Unrealized derivative gains on unsettled positions are not taxable until actual settlement; TCS credit claim remanded for verification.

Unrealized gains shown in a marked-to-market report on unsold derivative and share positions were held not taxable as current-year income because the profit had not been actually realised during the year; the corresponding gain or loss was recognised only on settlement in the subsequent year, so the addition was deleted. The claim for credit of TCS relating to the liquor business was not finally examined on the necessary factual material and was therefore remitted for verification and fresh decision by the Assessing Officer. The matter thus resulted in a partial allowance, with relief on the unrealised derivative profit issue and further examination directed on the TCS credit claim.

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Issues: (i) Whether the unrealized gain arising from unsold derivative and share positions reflected in the marked-to-market report could be taxed as income for the year under consideration; (ii) whether the claim for credit of TCS on the liquor business required verification and decision by the Assessing Officer.

Issue (i): Whether the unrealized gain arising from unsold derivative and share positions reflected in the marked-to-market report could be taxed as income for the year under consideration.

Analysis: The disputed addition arose only because the marked-to-market report reflected value changes in unsold scrips and unsettled positions. The material on record showed that the figure treated as profit by the Assessing Officer included unrealized gain on positions not finally squared up during the year, and that the relevant profit or loss was offered in the subsequent year when the transactions were actually settled. On these facts, the amount was not income realized during the year and could not be assessed as current year business income or capital gain.

Conclusion: The addition was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the claim for credit of TCS on the liquor business required verification and decision by the Assessing Officer.

Analysis: The record showed that the claim for TCS credit had not been adjudicated by the lower authorities on the necessary factual foundation. The entitlement to credit therefore required examination of the relevant documents and computation by the Assessing Officer in accordance with law.

Conclusion: The matter was remitted to the Assessing Officer for fresh decision on the TCS credit claim.

Final Conclusion: The appeal succeeded on the addition relating to unrealized derivative profit, while the TCS credit claim was sent back for verification, resulting in a partial allowance of the appeal.

Ratio Decidendi: Unrealized gains arising from marked-to-market valuation of unsold or unsettled derivative positions are not taxable as income until they are actually realized on settlement.

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