1977 (2) TMI 1 - SC - Income Tax

Whether loss in hedging transactions of banned items can be set off against profits of same year and whether such loss can be carried forward for set off in subsequent years - loss in hedging transaction of banned items could not be set off against profits of the same previous year under s. 24(1) - such a loss also could not be carried forward for set off against profits in the later years - Questions are answered in the negative and in favour of the department

Summary

Issues:
1. Set-off of hedging loss against other profits.
2. Carry forward of speculation loss to the next year.

Analysis:

Issue 1: Set-off of hedging loss against other profits
The case involved the question of whether the assessee was entitled to set off a hedging loss against other profits. The Income-tax Officer disallowed a loss arising from illegal forward contracts, contending that they were banned under the Forward Contracts (Regulation) Act, 1952. The Appellate Assistant Commissioner affirmed this decision, bifurcating the loss into hedging and speculative transactions. However, the Appellate Tribunal allowed the set-off and directed the hedging loss to be set off against other profits under section 24(1) of the Act. The Supreme Court referred to the Kothari decision, emphasizing that losses from illegal contracts cannot be set off under the first proviso to section 24(1). The Court held that the hedging loss, being from a banned contract, could not be set off against other profits.

Issue 2: Carry forward of speculation loss
The second issue pertained to the claim for carrying forward a speculation loss to the next year. The assessee incurred a speculation loss in banned contracts under the Forward Contracts (Regulation) Act, 1952. The Tribunal allowed the carry forward under section 24(2) of the Act. However, the Supreme Court rejected this claim, stating that allowing a benefit from an illegal business to continue in a lawful speculative business would be impermissible. The Court highlighted that the carry forward provision does not permit benefits from illegal activities to spill over to subsequent years. It emphasized the distinction between computing profits from illegal activities in a particular year and carrying forward losses to set off against income in subsequent years. The Court ruled that no benefit can be derived from illegal activities in the following year, and the claim for carrying forward speculation loss was denied.

In conclusion, the Supreme Court set aside the High Court's judgment, answering both questions in the negative and in favor of the department, disallowing the set-off of hedging loss against other profits and denying the carry forward of speculation loss to the next year. The appeal was allowed with costs.