TMI Blog1962 (8) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of contracts admittedly in the nature of teji-mandi contracts prohibited by section 19 of the Forward Contracts (Regulation) Act, 1952, and was disallowed by the department on the ground of its being an illegal loss. The contention that that loss also should be allowed was given up even before the Tribunal, and also before us, and the argument on behalf of the assessee is confined to the loss of ₹ 12,300. That loss arose in respect of two contracts for future delivery of turmeric, and they resulted in payment of the difference in price of ₹ 10,500 in respect of one contract, and ₹ 1,800 in respect of the other, totalling ₹ 12,300. Both the contracts provided for delivery of the goods but the goods in fact were not delivered, though the assessee had stock of the same, because he anticipated that by delivering the goods on the scheduled dates, he would have suffered heavy losses, and hence paid the price differences. The department as well as the Tribunal rejected the assessee's contentions, and held that the two transactions were speculative transactions, and the loss resulting therefrom could not be treated as a trading loss in computing the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely:... Section 24, with the marginal note Set-off of loss in computing aggregate income , reads thus: 24. (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 year: 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 1.--Where the speculative transactions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business. Explanation 2.--A speculative transaction means a transaction in which a contract for purchase and sale of any commodity including stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st profits of the same year under any other head. For example, loss in business may be set off against income from property, and loss under the head Income from other sources may be set off against profits of Business . The exceptions to this rule, however, are speculative loss, and loss falling under the head Capital gains , which cannot be set off against income falling under any other head. 4. If the loss cannot be set off under sub-section (1) of section 24 because of the absence or inadequacy of profits of the same year under any other head, it may, under sub-section (2), be carried forward and set off against the profits of a subsequent year (vide Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax [1953] 23 I.T.R. 82; [1953] S.C.R. 448. It may be mentioned that the Supreme Court in the aforesaid case held that the right of carrying forward of loss could be claimed under section 24(2) only if there were profits under another head against which part of the loss could be set off under sub-section (1), and if there was no income under any head at all, the loss could not be carried forward. This decision is however superseded by the Income-tax (Amendment) Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate folio in the same account books at Tuticorin. The financing of all the transactions was from Tuticorin and the control of all the transactions was under a single management. In 1937-38 the assessee carried on business in forward contracts but they stopped it in 1938-39. They again carried it on in the years 1939-40 and 1940-41 when it resulted in a loss. In 1941-42 the assessee did not deal in forward contracts but they claimed under section 24(2) of the Act that the unadjusted balance of loss carried forward from 1939-40 and 1940-41 should be set off against the profits of the year 1941-42. The department and the Appellate Tribunal disallowed the claim. But a Bench of the Madras High Court held that the dealing in forward contracts carried on by the assessee in the Rangoon grain market was a part of the general business of the assessee as dealers in rice and grain, and they were therefore entitled to set off the loss against the profits of the year 1941-42 under section 24(2) of the Act. Admittedly, the learned judges in that case were construing section 24(2) of the Act before its amendment in 1953, and the main question for consideration was, whether two dealings in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words, loss sustained in speculative transactions, which are in the nature of a business, shall be taken into account to the extent of the amount of profits and gains in any other business, consisting of speculative transactions. The ingredients of the proviso, therefore, are: (i) the loss sustained should related to speculative transactions; (ii) those transactions should be in the nature of a business; and (iii) the loss shall be taken into account only to the extent of profits and gains in any other business consisting of speculative transactions. (3) Explanation 1 lays down that, where speculative transactions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business, i.e., speculative transactions in the nature of a business shall be distinct and separate from any other business. (4) Explanation 2 gives the meaning of speculative transaction as 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 actual delivery or transfer of the commodity or scrips. This Explanation reveals t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation is quite obvious, as the legislature is aware that, under the general law, it will not be a speculative transaction. This definition, to our minds, is exhaustive, and does not permit the importing into income-tax law the general notions of wagering or speculative transactions in the domain of contract law. The effect of this Explanation is thus twofold: (i) where actual delivery of goods, or transfer of the commodity or scrips takes place, the transaction is not a speculative transaction, however highly speculative it may be in fact; and (ii) even if the original intention was not to gamble in differences, if in facts the contract is settled by payment of the difference, it is a speculative transaction under the Act. On behalf of the assessee it is contended that even assuming that the transactions fall within Explanation 2, they are saved by clause (a) to the proviso to that Explanation. That proviso excludes from the definition of speculative transactions what are popularly known as hedging contracts entered into by manufacturers and merchants in the course of business to guard against loss through future price fluctuations. In order, however, to invoke the proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns relating to gunnies against other profits earned in his other business. Under the forward contract, the assessee had the option either to take delivery of the goods or to pay the difference in prices. In respect of a portion of the goods covered by the forward contracts, he settled the difference, but did not take delivery, but he claimed that that loss should be taken into account in computing his business profits. The first question that the loss did not arise out of speculative business was not pressed before this court, and it was only the second question that was argued. The learned judges considered the effect of section 24(1) and the first proviso, and held that, having regard to the clear and unambiguous language of the proviso and the scheme of the Act, there can be little doubt that the legislature enacted it as a substantive provision, and that it modifies the computation of the profits and gains under the head of Profits and gains of business, profession or vocation under section 10 of the Act. Chandra Reddy C.J., who spoke for the court, followed the decision of the Bombay High Court in Keshavlal Premchand v. Commissioner of Income-tax [1957] 31 I.T.R. 7. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decision in R.C. No. 51 of 1960* of this court, the learned Chief Justice followed Keshavlal Premchand v. Commissioner of Income-tax [1957] 31 I.T.R. 7 and the cases of Manohar Lal Munshi Lal v. Commissioner of Income-tax [1962] 44 I.T.R. 618, Commissioner of Income-tax v. Hukam Chand Dalal [1962] 44 I.T.R. 614 and Commissioner of Income-tax v. Ramgopal Kaniyalal [1960] 38 I.T.R. 193, which followed the Bombay view, and answered the second question by saying that it is not open to an assessee to adjust the loss sustained in speculating business against his income derived from other business which are not of a speculative character, but could lay a claim to a set-off only against profits derived from a business of a speculative nature. This decision of a Bench of our High Court is binding upon us. Further, we see no reason to differ from the reasoning or conclusion in that case, and we respectfully follow it. Even so, it was argued on behalf of the assessee that the loss sought to be set off is only the result of two transactions, which cannot be said to be speculative transactions in the nature of a business within the meaning of the first proviso. We cannot countenance this c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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