PCIT Vs Kalyan Jewellers India Ltd. (Kerala High Court)
The case concerns the taxability of unrealized “mark-to-market” gains arising from forward contracts in commodity derivatives and whether such notional gains can be taxed before actual realization. The appeal was filed challenging the order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, which had held that such unrealized gains are not taxable.
The appellant contended that the assessee had included notional profits in its accounts arising from mark-to-market valuation of forward contracts, and therefore, such amounts should be treated as taxable income. It was argued that the Tribunal erred in relying on the judgment of the Supreme Court of India in Commissioner of Income Tax v. Woodward Governor India (P.) Ltd. to hold otherwise.
On the other hand, the respondent supported the Tribunal’s decision, submitting that reliance on Woodward Governor India and Godhra Electricity Co. Ltd. v. Commissioner of Income Tax was appropriate. It was argued that notional profits or losses cannot be treated as income or expenditure until they actually accrue. The respondent emphasized that the Supreme Court had clearly laid down that anticipated profits, reflected as appreciation in value, are not to be recognized for taxation until realized. It was further submitted that unrealized profits in the form of appreciated value of unsold goods carried forward to subsequent years do not constitute taxable income under ordinary principles of commercial accounting unless modified by statutory provisions.
