F & o and commodity derivatives

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CA Tejas Andharia (Querist)
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30 July 2011 As per the guidance note of ICAI, profit on unadjusted transactions at year end of derivatives can not be realised as per the concept of prudence, but such loss has to be booked.
But income tax act, 1961 is silent about the loss/profit on unadjusted transactions at year end of derivatives.
If we follow the GN of ICAI and set off the loss only of such transactions against other ordinary business income and do not take in to account such profit, what will be the situation under income tax act?

CA.Pankaj Shah

CA.Pankaj Shah (Expert)
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31 July 2011 Firstly since there are specific AS11, 30 they would override prudence n both profit n losses from derivatives have to be taken in account.

As per IT Act both have to be recorded (without prejudice to cbdt circular saying gains r taxable but losses not allowable from derivative). This law laid down by courts specifically by SC in Woodword Governors 312 ITR n ITAT mumbai sb in case of Bank of bahrain 41 SOT.

CA Tejas Andharia

CA Tejas Andharia (Querist)
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01 August 2011 Thanks for the answer.
But cases referred by you are related with AS-11 and Section 43A.
I want to know about the unadjusted losses/profits of F & O and Commodity Derivatives.
So, would u please rethink?
Pls provide the link to download the circular/notification of CBDT referred to by you.

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Asha Kanta Sharma

Asha Kanta Sharma

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24 July 2024 The treatment of unadjusted profits or losses on derivatives, including Futures and Options (F&O) and Commodity Derivatives, involves understanding both accounting principles and income tax laws in India. Here’s a clarification based on your query:

### Guidance Note of ICAI vs. Income Tax Act, 1961

1. **ICAI Guidance Note (Prudence Concept)**:
- The ICAI Guidance Note suggests that profits on unadjusted transactions at the year-end should not be recognized due to the principle of prudence in accounting. However, losses on such transactions should be recognized.
- This implies that if there are unrealized profits on derivative transactions (F&O or commodity), they should not be recognized in the financial statements until realized.

2. **Income Tax Act, 1961**:
- The Income Tax Act, 1961 does not specifically address the treatment of unrealized profits or losses on derivatives like F&O or commodity derivatives at the year-end.
- Income tax treatment primarily focuses on the actual realization of income (profits) or loss during the financial year. Unrealized profits are generally not taxable until realized, and unrealized losses may not be eligible for deduction until realized or adjusted against other income as per the provisions of speculative business income.

### Practical Considerations:

- **ICAI Guidance vs. Income Tax Treatment**: While the ICAI Guidance Note on Accounting Principles advises caution in recognizing unrealized profits, the Income Tax Act focuses on actual realization for tax purposes.

- **Taxation of Derivative Profits/Losses**:
- **Profits**: Taxable upon realization.
- **Losses**: Can be set off against any other speculative income in the same financial year. Any unabsorbed losses can be carried forward for set-off against speculative income for the next 4 years.

### Conclusion:

If you follow the ICAI Guidance Note and do not recognize unrealized profits on derivatives at year-end, it generally aligns with the principle of prudence in accounting. For income tax purposes, you should comply with the provisions of the Income Tax Act, which primarily concern the actual realization of income or losses during the financial year.

**Link to CBDT Circulars/Notifications**:
- The CBDT (Central Board of Direct Taxes) issues circulars and notifications from time to time. For specific circulars or notifications related to derivative transactions or speculative income, you can visit the official website of the Income Tax Department of India: [Income Tax Department](https://www.incometaxindia.gov.in).

Consulting with a qualified tax advisor or Chartered Accountant is recommended to ensure compliance with both accounting standards and income tax regulations concerning derivative transactions in India. They can provide tailored advice based on your specific circumstances and transactions.