TMI Blog1980 (7) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years 1965-66, 1966-67, 1967-68, 1968-69, 1969-70 and 1970-71, respectively ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the losses claimed of ₹ 7,301, ₹ 16,130, ₹ 9,975, ₹ 18,891, ₹ 3,583 and ₹ 16,500 were losses from speculation business within the meaning of section 73 of the Income-tax Act, 1961, and had to be considered as such for the assessment years 1965-66, 1966-67, 1967-68, 1968-69, 1969-70 and 1970-71, respectively ? The assessee is a firm of five partners carrying on business in ginning cotton and in the manufacture and sale of groundnut oil and cotton seed oil. Their previous year is the calendar year. The assessee owned extensive agricultural lands on which they grow cotton. The lands were supplied with water from a huge well. On May 1, 1963, the assessee-firm entered into a contract with the Ministry of Defence, Government of India, under which the assessee agreed to supply water for the use of the residents of a housing colony situate nearby, belonging to and occupied by the personnel of the Defence dept. Under the terms of the agreement, the assessee agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee came out of a well situated in the agricultural lands of the assessee was, according to the Tribunal, an accidental factor and the sale of water by the assessee must, in the circumstances, be regarded as being de hors the assessee's agricultural activities. On the basis of these considerations, the Tribunal held that the receipts from sale of water were assessable in the hands of the assessee as non-agricultural income. In this reference, at the instance of the assessee, this conclusion of the Tribunal is canvassed in the first of the questions we have set out earlier. Mr. S. V. Subramaniam, learned counsel for the assessee, relied on the definition of agricultural income in s. 2(1) of the Act, and stressed the following words occurring in that definition ; In this Act, unless there is anything repugnant in the subject or context,- (1) ' agricultural income ' means- (a) any rent or revenue derived from land which is situated in India and which is used for agricultural purposes. Learned counsel submitted that receipts obtained by the assessee from sale of water amounted to revenue which must be held to be derived from land which was used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annel, any rain water which had filled up the open tank and open channel would also be part of the supply. In such an event the Defence dept. could possibly raise no objection on the ground that what was supplied was not well water. The whole tenor of the agreement shows that what was dealt with between the assessee and the Defence dept. as the subject-matter of supply was not well water as such, but water as a saleable commodity from the open tank and open canal. In these circumstances, we have little hesitation in agreeing with the finding of the Tribunal that the receipts from the Defence department arose to the assessee as a result of the contract entered into with the Defence department, under the terms of which the assessee had undertaken to supply specific quantities of water in return for a price. We also agree with the other finding of the Tribunal that there is nothing in the agreement to indicate any direct nexus between the supply of water and the agricultural land held by the assessee. In the course of arguments at the bar, reference was made to an early decision of the Lahore High Court in Umar Hayat Khan v. CIT [1925] 2 ITC 52. In that case, the assessees were own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be held to be speculative transactions within the meaning of s. 43(3) of the Act. He further held that they cannot be regarded as hedging contracts having regard to their nature and purpose and the mode of settlement. He hence considered the losses claimed by the assessee as speculation losses in speculative transactions which must be dealt with as constituting a separate business. On this basis, he held that they should be set off only as against income from a similar speculative business by carrying them forward to the next year. This conclusion of the ITO was objected to by the assessee in the appeal before the AAC. The AAC accepted the ITO's finding that the transactions put through by the assessee in forward dealings, both in cotton seed oil and in groundnut oil, must be held to be speculative transactions. He also agreed with the further finding of the ITO that the transactions cannot be brought within the definition of hedging contracts falling under prov. (a) to s. 43(5) of the Act. Having agreed with these findings of the ITO, the AAC nevertheless proceeded to hold that the losses from these speculative transactions must be set off against the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess during the years in question. In arriving at this decision, the Tribunal relied on a decision of a Division Bench of this court in R. Chinnaswami Chettiar v. CIT [1974] 96 ITR 353. This part of the decision of the Tribunal is questioned by the assessee before us in this group of references by means of the second of the questions referred to by the Tribunal. Mr. Subramaniam, learned counsel for the assessee, submitted that having regard to the nature of the transactions in forward dealings which were being effected by the assessee in all these years, they must be related to the regular business of the assessee, viz., in the sale of spot commodities such as groundnut oil and cotton seed oil. Learned counsel said that it would be artificial to separate all these transactions and string them together as though, by doing so, they can be regarded as forming an integral part of a separate speculation business in themselves. We are unable to accept this argument on the basis of the relevant provisions of the Act. Section 43(5) of the Act carries a definition of speculative transaction . It is, however, not necessary to go into this definition, because Mr. Subramaniam does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. This was more or less the approach made by the Division Bench of this court, to which one of us a party, in R. Chinnaswami Chettiar v. CIT [1974] 96 ITR 353. In that case, an assessee was carrying on regular business as a dealer in spot yarn. During the particular accounting year in question in that reference, the assessee had also indulged in four forward transactions in yarn, all of which he settled, not by actual delivery, but by settlement or otherwise. The assessee questioned the finding of the ITO that these were speculative transactions. The assessee further submitted that even if these transactions were speculative transactions, they could not be regarded as constituting a separate speculative business. The Division Bench which heard the reference held that the transactions were in the nature of speculative transactions. They further held that having regard to the nature of the assessee's business as a dealer in yarn and having regard to the fact that the forward transactions were also entered into in the same commodity, namely, yarn, the transactions cannot be regarded as isolated transactions in the sense that they were totally unconnected with the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a regular business as well as a forward business in the same commodity, the conclusion is easily arrived at by the simple expedient of applying Expln. 2 to s. 28 of the Act. In the present case, the AAC was at pains to point out that these speculative transactions indulged in by the assessee were very much a part and parcel of the assessee's regular business. This finding renders impossible any escape from Expln. 2 to s. 28. The AAC failed to realize the legal effect of his own factual finding in terms of the statutory provisions. For all the above reasons, we answer both the questions in T. C. Nos. 734 to 739 of 1976, in the affirmative and against the assessee. The two questions referred to us in T. C. No. 481 of 1976 are as follows : Whether, on the facts and in the circumstances of the case, the revenue derived from the agricultural land of the assessee from its irrigation well is not agricultural income ? 2. Whether, on the facts and in the circumstances of the case, the transactions of the applicant are speculative transactions and that in any event the transactions are not within the exception under section 43(5) of the Income-tax Act, 1961 ? The firs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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