ACIT Vs Edelweiss Multi Strategy Investment (ITAT Mumbai)
Futures Gain Accepted, Silver Loss Rejected? ITAT Allows ₹2.29 Crore Trading Loss and MAT Relief to Category III AIF
The Silver Position at Year End
Edelweiss Multi Strategy Investment, a Category III Alternative Investment Fund, undertook transactions in commodities and derivatives. At the end of the relevant year, it held physical silver that had not yet been sold. It recorded a ₹2,29,15,417 mark-to-market loss on that silver, applying the lower of cost or market value.
The Assessing Officer disallowed the loss. His principal objection was that the financial statements described the physical silver as a “current investment”, rather than stock-in-trade. He also considered the loss notional because the silver remained unsold at the balance-sheet date. The officer relied on CBDT Instruction No. 03/2010 in support of his approach.
The Commissioner (Appeals) deleted the disallowance. He found that the silver formed part of the fund’s ongoing commodity trading strategy, despite the description used in its financial statements. He also granted consequential relief in the computation of book profit under section 115JB. The Revenue challenged both conclusions before the Tribunal.
Was the Silver an Investment or Trading Stock?
The Revenue argued that the fund’s own classification as a current investment should carry weight. According to it, the Commissioner (Appeals) could not simply treat the silver as trading stock without properly examining the fund’s intention, conduct and accounting treatment.
The fund explained that its purchase of physical silver was linked to corresponding futures positions. The two formed part of an integrated commodity trading or arbitrage strategy. It argued that the physical holding should be assessed in the context of those transactions, rather than by looking at one balance-sheet description in isolation.
The Tribunal agreed that the label was not conclusive. It examined why the commodity was acquired, how the fund conducted its transactions and how the physical and futures positions related to one another. The material supported the fund’s explanation that the silver and the futures contracts were components of its trading strategy. The Revenue had not produced material showing that the silver was held as a separate, passive investment unrelated to the commodity activity.
The finding was therefore based on the facts of the transactions, not merely on a general proposition that a taxpayer can disregard the description in its accounts. The Tribunal expressly observed that its conclusion did not rest merely upon CBDT Circular No. 4/2007.
The Mismatch in the Assessing Officer’s Approach
The Tribunal identified a further inconsistency. The Assessing Officer had accepted the unrealised mark-to-market gains on the corresponding futures positions, while rejecting the loss on the related physical silver as notional.
Once both positions were found to be part of the same trading strategy, the Tribunal held that a gain on one component could not be accepted while the corresponding diminution on the other was rejected on that ground, without material justifying the different treatment.
The fund also produced the following year’s accounts. These showed reversal of the earlier unrealised profit or loss and recognition of the result when the transactions were subsequently settled. That accounting trail supported the continuity of the trading treatment. The Tribunal found no material suggesting that the ₹2.29 crore loss had been claimed twice.
On those facts, it upheld the Commissioner (Appeals)’s deletion of the disallowance. The Revenue’s grounds concerning the treatment of the physical silver and allowability of the year-end loss were dismissed.
Consequence for Book Profit Under Section 115JB
The Revenue separately argued that the debit should be added back while computing book profit under section 115JB, relying on the provision concerning amounts set aside for diminution in the value of an asset.
The Tribunal examined the character of the debit. It found that the amount arose from year-end valuation of a trading position reflected in the profit and loss account. The Revenue had not shown that it was an independent provision set aside for diminution in the value of an asset, distinct from valuation of the trading stock itself.
The Tribunal therefore held that the debit could not be brought within clause (i) of Explanation 1 to section 115JB merely because it was described as a diminution in value. The later reversal or absorption of the adjustment on settlement supported its conclusion about the debit’s character. It upheld the MAT relief granted by the Commissioner (Appeals).
Author’s Comments
The useful distinction in this decision is between a balance-sheet label and the commercial character of a holding. The Tribunal did not say that every asset called a current investment must be treated as stock-in-trade. It found, on the available material, that this physical silver belonged to an integrated trading strategy involving corresponding futures contracts.
The decision also turned on the treatment of both sides of that strategy. The officer accepted the unrealised gain on the futures position but rejected the related valuation loss on physical silver. The fund’s subsequent accounts then showed how the year-end entries were reversed or absorbed when the position was settled.
For section 115JB, the Tribunal made a separate factual finding: the debit represented valuation of the trading position, rather than a distinct provision set aside for diminution in an asset’s value. The Revenue failed on both the normal computation and the book-profit adjustment. The ₹2.29 crore disallowance was deleted, the MAT relief was sustained, and no issue was remanded.
Cases Discussed
- CIT v. Nagri Mills Co. Ltd. (Bombay High Court), (1958) 33 ITR 681 — relied upon by the assessee for the principle that where deductibility is otherwise established and the controversy essentially concerns the year of recognition, a dispute merely regarding timing ought not to assume undue significance.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal filed by the Revenue is directed against the order dated 11/12/2025 passed by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [“Ld. CIT(A)”] u/s. 250 of the Income-tax Act, 1961 (“the Act”) for Assessment Year 2013-14, arising out of the assessment order dated 30/03/2016 passed u/s. 143(3) of the Act on following grounds of appeal:
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of ₹2,29,15,417/- being mark-to-market loss on unsold silver, ignoring the specific finding recorded in the assessment that the said silver was disclosed by the assessee as ‘current investment’ and not as stock-in-trade, and without recording any cogent factual findings to overturn such classification?
