Full Judgment Text
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PETITIONER:
SK. AR. K. AR. SOMASUNDRAM CHETTIAR AND CO., MADURAI
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, MADRAS
DATE OF JUDGMENT15/01/1992
BENCH:
JEEVAN REDDY, B.P. (J)
BENCH:
JEEVAN REDDY, B.P. (J)
RAMASWAMY, K.
CITATION:
1992 SCR (1) 49 1992 SCC Supl. (2) 54
JT 1992 (1) 93 1992 SCALE (1)12
ACT:
Income Tax Act, 1922-Section 24, third proviso, clause
(a)-Requirement under-Contract-Construction-Contract spoken
in first part and in second part-Co-relation-When the clause
applies to speculative transaction, indicated.
Income Tax Act, 1922-Section 24, third proviso, clause
(a)-Transactions entered into by assessee whether saved
under.
HEADNOTE:
The appellant-assessee, was a registered firm. It was
carrying on business in cloth and yarn. Its cloth business
consisted mainly in Gada manufactured by certain Mills.
The Income Tax Officer while making the assessment
relating to the assessment years of 1960-61 and 1961-62,
held that the losses of Rs. 2,04,746 and Rs. 17,000
respectively sustained by the assessee in the two assessment
years constituted losses in speculative transactions in the
nature of business and, therefore, could not be set off
except against profits from speculation. He carried forward
the said loss to be set off against speculation profits, if
any, in subsequent assessment years.
The assessee’s appeal was dismissed by the Appellate
Tribuanl, though its further appeal to the Tribuanl was
upheld.
Before the Tribunal, the assessee, conceding that the
transactions in question are speculative transactions within
the meaning of the Explanation 2 to section 24, Income Tax
Act, 1922, contended that the transactions in question were
saved under clause (a) of the proviso to Section 24 of the
Act.
The Tribuanl held that the transactions entered into by
the assessee were in the nature of the hedging contracts
and, therefore, saved under clause (a) of the proviso.
The Revenue obtained a reference to the High Court on
the
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question, "whether on the facts and in the circumstances of
the case, the transaction resulting in the loss of Rs.
2,04,746 in the previous year relevant for the assessment
year 1960-61 and in the loss of Rs. 17,000 in the assessment
year 1961-62 were saved from being treated as speculative
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transactions by clause (a) of the third proviso to Section
24(1) of the Income Tax Act, 1922."
The assessee conceding that the transactions in
question were speculative transactions, contended before the
High Court that the transaction were saved by clause (a) of
the third proviso to Section 24.
The High Court answered the reference in negative,
i.e., in favour of the Revenue, holding that the
transactions in question were not saved by clause (a) of the
third proviso.
The assessee-appellant challenged the view taken by
the High Court in these appeals by special leave.
On the question, whether the transactions in question
were saved by clause (a) of the third proviso to Section 24
of the Income Tax Act, 1922, dismissing the appeals, the
Court,
HELD : 1.01. When the first part of clause (a) speaks
of a contract in respect of merchandise, it refers to a
contract falling within the definition of speculative
transaction. But the further requirement of clause (a) is
that such a contract in respect of merchandise must have
been entered into by the merchant in the course of his
business to guard against loss through future fluctuations
"in respect of his contracts for actual delivery of goods
sold by him." Clearly, the contracts referred to in the
latter part of clause (a) must be contracts for actual
delivery of goods sold by him. It necessarily means
contracts of sale by him and such contracts must be for
actual delivery of goods. The words "for actual delivery of
goods" have evidently been put in designedly. [55D-E]
1.02. There need not be co-relation between contract to
contract but there ought to be a co-relation between the
contracts spoken to in the first part of clause (a) and the
contracts spoken to in the latter part. Unless such co-
relation exists between two sets of contracts, the clause is
not attracted. [55E-F]
2. The assessee entered into a contract of purchase
with the mills and a contract of sale with another person.
Then he entered into a
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contract of purchase with such person in respect of the
same goods. He then obtained delivery of the cloth from the
mills and sold them to the third parties. So far as the
first mentioned party is concerned he settled the contract
by paying the difference ,resulting in loss. It is evident
that the course of transactions do not attract and cannot be
made to fall within the four corners of clause (a). The
contracts entered into by the assessee do not fall within
nor are they saved by clause (a) of the proviso. [55H-56B,
55G]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1109-
10 of 1976.
From the Judgment and Order dated 19.4.1973 of the
Madras High Court in Tax Case NO. 278 of 1967.
A.T.M. Sampath for the Appellant.
Dr V. Gaurishankar, P. Parmeswarn, S. Rajappa and Ms.
A. Subhashini for the Respondents.
The Judgment of the Court was delivered by
B.P. JEEVAN REDDY, J. These appeals by the assessee are
preferred against the judgment of the Madras High Court
answering the question referred to it in favour of the
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Revenue. The question stated for the opinion of the High
court under Section 66 (1) of the Indian Income Tex Act,
1922 was "whether on the facts and in the circumsstances of
the case, the transactions resulting in the loss of Rs.
