Unrealised derivative gains are not taxable where no real accrual has occurred; book entries alone do not create income.

Unrealised mark-to-market gains on outstanding forward commodity derivative contracts were held not taxable under the Income-tax Act because income tax applies only to real accrual and not to hypothetical or notional gains. The Tribunal found that gains on unexpired contracts entered to hedge gold price risk remained anticipated profits, and that mere recognition in commercial books did not create taxability without actual crystallisation. The assessment addition on account of such mark-to-market gains was therefore deleted, and the assessee succeeded.

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Issues: Whether unrealised marked-to-market gains arising from outstanding forward commodity derivative contracts were taxable as income under the Income-tax Act, 1961.

Analysis: The assessee recognised mark-to-market gains in its books on outstanding forward contracts entered to hedge gold price risk, but did not offer them to tax on the footing that the gains had not actually crystallised. The Tribunal applied the settled principle that income tax is levied on real income and not on mere hypothetical or notional accretions. It held that unrealised gains on unexpired forward contracts are in the nature of anticipated profits, and that commercial accounting treatment by itself does not make such gains taxable where no real accrual has occurred.

Conclusion: The unrealised mark-to-market gains were not taxable, and the addition was liable to be deleted in favour of the assessee.

Final Conclusion: The appeal succeeded and the assessment addition on account of mark-to-market gains was set aside.

Ratio Decidendi: Unrealised gains on outstanding derivative contracts do not constitute taxable income unless they represent real accrual, as notional or hypothetical profits are outside the charge of income tax.

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