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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-8, Mumbai [in short CIT(A)], in appeal No. CIT(A)-8/IT-260/15-16 dated 11.11.2016. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle-3(1)(2), Mumbai (in short ‘ACIT’/ AO) for the A.Y. 2012-13 vide order dated 27.03.2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of Revenue is against the order of CIT(A) allowing the provision of mark to market loss arising on trading currency futures and commodity futures. For this Revenue has raised the following ground No.1:-
“1. Whether ld. CIT(A) is erred in allowing the provision for mark to market on trading of derivative instruments by treating it as notional loss without appreciating the fact that the contingent liability cannot be deductible under income tax act.”
At the outset, the learned Counsel stated that this issue has been settled by this Tribunal in assessee’s own case in for AY 2011-12 vide order dated 06.04.2018, wherein the Tribunal considering the assessee’s sister concern case in the case of Edelweiss Capital Limited vs. ITO (in ITA No. 5324/Mum/2007 vide order dated 10.11.2010), allowed the claim of the assessee vide Para 30 to 32 as under: -
“30. From the above, we note that the ITAT had carefully examined the issue and had come to the decision that the provision is being made to cover the anticipated loss in the derivates trading. There was no dispute that the assessee’s hold derivatives as its stock-in-trade and there is also no dispute that it follows the principle "cost or market price, whichever is lower" in valuing the derivatives. Thereafter, the Tribunal had opined that when the derivatives are held as stock-in-trade then whatever rules apply to the valuation of stock-in-trade will have to be necessarily applied to their valuation also. In this regard, the tribunal had referred to the Hon’ble Apex Court decisions referred hereinabove.
The tribunal in coming to the aforesaid decision has also held that the decision of the Hon’ble Supreme Court covered the facts of the present case and it was to the assessee’s strength that the Institute of Chartered Accountants of India in its guidelines have 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 profits cannot be recognized. The tribunal had held that in the light of the judgment of the Supreme Court cited above, the anticipated losses cannot be treated as a contingent liability..
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 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 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.”
When this was confronted to the learned Sr. DR, he also relied on the Para 4.2.3 of the AO’s order, wherein it is categorically stated that the Tribunal’s decision in the case of Edelweiss Capital Limited (cited supra) has not been accepted and appeal has filed before the Hon’ble High Court. The relevant Para 4.23 of the AO’s order reads as under: -
“4.23 The assessee has also placed reliance on the decision of Hon’ble ITAT as given in the case of Edelweiss Capital Ltd for AY 2004-05, wherein the Tribunal has deleted the similar disallowance. It is seen that the decision of Tribunal has not been accepted by the department on merits and on Hon’ble High Court, which are still pending.”
The learned Counsel for the assessee stated that there is no difference in facts of the present year comparing with AY 2011-12 in assessee’s own case.
After hearing both the sides and going through the facts of the case, we find that this issue is squarely covered by Tribunal’s decision in assessee’s own case. Respectfully following the same, we confirm the order of CIT(A) allowing the claim of the assessee. This issue of Revenue’s appeal is dismissed.
The next issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expense relating to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 hereinafter the Rules. For this assessee has raised the following ground No. 2:-
“2. Whether ld. CIT(A) is erred in deleting the disallowance made under section 14A of the Act without appreciating the fact that the assessee has neither established that no part of interest-bearing fund as well as expenses so claimed has found its way into the investments in Mutual Funds/ shares nor adduced any documentary evidences during the course of assessment proceedings before the AO.”
At the outset, the learned Counsel for the assessee took us through the Para 5.1 of the AO’s order which reads as under:-
“5.1 During the year under consideration the assessee has made investment in equity shares. The assessee has not earned any dividend income
14A of the I.T. Act. Therefore, the assessee vide order sheet dated 20.01.2015 was requested to show cause as to why the expenditure incurred for earning the exempt income should not be disallowed by applying the provisions of s.14A of the I.T. Act r.w.Rule-8D..”
From the above Para 5.1 of the AO’s order it is clear that the assessee has not earned any dividend income and once there is no dividend income, no disallowance of expenses relatable to the exempt income in term of the section 14A read with Rule 8D of the Rules. We find that the Hon’ble Bombay High Court, Nagpur Bench in Income Tax Appeal No. 51 of 2016 in the case of Pr. CIT vs. Ballarpur Industries Limited has considered this issue and finally following the judgment of Hon’ble Delhi High Court in the case of Cheminvest Limited vs. CIT (2015) 378 ITR 33 (Delhi) held as under: -
“On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression “does not form part of the total income” in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income.”
As in the present case, there is no exempt income claimed by assessee, no disallowance can be made in relation to exempt income by invoking the provision of section 14A of the Act read with Rule 8D of the Rules. This issue of the Revenue’s appeal is dismissed. The appeal of Revenue is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 06-08-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 06-08-2018 kao kI ga[- .