TMI Blog1968 (6) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 1,50,217 in the jute and hessian account which the assessee claimed as its loss from the business in jute and hessian. Before the Income-tax Officer the assessee contended that the loss was a business loss as the actual delivery of goods was taken and given by the transfer of " P. D. Os. " The Income-tax Officer found that the assessee did not maintain any godown and there was no actual delivery of goods in any case. In the absence of physical delivery the Income-tax Officer held that the loss of Rs. 1,50,247 was a speculative loss and allowed it to be carried forward to be set off against future speculation profits under section 24(1) of the Income-tax Act, 1922. Before the Appellate Assistant Commissioner the assessee contended, inter alia, that the delivery of P.D.Os. amounted to actual delivery of the goods. In the alternative, the assessee dealt in P.D.Os. themselves as if these P.D.Os. were like share certificates or any other commodity having an intrinsic value. In other words, the contention was that the assessee dealt in the purchases and sales of P.D.Os. It was stated that each P.D.O. was purchased after payment by cash or by cheque and each P.D.O. was sold and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention that the P.D.O. would become a valuable document by itself. He was of the view that a person might be called a trader or a dealer in the goods represented by the P.D.O. or the railway receipt ; but there could not be a trade or dealing in the P.D.Os. or the railway receipts taken by themselves. The Income-tax Officer said that under Explanation 2 to section 24(1) physical delivery of the goods was necessary for taking a transaction out of the definition of "speculative transaction ". Accordingly, he held that the loss of Rs. 1,50,217 was a speculation loss and had nothing to do with the assessee's business as such. The assessee preferred an appeal against this order of the Income-tax Officer. Before the Appellate Assistant Commissioner (who succeeded the Appellate Assistant Commissioner who made the first order, i.e., the order of remand) the assessee contended that the Income-tax Officer did not appeal against the first order of remand. In the premises, the decision of the (first) Appellate Assistant Commissioner that if the facts stated by the assessee were found to be correct then the assessee could be held to be a dealer in the purchases and sales of P.D.Os. had bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidance to the Income-tax Officer to be followed while reframing the assessment; but these observations were mere obiter and, since the assessment had been set aside, the whole matter concerning the nature of the loss of Rs. 1, 50,217 was left open to be reconsidered by the Income-tax Officer. The Tribunal said that on reconsideration the Income-tax Officer once again held that the loss was a loss in speculative transaction and thereafter the (second) Appellate Assistant Commissioner gave the final finding that such a loss was a business loss and had to be set off against the income of the assessee from sources other than speculation. The Tribunal held that it was only after this second order that the department could have a grievance and could appeal against the decision. The previous judgment, says the Tribunal, of the (first) Appellate Assistant Commissioner merely incorporated an observation and not a decision on the issue. On the merits the Tribunal followed the judgment of this court in D. M. Wadhwana v. Commissioner of Income-tax, and held that the Appellate Assistant Commissioner had erred in holding that the loss suffered in transactions in which the delivery of P.D.Os. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n quoted. It appears that the assessee's first contention before the Appellate Assistant Commissioner was that the delivery of P.D.Os. amounted to actual delivery of goods. The Appellate Assistant Commissioner did not reach any final conclusions on this contention. There was an alternative contention of the assessee, namely, that the assessee dealt in the P.D.Os. themselves as if the P.D.Os. were like share certificates or any other commodity having an intrinsic value. In other words, the assessee was a dealer in the purchase and sale of P.D.Os. The assessee's statement before the Appellate Assistant Commissioner was that each P.D.O. was purchased after payment by cash or by cheque and each P.D.O. was sold and delivered after actual receipt of cash or cheque. The Appellate Assistant Commissioner found no prohibition or restriction to such transactions. But since the Income-tax Officer had not considered this aspect of the case, he made an order of remand. His direction to the Income-tax Officer was to make a reassessment after looking into the assessee's account " with referenee to the view of business dealings discussed " in his order of remand. In the concluding paragraph of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e carries on business in jute and hessian, (b) in that business of jute and hessian P. D. Os. are given and taken and (c) P. D. Os are given and taken against payment in cash or cheque. On these findings the Appellate Assistant Commissioner has come to the conclusion that the transactions in questions were not speculative transactions. The Commissioner was aggrieved by the order and went to the Tribunal by way of appeal. In these circumstances, the appeal could not be held to be incompetent. In other words, the appeal to the Tribunal was maintainable, on the facts of this case, whether or not there were findings about dealings in P. D. Os. in the first order of the Appellate Assistant Commissioner. We now proceed to consider the second question in this reference. From the first order of the Income-tax Officer we find that the assessee had returned a gross loss of Rs. 1,50,217 " under jute hessian account (vide page 8 of the paper book). At page 9 the Income-tax Officer says : " The assessee-company