Open derivatives valuation must follow mark-to-market treatment, not stock reclassification, and related losses are allowable.

Open futures and options contracts were not ordinary trading stock, and their year-end position had to be reflected through mark-to-market treatment rather than by treating outstanding contracts as opening or closing stock. The addition arose from a reworking of profit that ignored the distinct nature of derivative transactions and the allowable loss from daily marking of open positions. On that basis, the adjustment was found unsustainable and deleted in favour of the assessee. The stated principle is that open derivatives contracts cannot be valued as stock for profit computation, and mark-to-market losses on such outstanding positions are allowable.

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Issues: Whether the addition made by treating open futures and options positions as opening and closing stock and reworking the profit from such transactions was sustainable.

Analysis: The assessee's futures and options transactions were shown to remain open at year-end and were not ordinary trading stock. In such transactions, the year-end position is properly reflected through mark-to-market treatment and not by classifying outstanding contracts as opening or closing stock. The addition was based on a reworking that ignored the peculiar nature of derivatives transactions and the allowable loss arising from daily marking of open positions.

Conclusion: The addition was not sustainable and was deleted in favour of the assessee.

Ratio Decidendi: Open futures and options contracts cannot be treated as opening or closing stock for profit computation, and mark-to-market losses on such outstanding positions are allowable.

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