K GIRDHARILAL INTERNATIONAL LTD,MUMBAI vs. DCIT RG 5(2), MUMBAI

Assessee by : Shri K.Shivaram & Aditya R. Ajgaonkar (AR) Revenue by : Shri Sambit Mishra (DR) Date of hearing : 15.02.2017 Date of Pronouncement : 22.02.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JM: 1. These two Cross Appeals u/s 253 of the Income-tax Act (‘the Act’) are directed against the order of Ld. Commissioner of Income-tax (Appeals) [for short ‘the CIT(A)] –10, Mumbai dated 17.03.2015 for Assessment Year (AY) 2009-10. The assessee has raised the following grounds of appeal: Ground No.

1. The Hon'ble Commissioner of Income-tax (Appeals)-

10. Mumbai ['CIT (A)'] has erred in law and facts and circumstances of the case in confirming the disallowance under section 14A of the Income Tax Act, 1961 ('the Act') as per Rule 80 of the Income tax Rules, 1962 ('the Rules). Ground No. 2 2 & 3479/M/2015 K Girdharlal International Ltd. The Hon'ble CIT(A) has erred in law and on facts and in circumstances of the case in confirming the disallowance under Rule 80(2)(ii) of the Rules by inadvertently including investments, income on which is taxable and excluding deferred tax asset from the total assets. Ground No. 3 The Hon'ble CIT(A) has erred in law and on facts and in circumstances of the case in confirming the disallowance of proportionate interest of Rs.6,745 under section 36(1)(iii) of the Act on the borrowed funds for the investments made in the property without appreciating the fact that borrowed funds were utilized wholly and exclusively for business purposes. The revenue in its appeal has raised the following grounds of appeals: (1) The ld CIT(A) erred in directing the AO to adopt net interest expenditure instead of gross expenditure while working the addition u/s14A of the ACT read with rule 8D(ii) of IT Rules. (2) The ld CIT(A) erred in directing the AO to allow Mark to Market loss though the CBDT Instruction No. 3 dated 23.03.2010 clearly states that the Mark to Market Loss should be differentiated from loss on account of forward contract and should be disallowed.

2. Brief facts of the case are that assessee-company engaged in the business of manufacturing and export of rough, cut and polished diamonds and studded jewellery, filed its return of income for the relevant AY on 23.09.2009 declaring total income of Rs. 14,78,20,133/-. The assessment was completed u/s 143(3) of the Act on 15.03.2013. The Assessing Officer (AO) while framing the assessment order besides the other additions/disallowance disallowed a sum of Rs. 8,49,72,447/- u/s 14A and disallowed marked to market loss of Rs. 7,20,570/-. On appeal before the ld. CIT(A), the ld. CIT(A) directed the AO to re-work the disallowance under Rule 8D(2)(ii) and confirmed the disallowance of Rule 8D(2)(iii). On the disallowance of marked to market loss the ld. CIT(A) while relied upon the decision of Edelweiss Capital Limited (ITA No. 5324/M/2007 dated 01.11.2010 and Kotak Mahindra Investment Ltd. (ITA No. 1502/M/2012) wherein marked to marked loss in derivative transaction was allowed as business loss. Thus, on the basis of decision of Mumbai Tribunal that investment loss on the basis of valuation as on the date of closing of the accounting year in respect of equity derivative which are held as stock-in-trade is allowable loss and directed the AO to allow Mark to Market loss. Thus, being aggrieved by the order of AO, the assessee has challenged the confirmation of disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii). The Revenue is also aggrieved by the order of ld.

