid.
That keeping in view the cited cases by A.R. which includes the Supreme Court decision where it is held
“For attracting Section 14A there has to be a proximate cause for disallowance which is in relationship with the tax-------- exempt income. ”
The appellant company got unsecured interest free loan of Rs.
67,04,10,000/- from holding co. Awaita Properties Ltd. and invested Rs. 53,06,88,553/- in investment during current year. Hence there is no interest paid on such loan. The AR vehemently argued that no disallowance u/s 14A be made in this case.
The audited accounts placed on the record also does not reveals any expenses of interest which may create suspicion that the investment were made by raising the funds. Further keeping in view the nature of activities carried out by the appellant-company also gives the relief as held by ITAT Mumbai decision quoted by the A.O. (312 ITR 1TR (AT), (irrespective of the fact that it is referred by learned A.O) Thus in these circumstances I agree with the learned AR that action of the A.O. was not justified, thus the disallowance of Rs.13,26,721/- u/s 14A is deleted.”
The CIT(A) has given a clear finding that there was no borrowed money utilised for such investment and therefore, no interest was paid by the assessee. This position was not contradicted by the Ld. DR. Thus, Ground No. 3 is dismissed. Therefore, there is no need to interfere with the order of the CIT(A). Hence, appeal of the Revenue is dismissed.