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IDBI Capital Market Services Ltd vs. DCIT (ITAT Mumbai)
March, 18th 2015

Mark-to-market loss on interest rate swap contracts is not a notional loss, (ii) Benefit against s. 40(a)(ia) disallowance conferred in Kotak Securities 340 ITR 333 (Bom) has to be extended to cases where ROI was filed pre-delivery of the verdict

(i) It is an undisputed fact that the assessee has made the valuation of interest rate Swap contracts as at the end of the year. It is also an undisputed fact that assessee had incurred losses on such valuation. The said losses have been claimed as deduction in the P&L Account. It is also an undisputed fact that the assessee has made the entries following Accounting Standard, AS-11 of the ICAI. Such losses being treated as mark to market the losses have been allowed by the Tribunal in series of cases following Special Bench decision in the case of Bank of Bahrain & Kuwait 132 TTJ 505 (Mum) (SB). The Hon’ble Supreme Court in the case of Woodward Governor India Pvt. Ltd 179 Taxman 326 (SC) has considered such losses as allowable and not of contingent in nature;

(ii) The disallowance under section 40(a)(ia) of the Act in respect of payments made to Bombay Stock Exchange is covered in favour of the assessee and against the Revenue except that the transaction charges have been considered to be subject to TDS by the decision of Hon’ble Bombay High Court in the case of Kotak Securities Ltd in Income Tax appeal No.3111 of 2009 (340 ITR 333). However, we find that the Hon’ble High Court has observed that section 194J was inserted w.e.f. 1/7/1995 and till assessment year 2005-06 both the Revenue and the assessee proceeded on the footing that section 194J was not applicable to the payment of transaction charges and accordingly during the period from 1995 to 2005 neither the assessee has deducted tax at source nor the Revenue has raised any objection. The Hon’ble High Court further observed that in these circumstances if both the parties for nearly a decade proceeded on the footing that section 194J is not attracted, then in the assessment year in question, no fault can be found with the assessee in not deducting tax at source under section 194J of the Act and consequently, no action could be taken under section 40(a)(ia) of the Act. As the Return of income for the year under consideration was filed on 14/08/2009 and this decision of the Hon’ble was pronounced on 21/10/2011. Thus, the assessee had already filed the return of income and the time period for deducting tax at source was also lapsed. Considering these peculiar facts, in our considered opinion no disallowance on this account should be made for the year under consideration.

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