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the claim of mark-to-market loss on an unrealised/unsold position as an ‘ascertained loss’, and in disregarding the basis of disallowance adopted in assessment, namely, that mark-to-market losses without actual settlement/realisation are not allowable being notional in nature, as per the framework relied upon by the Assessing Officer?
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the nomenclature in the balance sheet is not determinative and in applying CBDT Circular No. 4/2007 mechanically, without appreciating that the assessee itself disclosed the commodity as ‘current investment’ and without carrying out the necessary fact-finding exercise on intention, conduct, accounting consistency and the true nature of holding so as to justify treatment as stock-in-trade?
4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing deletion of the consequent adjustment made by the Assessing Officer to book profit under section 115JB, when the very premise for granting such relief—namely that the diminution pertains to stock-in-trade—had not been established on facts and when the computation and applicability were not examined with reference to the specific adjustments contemplated under Explanation 1 to section 115JB?
5. The appellant craves leave to add, amend, alter, modify or withdraw any of the above grounds of appeal at any time before or at the time of hearing.”
Brief facts of the case are as under:-
Assessee is a Category III Alternative Investment Fund registered with SEBI and was engaged, inter alia, in transactions involving commodities and derivatives. The assessee filed its return of income for the year under consideration on 30/09/2013 declaring total income of Rs.65,70,864/- under the head “Profits and gains of business or profession”. The case was selected for scrutiny and assessment was completed u/s. 143(3) of the Act on 30/03/2016.
2.1. During the assessment proceedings, the Ld. AO noticed that the assessee debited Rs.2,29,15,417/- towards diminution/mark-to-market loss in respect of physical silver remaining unsold as at the year end. The assessee’s case was that the physical silver constituted part of its commodity trading activity and, in accordance with the method followed by it, the same was valued at cost or market value, whichever was lower. The Ld.AO, observed that the physical silver was reflected in the financial statements under the nomenclature “current investment” and not as stock-in-trade. The Ld.AO proceeded on the basis that, in the absence of actual settlement as at the balance-sheet date, the impugned diminution represented a notional loss and, placing reliance on CBDT Instruction No. 03/2010 dated 23/03/2010, disallowed the claim.
Aggrieved, by the order of the Ld.AO, the assessee preferred an appeal before the Ld. CIT(A).
3. The Ld. CIT(A), on examining the material placed before him, held that the physical silver formed part of the assessee’s ongoing trading strategy and constituted stock-in-trade irrespective of the nomenclature employed in the financial statements. The Ld. CIT(A) also noticed that while the Ld.AO accepted the unrealised mark-to-market gains arising on the corresponding futures transactions, the mark-to-market loss relating to physical silver had been disallowed. The disallowance of Rs.2,29,15,417/- was accordingly deleted.
The Ld. CIT(A) further granted relief in respect of the corresponding computation of book profit u/s. 115JB.
Aggrieved by the order passed by Ld.CIT(A), assessee is in appeal before this Tribunal.
4. Before us, the Ld.DR relied upon the assessment order and submitted that the assessee itself had disclosed the physical silver as “current investment” in the audited accounts and, therefore, the Ld.CIT(A) was not justified in treating the same as stock-in-trade. It was submitted that, the impugned loss arose merely on revaluation of unsold silver and no actual settlement had taken place during the year. The Ld.DR thus supported the treatment of the same as a notional loss.
In respect of Ground No.4, the Ld. DR submitted that the relief granted by the Ld.CIT(A) in the computation of book profit u/s.115JB was also not justified having regard to Explanation 1 thereto.
4.1. The Ld.AR, on the other hand, supported the order of the Ld.CIT(A). He submitted that the assessee was carrying on transactions in commodities and derivatives and that the purchase of physical silver and the corresponding futures positions constituted parts of an integrated commodity trading/arbitrage strategy. According to the Ld.AR, the physical silver could not be viewed in isolation merely on the basis of its description as “current investment” in the balance sheet. It was further submitted that the corresponding unrealised gains arising from the futures leg of the trading position had been accepted by the Ld. AO and, therefore, the corresponding diminution arising on the physical commodity could not, on the same set of transactions, be rejected merely as notional.
4.2. The Ld.AR further drew our attention to pages 43, 45 and 48 of the paper book. Page 45 contains the Income and Expenditure Account for the subsequent year ended 31/03/2014 and page 48 contains Schedule 7 relating to “Income from Investments”, wherein the resultant figures from sale/redemption of investments as well as futures trading have been reflected. The break-up placed at page 43 contains, inter alia, reversal entries pertaining to the preceding year’s unrealised profit/loss and the subsequent realised result on the transactions. It was thus submitted that the impugned year-end valuation adjustment formed part of a continuing accounting treatment and was subsequently reversed/absorbed upon settlement of the trading position.
