TMI Blog2013 (7) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... t trader would care to show increased profits before actual realization. Respectfully following the law laid the assessee has rightly claimed mark-to-market loss which is liable to be allowed. In favour of assessee. - ITA No.1502/Mum/2012 - - - Dated:- 3-5-2013 - Sanjay Arora, and Sanjay Garg, JJ. For the Appellant : Mr Manoj Kumar For the Respondent : Mr Farrokh Irani ORDER:- Per: Sanjay Garg: The present appeal has been preferred by the revenue against the order of the learned CIT(A) dated 22.12.2011 relevant to A.Y. 2008-09 deleting the addition of Rs. 1,38,93,123/- made by the AO while disallowing the mark-to-market loss claimed by the assessee on account of trading in derivative transactions. On the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in deleting the addition of Rs.1,38,93,123/- made by disallowing the mark-to-market loss claimed on account of trading in derivative transactions, without appreciating the fact that the loss claimed on the basis of value of derivative as on 31st March is merely a notional loss and the actual loss or the profit in respect of such derivative transactions would get crystallized o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-trade of the assessee and they are the current assets and therefore, it is as per the normal rule of valuation of stock-in-trade that they are valued at cost or market price whichever is less at the end of the year and any such loss on such valuation which is called Mark to Market Loss has to be allowed even though it may appear to be a notional loss. This fact has also been recognized by the Institute of Chartered Accountants, the accountancy board in the country, that such a loss is to be allowed at the close of the year (refer the guidance note issued by ICAI titled guidance note on accounting for equity index and equity stock futures and options para No.44 to 47). The assessee has been following this method of valuation of such contracts consistently year after year which has not been disputed by the A.O. The issue has been decided in favour of the assessee by various judicial authorities which have been relied by the assessee which are as follows: a. Edelweisse Capital Ltd. vs. ITO (supra) b. Bank of Bahrain Kuwait (supra) In addition to the above case laws in which the decision is directly on the issue involved in the case of the assessee where i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the stock in trade which is purchased by paying/depositing the initial margins on percentage basis to the broker taking into consideration maximum anticipated rise or fall in the price of the stock in future. As observed above, the difference of margin in calculated and settled on daily basis in view of the market rates and trends. The Hon ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd (2009) 179 Taxman 326, while dealing with the question as to whether the additional liability arising on account of fluctuation in the rate of exchange can be allowed to be adjusted pending actual payment of the varied, has observed that expenditure as used in section 37 in Income Tax Act may in the circumstances of a particular case cover an amount which is a loss even though said amount has not been given from the pocket of the assessee. It has been further observed that the ordinary principle of commercial accounting requires that in the Profit Loss account the value of stock in trade at the beginning and at the end of the year should be entered at cost or market price, whichever is lower. While anticipated loss is taken into account, anticipated profit in the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading in stock future has not only been recognized but certain standards have also been recognized for recording loss and profit under such type of transactions. While dealing with a similar issue, the co-ordinate Bench of this Tribunal vide order dated 10.11.2010 in ITA No.5324/Mum/2007 for A.Y. 2004-05 in the case of Edelweiss Capital Ltd. , has observed as under: We have considered the facts and the rival contentions. In the Scheduled annexed to and forming part of the Balance Sheet and Profit Loss Account for the year under appeal (page 13 of the Paper Book), the assessee has made the following Note: H. Equity Futures-Index/Stock (a) Initial Margin- Equity Derivative Instruments , representing initial margin paid, and Margin Deposits , representing additional margin over and above initial margin, for entering into contracts for Equity Index/ Stock Futures, which are released on final settlement/squaring-up of underlying contracts, are disclosed under Loans and Advances. (b) Equity Index/Stock Futures are marked-to- market on a daily basis. Debit or credit balance disclosed under Loans and Advances or Current Liabilities respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax, West Bengal (1953) 24 ITR 481 (SC) speaking through Hon ble Justice Patanjali Sastri, the then Chief Justice of India (page 485-486 of the Report). At page 486 the Supreme Court further observed that loss due to a fall in price below cost is allowed even if such loss has not been actually realized . Quoting from the case of Whimster Co. Vs. Commissioners of Inland Revenue (1926) 12 Tax Cases 813, the Supreme Court observed that the profits that are chargeable to tax are those realized in year and that an exception is recognized where a trader purchased and still holds goods which are fallen in value in which case though no loss has been realized nor it has occurred, nevertheless at the close of the year he is permitted to treat these goods as of their market value. This decision of the Supreme Court governs the facts of the present case. It is 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 anticipated loss, in the light of the judg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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