TMI Blog2010 (6) TMI 881X X X X Extracts X X X X X X X X Extracts X X X X ..... loss arising from the open position of the Future options as on 31.3.2005 cannot be treated as notional loss and disallowed, the A/R of the Assessee vide letter dt 27.12.2007 replied as under: Under instructions from above clients and in response to your query with respect to disallowance of loss on open position of Futures Options we would like to inform you that all contracts entered into, which are ultimately squared up are carried forward on a day to day basis at the closing rate prevailing at the end of the day, to the subsequent day thereby charging the profit or loss on the respective days. Hence in our humble submission we would like to inform you that our clients . 3. As per ICAI guidance Note on accounting for Equity Index and equity Stock Futures and Options , a future contract, like a forward contract, is an agreement between two parties to buy or sell an asset a certain time in future for an agreed price. Future contracts are normally traded on an exchange. To make trading possible, the exchange specifies certain standardized features of the contract. An option is a type of derivative instrument whereby a person gets the right to buy or sell at an agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Account as the case may be, represents the net amount paid to/received from the Clearing/Trading Member on the basis of movement in the prices of equity index futures or equity stock futures till the balance sheet date in respect of open futures contracts. In case, the said account has a debit balance on the balance sheet date, the same should be shown as a current asset. On the other hand, in case the said account has a credit balance on the balance sheet date, the same should be shown as a current liability. 45. Keeping in view prudence as a consideration for the preparation of financial statements, provision for the anticipated loss in respect of open futures contract should be made. For this purpose, the net amount paid/received on account of Mark-to-Market Margin on open futures contracts on the balance sheet date should be determined indexwise/ script-wise. Where the index-wise/script-wise balance is a debit balance representing the net amount paid, provisions should be made for the said amount. However, where the index-wise/script-wise balance is a credit balance representing the net amount received, the same should be ignored keeping in view the consideration of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Notification No. SO 69E dt. 25.1.1996 provides that Accounting Policies adopted by the assessee should be such that it represents a true and fair view of the state of affairs of the business and financial statements prepared and presented on the basis of such accounting policies. 6. The CIT(A) therefore disallowed the assessee s claim of loss observing as under: The arguments of the appellant have been examined in detail in the aforesaid quoted decision of the undersigned in case of M/s. Edelweiss Securities Pvt. Ltd. , A.Y. 2005-06. Following the same, it held that mark to market loss is a notional loss, the real loss or profit occur not on the balance date but on the date of settlement or squaring up of contract which takes place on subsequent date. In view of the above, (i) The disallowance of loss of ₹ 23,42,830/- is confirmed. (ii) The income is enhanced by a sum of ₹ 13,33,180/-. 7. The Assessee has claimed a loss of Rs. ₹ 23,42,830/- on this count which was disallowed by the AO. This loss pertains to loss for the period upto 30.3.2005. The CIT(A) gave a notice for enhancement and disallowed ₹ 13,33,180/- , being t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts for foreign exchange. On the outstanding contracts the assessee estimated the likely loss. The Madras High Court has held that in view of the unpredictability of the foreign exchange fluctuation, the loss on unexpired contracts cannot be estimated. In this case it is not an estimate of loss at a future date. The loss has actually occurred on the basis of the fluctuation of the price of the futures every day and the same is also settled. 12. The Bombay High Court in the case of CIT vs Kamani Metal products Pvt. Ltd (208 ITR 1017), the assessee contracted to purchase Copper Cathode at ₹ 33,825 per M.T. Till the last date of the accounting year the material was not received. The market price of copper cathodes fell to ₹ 25,461/-. The assessee provided for the anticipated loss in the price of copper cathodes and claimed it as a deduction. The Bombay high Court held that the assessee did not have any stock in trade on hand as on the last day of the previous year which can be valued at market value and loss can be booked. It was only a contract to purchase the material at a future date. The assessee had not paid any amount and no property passed to assessee. Hence th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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