claimed that the loss under jute hessian account was their business loss, as actual delivery of goods was taken by them. The assessee-company did not maintain any godown and on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inter alia : " Taken by itself the railway receipt is without worth. The same is the case with the P. D. O. By itself the P. D. O. has no value. It is just a scrap of paper. A person may be called a trader or a dealer in the goods represented by the P. D. O. or the railway receipt. But, obviously, there cannot be a trade or dealing in the P.D.O. or R.R. taken by itself. If they do not represent any tangible goods they represent nothing and they cannot have any value. Further, if the assessee was a dealer in P.D.Os. what prevented it from registering itself as a dealer in the P.D.Os. with the commercial tax authorities ? A copy of the certificate of registration (for commercial tax) taken by the assessee has been..... placed in the miscellaneous file of 1955-56. This certificate..... shows that the assessee was registered for re-sale of jute products and some other goods but it was never registered as a dealer in P.D.Os." The reason why we have quoted the above portions of the Income-tax Officer's order is two-fold. Firstly,we intend to point out that the assessee was all along claiming the loss as a loss in its business of jute and hessian and, secondly, the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to have been ' settled ' otherwise than by delivery of the 'commodity ' because the holder of the P.D.O. and mate's receipts can on presentation to the mill get actual delivery of the goods. " This paragraph reveals that in certain cases the assessee entered into contracts for sale of jute and hessian on a particular date but instead of giving physical delivery of the contracted goods, the assessee performed its obligations under the contract by delivery of P.D. Os. The question is whether such transactions are hit by Explanation 2 to section 24(1). Against the background of the aforesaid findings in paragraph 5 of the order, the Appellate Assistant Commissioner in paragraph 7 of his order (at pages 22 and 23 of the paper book) has stated : " The appellant's representative finally points out that my predecessor when he set aside the original order had in fact accepted the appellant's contention on this point and that in setting aside the original order, the only matter he wanted the Income-tax Officer to verify was whether, as stated by the appellant, pucca delivery orders were transferred on immediate payment by cash or cheque of the full value of the goods, and that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips : ...... " For purposes of the instant reference the plain meaning of Explanation 2 appears to be that, if a contract for purchase and sale of any commodity is settled otherwise than by actual delivery, it would be a speculative transaction. Now, the expression used is " actual delivery. " Delivery, it is well-known, may be actual or constructive. Delivery is constructive when it is effected without any change in the actual possession of the thing delivered, as in the case of delivery by attornment or symbolic delivery. Delivery by attornments may take place in three classes of cases : first, the seller may be in possession of the goods, but after sale he may attorn to the buyer, and continue to hold the goods as his bailee ; secondly, the goods may be in the possession of the buyer before sale but after s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively to take delivery of the stipulated number of bales from the mills concerned and drew bills on each other pursuant to the contract. Debit and credit entries for the entire amount in respect of the pucca delivery orders were found in the account books and the bank pass-book of the assessee. The question was whether the net loss incurred by the assessee in these transactions could be set off against the other business income of the assessee under section 24(1) of the Income-tax Act, 1922. G.K.Mitterj.(sitting with Masud J.) held that,as the exchange of pucca delivery orders amounted only to notional and not real delivery of the goods as contemplated by Explanation 2 to section 24(1), the transactions were speculative transactions and the loss incurred by the assessee could not be set off against the other business income under section 24(1). It was held further that the word " actual " in Explanation 2 to section 24(1) meant " real " as opposed to " theoretical " or " probable ". It was also held that there was nothing in Explanation 2 to section 24(1) to show that it was intended to apply only to transactions in which there was no actual delivery of goods even at the ultimat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attention has been drawn to a judgment of A. N. Ray J. (sitting with D. Basu J.) in Commissioner of Income-tax v. Ram Chandra Gupta Co. This decision does not assist us in deciding the points under consideration in this reference. In the case before A. N. Ray J. the finding was that during the relevant previous year the assessee had entered into transactions in gunny bags entailing purchase and sale of delivery orders. The necessary consequence of that finding is that the assessee undertook not to deliver the goods but to deliver the relative delivery orders only which the assessee did. Moreover, Ray J. has said at page 260 : " In the present case there is no finding that there was any settlement of the contracts of purchase and sale and therefore one of the vital limbs of Explanation 2 to section 24(1) of the Indian Income-tax Act is not found as a fact in order to bring the transaction within the mischief of a speculative transaction. " In our case the Appellate Assistant Commissioner in his second order has found that the assessee undertook to deliver the goods but purchased delivery orders and made over these orders to its own purchasers to perform its obligations under ..... 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