Case Law Details
Brief of the Case
In the present facts of the Case the Hon’ble Tribunal completely relied on the Judgment of M/s. Indsec Securities & Finance Ltd., ITA No. 4236/M/2012, where it was observed that Derivatives are also Stock-in-trade and accordingly the valuation will be done.
Facts of the Case
In the present facts of the Case, the Ld. CIT(A) have deleted the addition of Rs. Rs.8,55,86,854/- made on account of mark to market loss claimed on account of trading in derivative transactions where the actual loss or the profit in respect of such derivative transaction would have to get crystallized only at the time of settlement of such transaction.
Contention of the Assessee
The Ld. Counsel for the Assessee submitted that the issue is clearly covered by the Judgement of M/s. Indsec Securities & Finance Ltd., ITA No. 4236/M/2012 where it was held that not only actual stock but derivatives could also be taken into stock in trade and the principle “cost or market price whichever is lower” will be applied.
Contention of the Revenue
According to the Judgement of the Hon’ble Tribunal in para 4 where it has been observed that the Revenue have not submitted any contrary facts or case laws which may justify departure from the above observations made by the Tribunal.
Held by the CIT(A)
The Ld. CIT(A) have deleted the addition of Rs. Rs.8,55,86,854/- made on account of mark to market loss claimed on account of trading in derivative transactions.
Held by the Tribunal
The Hon’ble Tribunal relied on the case of M/s. Indsec Securities & Finance Ltd., ITA No. 4236/M/2012 in which it was mentioned that stock future is one of the future contracts which is traded on exchanges. In such type of contracts, the stock is not actually purchased rather the profit or loss is calculated on the book value in comparison to the actual market rate of the stocks on the date which has been agreed by the parties for the performance of the contract. The difference between the predetermined price and market price is settled daily on mark-to-market basis. In this reliance was made on CIT v. Woodward Governor India (P.) Ltd (2009) 179 Taxman 326 where it was 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. Further, it was observed that Profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting. Unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following year’s account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually.
It is not only the actual stock but derivatives can also be held as stock in trade and the principle “cost or market price whichever is lower” has been rightly followed by the assessee in valuing the derivatives and further when the derivates are held as stock in trade then whatever rules apply to the stock in trade will have to apply to their valuation also. While anticipated loss is taken into account while valuation of closing stock, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as not prudent trader would care to show increased profits before actual realization.
Accordingly, in the case of Indsec securities the decision was in the favour of Assessee. Therefore, in this case also the decision was in the favour of Assessee.