4.3. The Ld.AR placed reliance upon the decision of Hon’ble Bombay High Court in case of CIT v. Nagri Mills Co. Ltd. reported in (1958) 33 ITR 681, to contend that where a deduction is otherwise allowable and the dispute essentially relates to the year of its allowance, such controversy ought not to be prolonged merely on the question of timing.
We have perused the submissions advanced by both sides in light of the record placed before us.
5. It is noted that the issues are interconnected and concern the allowability of the mark-to-market loss of Rs.2,29,15,417/- in respect of the physical silver remaining unsold as at the end of the year. The principal objection of the Revenue is that the assessee itself disclosed the silver under the nomenclature “current investment” and not as stock-in-trade. In our view, the controversy cannot be determined solely by the nomenclature appearing in the balance sheet. The nature of the holding has to be appreciated having regard to the business carried on by the assessee, the purpose for which the commodity was acquired, the manner in which the transactions were undertaken and the corresponding transactions forming part of the same trading strategy.
5.1. It is not in dispute that the assessee was engaged in transactions involving commodities and derivatives. The material placed before us supports the assessee’s contention that the physical silver and the corresponding futures positions were components of the trading/arbitrage strategy undertaken during the year. Further it is noted that no material is been brought on record before us by the Revenue to demonstrate that the physical silver was acquired and held as an independent passive investment unrelated to the assessee’s commodity transactions.
5.2. We, therefore, find merit in the finding returned by the Ld.CIT(A) that the true character of the holding has to be examined from the surrounding facts and the manner in which the assessee conducted its transactions and cannot be concluded solely on the basis of the description appearing in the financial statements. We may also observe that our conclusion in this regard is based on the fact emerging from the record and does not rest merely upon CBDT Circular No.4/2007.
5.3. We further find an important factual aspect in the treatment accorded to the corresponding futures transactions. The Ld.CIT(A) recorded that the unrealised mark-to-market gains on futures contracts were accepted by the Ld.AO, whereas the corresponding mark-to-market loss on the physical silver was disallowed. Once the physical commodity and the corresponding futures positions are found to form components of the assessee’s trading strategy, the gain arising on one component cannot be accepted while the corresponding diminution arising on the other component is rejected merely by treating the latter as notional, without bringing any distinguishing material on record.
5.4. The subsequent accounting treatment also supports the factual position canvassed by the assessee. As noted hereinabove, the subsequent year’s Income and Expenditure Account and Schedule 7, read along with the break-up placed at page 43 of the paper book, contain the reversal of the preceding year’s unrealised profit/loss and recognition of the subsequent realised result from the transactions. It is further noted that the assessee has been recording accounts to demonstrate continuity of the accounting treatment and subsequent reversal/absorption of the earlier year-end valuation adjustment upon settlement. There is also no material before us to suggest that the assessee claimed the same loss twice.
5.5. The Ld.AR placed reliance on the decision of the Hon’ble Bombay High Court reported in CIT v. Nagri Mills Co. Ltd. (1958) 33 ITR 681. In that case, Hon’ble Court was concerned with a dispute regarding the assessment year in which an otherwise allowable expenditure was to be deducted. The principle emerging therefrom, insofar as relevant to the submission advanced before us, is that where the deductibility of an item is otherwise established and the controversy essentially concerns the year of its recognition, disputes merely concerning timing ought not to assume undue significance.
5.6. Considering the nature of the assessee’s business, the corresponding futures transactions, the treatment accorded by the Ld. AO to the unrealised gains arising on such futures positions and the subsequent accounting trail placed before us, we find no reason to interfere with the finding of the Ld. CIT(A) deleting the disallowance of Rs.2,29,15,417/-.
Accordingly, Ground Nos.1 to 3 raised by the Revenue are dismissed.
6. Ground No.4 raised by the Revenue challenges the relief granted by the Ld. CIT(A) in respect of the computation of book profit u/s.115JB of the Act.
The Revenue contends that the diminution ought to be considered with reference to the adjustments contemplated under Explanation 1 to section 115JB.
6.1. We have already held hereinabove, that the impugned debit represents the year-end valuation of the physical silver forming part of the assessee’s trading operations. In other words, what has been recognised in the Profit and Loss Account is the result of valuation of the trading position as at the balance-sheet date. There is nothing brought before us by the Revenue to demonstrate that the impugned amount represented an independent sum merely set aside as a provision for diminution in the value of an asset, distinct from the valuation of the trading stock itself.
6.2. In these facts, once the impugned debit is found to arise from valuation of the trading position and not from creation of a separate provision, the same cannot be brought within clause (i) of Explanation 1 to section 115JB merely on the basis of the expression “diminution in value”. The subsequent accounting treatment, showing reversal/absorption of the year-end adjustment upon settlement, further supports the factual character of the debit. We therefore find no infirmity in the relief granted by the Ld. CIT(A) on this issue.
Accordingly, Ground No.4 raised by the Revenue is dismissed.
7. Ground No.5 is general in nature and does not require separate adjudication.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 25-09-2026.
