INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Allowability - Mark to market loss on outstanding derivatives -

Assessee-company was engaged in business of shares and stock broking, trading in debt securities, and other financial services. It made investments in shares and debt securities. AO disallowed assessee's claim of mark to market loss on outstanding derivatives by treating it as a notional loss alleging that as on the date of balance sheet, the contracts were still outstanding and thus, the loss was not ascertainable. Whereas, CIT (A) observed that the mark to market loss arose out of speculative transaction and as per section 43(5), it was not allowable. Held: Assessee specifically stated that it carried out its transactions in derivatives in future and option segments of National Stock Exchange. However, from the impugned order of CIT (A), it was found that he completely overlooked the said factual position while observing that the assessee entered into over the counter derivative transaction and not in any recognized stock exchanges, while treating it as speculative loss under section 43(5). Thus, the derivative transaction in respect of which the assessee claimed mark to market loss would come within the exception as per clause (d) of the proviso to section 43(5). Further, it is well settled that mark to market loss as on the balance sheet date is allowable under section 37(1). Moreover, AO consistently allowed assessee's claim of mark to market loss in subsequent assessment years. Therefore, the mark to market loss was not in the nature of speculation loss and hence, would be allowable.

REFERRED : CIT v. Woodward Governor India Pvt. Ltd. (2009) 179 Taxman 326 (SC) : 2009 TaxPub(DT) 1628 (SC).

FAVOUR : In assessee's favour.

A.Y. :

INCOME TAX ACT, 1961

Section 14A Read with Rule 8D

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