1967 (8) TMI 17 - HC - Income Tax

Illegal contracts - Even though the said contracts were not validly entered, the said loss is liable to be taken into account in computing the business income of the assessee under section 10 and the assessee is entitled to set it off against the profit from other speculative transactions

Issues Involved:
1. Legality of the forward contracts under the Forward Contracts (Regulation) Act, 1952.
2. Entitlement of the assessee to set off the loss from these contracts.
3. Classification of the transactions as speculative under Section 24 of the Indian Income-tax Act, 1922.
4. Entitlement of the assessee to set off the balance loss against other income.

Issue-wise Detailed Analysis:

1. Legality of the Forward Contracts:
The central question was whether the forward contracts resulting in a loss of Rs. 3,40,443 were illegal under Section 15, sub-sections (1) and (4) of the Forward Contracts (Regulation) Act, 1952. The court examined the statutory definitions and provisions, including "ready delivery contract," "forward contract," "specific delivery contract," and "non-transferable specific delivery contract." It was concluded that the impugned contracts were not "non-transferable specific delivery contracts" as required by Section 18(1) for exemption. The contracts were entered into in contravention of Section 15(4) because they were not disclosed as being on the assessee's own account. However, the contracts were not illegal under Section 15(1) since they were entered into with a member of the association.

2. Entitlement to Set Off the Loss:
The court addressed whether the loss from the unlawful business could be taken into account in computing the business income of the assessee. It was held that the income-tax law applies to both lawful and unlawful businesses. Hence, if profits from an illegal business are taxable, losses from such business should also be accounted for. The court referenced several English and Indian decisions to support this view, concluding that the loss of Rs. 3,40,443 from the impugned contracts should be taken into account in computing the assessee's business income.

3. Classification of Transactions as Speculative:
The court examined whether the transactions resulting in the loss were speculative under Section 24 of the Indian Income-tax Act, 1922. According to the second Explanation to Section 24(1), a speculative transaction is one where a contract for purchase and sale is settled otherwise than by actual delivery. The impugned contracts were settled by cross-contracts of purchase, not by actual delivery, making them speculative transactions. Therefore, the loss of Rs. 3,40,443 was a speculative loss and could only be set off against speculative profits.

4. Set Off Against Other Income:
The court addressed whether the balance loss of Rs. 1,21,397 could be set off against the assessee's other income. Given that the loss was from speculative transactions, the first proviso to Section 24(1) applied, which restricts the set off of speculative losses only against speculative profits. Therefore, the balance loss could not be set off against the assessee's other income.

Conclusion:
The court answered the questions as follows:
1. The contracts were not validly entered into in accordance with Section 15(4) of the Forward Contracts (Regulation) Act, 1952.
2. The loss of Rs. 3,40,443 is liable to be taken into account in computing the business income of the assessee and can be set off against speculative profits.
3. The transactions were speculative for the purposes of Section 24 of the Indian Income-tax Act, 1922.
4. The balance loss of Rs. 1,21,397 cannot be set off against the assessee's other income.

Each party was ordered to bear its own costs of the reference.

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