3 & 3479/M/2015 K Girdharlal International Ltd. CIT(A) and directed to adopt net interest expenditure under Rule 8D(2)(ii) as well as for the direction to allow the Mark to Market loss.

are taken together. The Ld. AR of the assessee argued that the assessee has sufficient interest free fund with int to make investment in Shares. The investment made in Share are from own reserve and surplus fund, no borrowed funds have been utilized for such investment. The assessee before the lower authorities submitted that assessee obtained the entire interest bearing fund for packaged credit facility, post shipment credit facility, PCFC, EBRD in foreign currency loan. According to the assessee, the assessee was having sufficient interest free funds available with it, hence, no interest disallowance was warranted. To substantiate his submission, the ld. AR of assessee relied upon the decision of CIT Vs Reliance Utility and Power Ltd. 313 ITR 340 (Bom) and CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). The ld. AR of assessee further submitted that the similar disallowance was made for AY 2008-09. On appeal before the ld. CIT(A), ld. CIT(A) directed the AO to complete the disallowance by only net interest against the interest expenses. Aggrieved by the order of ld. CIT(A), the Revenue filed appeal before the Tribunal. The Tribunal vide order dated 21.03.2014 in ITA No. 65/Mum/2013restored the similar grounds appeal to the file of CIT(A). The ld AR submits that this appeal may also be restored to the file of CIT(A) for working out the disallowance. On the other hand, ld. DR for the Revenue supported the order of authorities below.

5. We have considered the rival contentions of the parties and gone through the orders of authorities below. We have seen that the similar disallowance was made against the assessee for AY 2008-09 and the coordinate bench of Tribunal vide order dated 21.03.2014 in ITA No. 65/Mum/2013 restored the similar grounds of appeal to the file of AO. Thus, considering the decision of coordinate bench the Ground No. 1 and 4 & 3479/M/2015 K Girdharlal International Ltd. 2 of assessee assessee’s appeal and Ground No.1 of Revenue’s appeal are restored to the file of ld. CIT(A) to pass fresh order considering the decision of Reliance Utility and Power Ltd. (supra) and HDFC Bank Ltd. (supra). Needless to say that ld. CIT(A) shall provide sufficient opportunity before passing order. In the result the ground No. 1 & 2 of assessee’s appeal and ground No. 1 of revenue’s appeal are allowed for statistical purpose.

6. Ground No.2 of Revenue’s appeal relates to Mark to Market loss. The Ld. DR for the Revenue relied upon the order of AO and would argue that the order of ld. CIT(A) be set-aside and the order passed by AO may be restored. On the other hand, ld. AR of assessee argued that during the year under consideration, the assessee entered into derivative transaction in respect of equity share through recognize the Stock- Exchange. The majority of the transactions were squared up during the year except transaction outstanding as on 31.03.2009. The derivative contracts were valued everyday at market value and Profit & Loss were entered in the books of account. Hence, the net loss on the outstanding derivative as on 31.03.2009 was at net loss of Rs. 7,28,570/-. The AO has not considered the contention of assessee that Mark to Market loss is revenue in nature and be considered as notional contingency in nature. In support of his submission ld. AR of assessee relied upon the Circular No. 3 of 2010 dated 23.03.2010 and the decisions of Tribunal in DCIT Vs Kotak Mahindra investments ltd ITA No. 1502/M/2012, Edelweiss Capitals Ltd ITA No. 5324/M/2007, CIT Vs D. Chetan & Co (2017) 390 ITR 36 (Bom) 7. We have considered the rival contention of the parties and gone through the order of authorities below. We have seen that during the assessment proceeding, the AO treated the Mark to Market los as a notional in nature and accordingly disallowed the claim of assessee. The Ld. CIT(A) on the basis of decision of Tribunal in Edelweiss Capital Limited (supra) and Kotak Mahindra Investment Ltd. (supra) held that Mark to Market loss is a business loss and directed the AO to allow the same.

8. We have seen that ld. CIT(A) has followed the decision of Mumbai Tribunal Tribunal in Edelweiss Capital Limited (supra) and Kotak Mahindra Investment Ltd. (supra) and directed the AO to allow the loss. In a recent decision Hon’ble Bombay High Court in CIT VS D. Chetan (supra ) held that loss suffered in foreign exchange transactions entered into for hedging business transactions cannot be disallowed as 5 & 3479/M/2015 K Girdharlal International Ltd. being “notional” or “speculative” in nature. The ld. DR for the Revenue was unable to convince us as to why the Mark to Market loss is not a Revenue loss. Accordingly, we do not find any infirmity in the order passed by ld CIT(A). Hence, ground No.2 raised by Revenue is dismissed.