TMI Blog1971 (10) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the assessment year 1958-59 the corresponding accounting period being the Samvat year 2013, the assessee claimed to have incurred a loss of Rs. 3,40,443 in certain transactions entered into with different people for the supply of groundnut oil. The transactions, according to the assessee, were non-transferable ready delivery contracts entered into with non-members of the Association. It was expected that these contracts could be performed but owing to certain reasons some of the contracts could not be performed and the differences had to be paid. According to the assessee it had acted as a pucca artia. The assessee claimed that the aforesaid loss was allowable under section 10(1) of the Income-tax Act, 1922, as a deduction against its other business income. The Income-tax Officer came to the conclusion that the transactions in question were hit by the provisions of the Forward Contracts Regulation Act, 1952, hereinafter called the "Act", and the Rules and Regulations of the Saurashtra Oil and Oilseeds Association Ltd. In particular the transactions were hit by the provisions of sub-sections (1) and (4) of section 15 of the Act and were not saved by section 18. The losses were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et off the loss against the profits in speculative transactions and to that extent the contention. of the assessee was accepted. Both the assessee and the Commissioner of Income-tax moved the Tribunal for submitting a case and referring certain questions of law to the High Court. Thus in all the following four questions were referred by the Tribunal : " (1) Whether, on the facts and in the circumstances of the case, the contracts in respect of which the loss of Rs. 3,40,443 was claimed were illegal contracts and were not validly entered into under the Forward Contracts (Regulation) Act, 1952 ? (2) Whether even assuming that the transactions in which the loss of Rs. 3,40,443 was incurred were illegal transactions, the assessee would be entitled to the set off of the said loss ? (3) Whether, on the facts and in the circumstances of the case, the transactions resulting in a loss of Rs. 3,40,443 were speculative transactions for the purpose of section 24 of the Indian Income-tax Act, 1922, merely on the ground that the assessee had not performed the contracts by giving delivery and had paid damages in settlement of the obligations contracted for ? (4) Whether, on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deals with consideration or object of an agreement which is forbidden by law. Such consideration or object would be unlawful according to the provisions of that section and the agreement would consequently be void. The High Court did not decide the point whether the contracts which contravened the provisions of section 15(4) of the Act were illegal. It did not consider it material to decide whether the impugned contracts were illegal. In its opinion what was material was that the impugned contracts had been entered into unlawfully and the question was whether the loss sustained in the unlawful business could be taken into account in computing the business income of the assessee. We consider that the first question which was referred to the High Court stands concluded by the law laid down by this court in Sunder Lal Son v. Bharat Handicrafts P. Ltd. It was laid down that the prohibition imposed by section 15(4) of the Act was not imposed in the interest of revenue. That provision was conceived in the larger interest of the public to protect them against the malpractices indulged in by members of recognised associations in respect of transactions in which their duties as agents cam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee." The High Court was not inclined to accede to the submission on behalf of the revenue that the same principle would be applicable as has been applied in certain cases in which the question which came up for determination was whether an expenditure incurred on an illegal activity would be deductible under section 10(2)(xv) of the Act of 1922. One of such cases is a decision of the Punjab High Court in Raj Woollen Industries v. Commissioner of Income-tax. In that case the real question was whether a certain amount which was paid to achieve what was prohibited by law, viz., the export of wool without having the requisite export licence, was an amount which the assessee was entitled to deduct under section 10(2)(xv) of the Act of 1922. It was held that according to principle and authority such deduction could not be claimed. It was also observed that such a deduction could not be permissible even under section 10(1). The following observations may be referred to : " Profits had to be ascertained according to the accepted principles of commercial accountancy and if section 10(2)(xv) did not permit deduction of an item of expenditure which was laid out or e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible deductions under section 10(2) are concerned they cannot be claimed by the assessee if such expenses have been incurred in either payment of a penalty for infraction of law or the execution of some illegal activity. This, however, is based on the principle that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of the trade cannot be described as such. Penalties which are incurred for infraction of the law are not a normal incident of business and they fall on the assessee in some character other than that of a trader ; (See Haji Aziz Abdul Shakoor Bros. v. Commissioner of Income-tax). In that case this court said quite clearly that a disbursement is deductible only if it falls within section 10(2)(xv) of the Act of 1922, and a penalty cannot be regarded as an expenditure wholly and exclusively laid for the purpose of the business. Moreover, disbursement or expenses of a trader is something "which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which comes upon him ab extra " (Finlay J. in Allen v. Farquharson Brothers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for in that event the loss of Rs. 3,40,443 would be liable to be taken into account in determining the profits from such business under section 10." Section 24, to the extent it is material for our purposes, is set out below : " 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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