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2016 (6) TMI 283 - ITAT MUMBAIDisallowance of loss - whether the unrealized gain, i.e., as may stand to arise on the basis of the market values (of the underlying shares) as at the close of the year on open contracts, prior to the settlement date, could be taken into account for the purpose of closing accounts and recognizing income for the relevant year? - Held that:- The question of booking ‘gain’, i.e., on an appreciation of the contract value/s, as would be apparent, does not arise. Providing for a liability with reference to the market value, which is adopted as a surrogate measure for realizable value, net of cost, if any, toward realization, i.e., at net realizable value, where held on revenue account, is on the basis of the accounting principle of prudence which suggests booking of all known losses and liabilities. Providing for the same is on the premise that the enterprise following accrual method of accounting, the loss had accrued even though the liability may not have crystallized or its amount may not be quantifiable with exactness and, therefore, represents only an estimate thereof, based on the best available information. Such estimates are called accounting estimates, which inform and permeate the preparation and presentation of final accounts, the background facts with regard to which are generally communicated through the notes to the accounts. The price/s obtaining on the settlement date/s, subsequent to the valuation (balance-sheet) date, may well be different and not in agreement with that as at the year-end, anterior thereto. In fact, even if anticipated, the gain is proscribed for being booked, militate as it clearly does against the accounting principle of prudence, advocating the provision for all known liabilities while at the same time not recognizing any anticipated income. The said principle, prescribed per AS-I issued by the Board, since notified u/s. 145(2) of the Act, therefore acquires the force of law. Reference in this context may also be made to AS-9 (Recognition of income) issued by Institute of Chartered Accountants of India, which again assumes legal status in view of section 209 of the Companies Act, 1956. The statement of a trade liability, at current value, is on an entirely different footing. Finally, before parting, we may add that the loss on the basis of ‘mark to market’ open derivative contracts, standing thus to be allowed in the facts and circumstances of the case, the A.O. shall be at liberty to withdraw the said loss on the settlement date/s, which the Revenue was otherwise bound to allow to the assessee, i.e., to that extent (Rs.11.54 lacs). Like-wise the ‘gain’ on the balance (brought forward) contracts would stand to be taxed in its' entirety on settlement. We state so in order to avoid any prejudice or double benefit to either side. - Decided in favour of assessee
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