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TaxTMI 
TaxTMI 
TaxTMI 
2026 (4) TMI 195
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....ket' instrument in respect of a Forward Contract in Commodity Derivatives, the said amount was taxable; but that the Tribunal has held otherwise. He prays that, consequently, the impugned order be set aside. 3. Sri. R. Jaikrishnan - learned counsel for the respondent, on the other hand, submitted that the learned Tribunal has relied upon Woodward Governor India (Supra), as also on Godhra Electricity Co. Ltd., Ahmedabad v. Commissioner of Income Tax, Gujarat-II [(1997) 225 ITR 746], to hold correctly that notional profits or notional losses cannot either be treated as income or expenditure respectively, until the same is to accrue. He pointed out that, in Woodward Governor India (Supra), the Hon'ble Supreme Court has categorically held that no prudent trader would show anticipated profit, in the shape of appreciated value of the closing stock, before it is actually realized; and that, this is the same with anticipated loss also. He argued that, as also declared by the afore two judgments, unless such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods, remaining unsold at the end of the accounting year a....
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....uring the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading section 37(1) with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial acc....
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....pts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis, i.e., accrual of the right to receive payment and the accrual of the liability to disburse or pay. In CIT v. Shoorji Vallabhdas and Co.it has been laid down : (ITR p.148). "... Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise." 14. This principle is applicable whether the accounts are maintained on case system or under the mercantile system. If the accounts are maintained under the mercantile system what has to be seen is whether income can be said to have really accrued to the assessee company. In H.M. Kashiparekh & Co. Ltd. v. CIT the Bombay High Court had said : "...Even so, (the failure to produce account losses) we shall proceed on the footing that, the assessee company having followed the m....
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....ollowing the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee company in respect of those enhanced charges in view of the fact that soon after the assessee company decided to enhance the rates in 1963 representative suits (Civil Suits Nos. 152 of 1963 and 50 of 1964) were filed by the consumers which were decreed by the trial court and which decree was affirmed by the appellate court and learned Single Judge of the High court and it is only on 3-12-1968 that the letters patent appeals filed by the assessee company were allowed by the Division Bench of the High Court and the said suits were dismissed. But appeals were filed against the said judgment by the consumers in this Court and the same were dismissed by the judgment of this Court dated 26-2-1969. Shortly thereafter, on 19-3-1969, the Under Secretary to the Government of Gujarat wrote a letter advising the assessee company to maintain status quo for the rates to the consumers for at least six months and the Chief Electrical Inspector was directed to go through the accounts of the assessee company from ye....
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....t of the enhanced charges for supply of electricity which were added by the Income Tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income Tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Income Tax officers did represent the income which had really accrued to the assessee-company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal. 6. We notice that the learned Tribunal has adverted to the afore two precedents and has entered its opinion to the effect that the unrealized 'mark-to-market' gains made on Forward Exchange Contracts are not liable to tax, thus deleting the addition made by the Assessment Officer; which was then confirmed by the CIT (Appeals). 7. It is doubtless that, in a 'mark-to-market' forward commodities contract, the gains and losses fluctuate un....