2,04,746 in the previous year relevant for the assessment
year 1960-61 and in the loss of Rs. 17,000 in the assessment
year 1961-62 were saved from being treated as speculative
transactions by Clause (a) of the third proviso to Section
24(1) of the Income Tax Act, 1922."
The assessee is registered firm carrying on business in
cloth and yarn. Its Head-Office is at Madurai with branches
at Vijayanagaram and Calcutta. Its trade in cloth consisted
mainly in Gada manufactured by certain mills including
Meenakshi Mills Ltd., Virudhanagar Textiles Ltd. and Loyal
Textiles Mills Ltd. The assessment yeras concerned herein
are 1960-61 (previous year ending on 12.4.1960) and 1961-62
(pervious year ending on 12.4.1961). In his assessment
orders, relating to these two assessment years, the Income
Tax Officer held that the losses of Rs. 2,04,746 and Rs.
17,000 respectively sustained by the assessee in the said
two assessment year constituted losses in speculative
transaction in the nature of business and, therefore, could
not
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be set off except against profits from speculation. He
carried forward the said loss to be set off against
speculation profits, if any, insubsequent assessment
years. The assessee’s appeal to the Appellate Tribunal
proved unsuccessful. However, his further appeal to Tribuanl
was upheld. Before the Tribunal, the counsel for the
assessee conceded that "the transactions in question are
speculative transactions within the meaning of the
explanation." (The reference is to Explanation-2 to Section
24). His contention, however, was that the transactions in
question are saved under Clause (a) of the proviso to
Section 24. The Tribunal examined the said contention with
reference to the facts of the case and concluded that the
transactions entered into by the assessee were in the nature
of the hedging contracts and, therefore, saved under Clause
(a) of the proviso. Dissatisfied with the order of the
Tribunal, the Revenue asked for and obtained the above
reference. Before the High Court as well, counsel for the
assessee conceded that the transactions in question are
speculative transactions but contended that they are saved
by Clause (a) of the third proviso to Section 28. This is
what the High Court has recorded :
"In this case it has been conceded at all stages
by the assessee that the transactions in respect
of which the losses in question have occurred are
speculative transactions as defined in Explanation
2, and therefore, it is not necessary for us to
consider the scope of the Explanation 2 to
Section 24. The only question for consideration
is whether the transactions which are admittedly
speculative coming within Explanation 2 to Section
24(1), Will fall within the scope of Clause (a) of
the third proviso to that section."
The High Court disagreed with the interpretation placed
by the Tribunal upon Clause (a) of the said proviso and held
that on the material placed before it, it is not possible to
hold that the transactions in question were saved by clause
(a) of the third proviso. Accordingly, it answered the
question referred n the negative-that is against the
assessee and in favour of Revenue. The correctness of the
view taken by the High Court is challenged in this appeal.
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Section 24 of the 1929 Act insofar as it is relevant
reads as follows :
"24. Set off of loss in computing aggregate income
(1) where any assessee sustains a loss of
profits or gains in any year under any of the
heads mentioned in section 6, he shall be entitled
to have the amount of the loss set off against his
income, profits or gains under any other head in
that years :
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Provided that in computing the profits and gains
chargeable under the head ‘profits and gains of
business, profession or vocation’, any loss
sustained in speculative transactions which are in
the nature of a business shall not be taken into
account except to the extent of the amount of
profits and gains, if any, in any other business
consisting of speculative transactions.
Explanation 2 : A speculative transaction means a
transaction in which a contract for purchase and sale of any
commodity including stocks and shares is periodically or
ultimately settled otherwise than by the actual delivery or
transfer of the commodity or scrips.
Provided that for the purposes of this Section :
(a) a contract in respect of raw materials or
merchandise entered into by a person in the course
of his manufacturing or merchanting business to
guard against loss through future price
fluctuations in respect of his contracts for actual
delivery of goods manufactured by him or
merchandise sold by him; or
(b) a contract in respect of stocks and shares
entered into by a dealer or investor therein to
guard against loss in his holding of stocks and
share through price fluctuations; or
(c) a contract entered into by a member of a
forward market or a stock exchange in the course of
any transactions in the nature of jobbing or
arbitrate to guard against loss which may arise in
the ordinary course of his business as such member,"
Explanation 2 to Section 24 defines what a speculative
transaction is. It corresponds to the definition contained
in Clause 5 or Section 43 of the Income Tax Act, 1961. The
Mardas High Court has taken the view that by virtue of the
definition contained in Explanation 2, "whenever there is no
actual delivery or transfer of the goods, the transaction
should be taken to be of a speculative nature.......If the
actual delivery of the goods is not given under the
settlement of the contract, then the intention of the
parties at the time of contract is immaterial." It is not
necessary for us to express any opinion on this aspect since
it was conceded by the assessee’s counsel before the High
Court that the transactions in question were indeed
speculative transactions as defined by Explanation 2. The
only question with which we are concerned-and which alone
has been considered by the High Court too-is whether the
transactions in question are saved by Clause (a) of the
third proviso to Section 24.
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The Tribunal was of the opinion that Clause (a) of the
third proviso is intended to save hedging contracts among
others. It dealt with the concept of hedging contracts and
held that for attracting Clause (a) of the proviso, the
"contracts for actual delivery of goods manufactured by him
or merchandise sold by him" need not necessarily by sale
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contracts but can also be purchase contracts. Applying the
said interpretation it examined the transactions in question
and held them saved by the said Clause. The High Court,
however, did not agree with the said interpretation. It
took the view that ’for a transaction to come under Clause
(a), it should be one entered into by an assessee to guard
against loss through future price fluctuations in respect
of his sale contracts". It, however, agreed with the
Tribunal that there need not be actual co-relation,
contract to contract, between the purchase and sale
contracts contemplated by the Clause and that it is
sufficient if a transaction either by way of purchase or
sale is entered into with a view to guard against any future
loss in that particular line of business. It held "for a
transaction to come under Clause (a) it should be one
entered into by an assessee to guard against loss through
future price fluctuations in respect of his sale
contracts.........there need not be actual co-relation,
contract to contract, but that it is sufficient if a
transaction either by way of purchase or sale is entered
into with a view to guard against any future loss in that
particular line of business." It, however, added a note of
caution which we may set out in its own words. "But we are
inclined to think that we will be doing considerable
violence to the language used in Clause (a) if it is
understood to cover all cases of purchases and sales entered
into by an assessee with a view to guard against his future
loss in general in that line of business. It is true, a co-
relation-contract to contract-may not be necessary. But the
contract or contracts contemplated by Clause (a) has or have
to guard against loss through price fluctuations in respect
of contract or contracts of sale entered into by him of the
same goods." Applying the said test the High Court examined
the transactions in question and came to the conclusion that
they were not saved under the said Clause. It noted that
both with respect to cotton bales and yarn, the assessee had
initially entered into contracts of purchase of certain
goods from the mills. He then entered into a contract of
sale of the same goods to a party. Later , he entered into a
contract to re-purchase the same goods from the same party.
Subsequently ,he took delivery of the goods from the
mills and sold them to other parties. So far as contracts of
purchase and sale with the first mentioned party are
concerned , he settled them by paying the difference. In the
circumstances, the High Court held that it is not possible
to say either that the sale contract entered into by the
assessee with the purchaser, or the purchase contract
entered into between them, would come under Clause (a). The
only question now before us is whether the High Court was
right in its interpretation of Clause (a) of the third
proviso of
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Section 28 (which corresponds to Clause (a) of the proviso
to the definition of speculative transactions contained in
Clause 5 of Section 43 of the 1961 Act)?
The proviso containing Clauses (a) to (c) is a proviso
to Explanation 2 which defines what a speculative
transaction is. Clause (a) of the proviso contemplates and
applies to a manufacturer as well as a merchant. The
assesee herein is not a manufacturer but only a merchant.
The said Clause insofar as it is relevant to the merchant
would read thus :
"a contract in respect of merchandise entered into
by a person in the course of his merchanting
business to guard against loss through future
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price fluctuations in respect of his contracts for
actual delivery of merchandise sold by him, shall
not be deemed to be a speculative transaction".
When the first part of Clause (a) speaks of a contract
in respect of merchandise, it refers undoubtedly to a
contract falling within the definition of speculative
transaction. But the further requirement of Clause (a) is
that such a contract in respect of merchandise must have
been entered into by the merchant in the course of his
business to guard against loss through future fluctuations
"in respect of his contracts for actual delivery of goods
sold by him." Clearly, the contracts referred to in the
latter part of Clause (a) must be contracts for actual
delivery of goods sold by him. It necessarily means
contracts of sale by him and such contracts must be for
actual delivery of goods. The words "for actual delivery of
goods" have evidently been put in designedly. We agree with
the learned Judges of the High Court that there need not be
co-relation between contract to contract but there ought to
be a co-relation between the contracts spoken to in the
first part of Clause (a) and the contracts spoken to in the
latter part. Unless such co-relation exists between two
sets of contracts, the Clause is not attracted. The
Tribunal was not right in holding that the words "contracts
for actual delivery of goods" occurring in the latter part
of the definition do also take in contracts of purchase.
Such an understanding is inconsistent with the scheme and
spirit of the Clause.
If we examine the contracts entered into by the
assessee on the above touch-stone, it would be evident that
they do not fall within nor are they saved by Clause (a) of
the proviso. The nature of transactions entered into by the
assessee, as found by the High Court, has already been set
out by us hereinbefore. The assessee entered into a
contract of the purchase with the mills and a contract of
sale with another person. Then he entered into a
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contract of purchase with such person in respect of the same
goods. He then obtained delivery of the cloth from the
mills and sold them to the third parties. So far as the
first mentioned party is concerned he settled the contract
by paying the difference resulting in loss. It is evident
that the said course of transactions do not attract and
connot be made to fall within the four corners of Clause (a)
We, accordingly, dismiss the appeal. No order as to
costs.
V.P.R. Appeals dismissed
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