TMI Blog1991 (6) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... 1962-63, the commission account of Harsukhlal and Brothers showed net receipts of Rs. 3,06,086. The assessee-firm claimed deduction of Rs. 27,035, on the ground that the amount due from the firm of Tataram Ramjilal had become a bad debt. It is this claim for deduction of Rs. 27,035 which is the subject-matter of this reference. The facts relevant to this claim for deduction are as follows : The firm of Tataram Ramjilal had entered into a forward contract for purchase of 8,000 tins of ground-nut oil through the assessee-firm. The market price of ground-nut oil was falling and, therefore, the assessee-firm "tried to cover transactions in order to reduce its losses" It drew hundis in favour of the firm of Tataram Ramjilal, but the hundis were dishonoured. The assessee-firm thereupon settled the transaction by selling 8,000 tins of ground-nut oil to avoid further loss. There is no dispute that there was no actual delivery of 8,000 tins of ground-nut oil. The assessee-firm, as a result of the said transaction, had to suffer a loss of Rs. 27,055, which it claimed from the firm of Tataram Ramjilal. The firm of Tataram Ramjilal, however, did not pay the said amount as claimed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Rs. 27,035 could be carried forward as held by the Appellate Assistant Commissioner, it had to be established that such loss arose from the same business carried on by the assessee-firm. The Appellate Assistant Commissioner had, however, not reached such a conclusion. In this connection, reliance was placed on the decision of the Supreme Court in CIT v. S. C. Kothari [1971] 82 ITR 794. The Tribunal found that the Appellate Assistant Commissioner had not considered whether the transactions in respect of which loss was claimed were from the same business of the assessee-firm. The Tribunal held that the Appellate Assistant Commissioner had also not considered the claim of the assessee-firm that it had claimed deduction of Rs. 27,035 as a bad debt and that such claim arose in the assessee-firm's business as commission agent. In this view of the matter, the Tribunal set aside the order of the Appellate Assistant Commissioner and directed him to consider the contentions raised by the Revenue and the assessee and render his decision in accordance with law, keeping in view the decision of the Supreme Court in S. C. Kothari's case [1971] 82 ITR 794, if it was applicable to the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated to the assessee-firm's business and, therefore, the loss claimed by it was an allowable one. In reaching this conclusion, the Tribunal placed reliance on the decision of the Andhra Pradesh High Court in Badrinarayan Balakishan v. CIT [1968] 69 ITR 323. In the result, the Tribunal allowed the appeal of the assessee-firm, holding that it was entitled to claim deduction of the loss of Rs. 27,085. The Revenue, being aggrieved by the order of the Tribunal, sought reference and the Tribunal has referred to us, for our opinion, the following questions under section 256(1) of the Act : "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee was entitled to claim deduction of the loss of Rs. 27,035 ? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in coming to the conclusion that the transaction in question related to the assessee's business and the loss of Rs. 27,035 was an allowable deduction against the business income of the assessee ? (3) Whether the Appellate Tribunal was right in law in holding that, in order to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-firm had entered into a forward contract for purchase of 8,000 tins of ground-nut oil on behalf of the firm of Tataram Ramjilal. The price of ground-nut oil was going down and, in order to reduce the losses and to cover the transactions, it drew hundis in favour of the firm of Tataram Ramjilal. These hundis were dishonoured. The assessee-firm, therefore, to avoid further loss, settled the transactions by selling 8,000 tins of oil for which it had entered into a forward contract. Admittedly, there was no delivery of 8,000 tins of oil. It was as a result of the said transaction that the assessee-firm suffered loss of Rs. 27,035. The assessee-firm sought to recover this amount from the firm of Tataram Ramjilal by filing a civil suit in the civil court. The civil court, however, dismissed the suit holding that the assessee-firm settled this transaction without any authority from the firm of Tataram Ramjilal and that the transaction was illegal inasmuch as it was in violation of the provisions of the Saurashtra Ground-nut and Ground-nut Products (Forward Contracts Prohibition) Order, 1949. Since the competent court has held that the assessee-firm is not entitled to recover the said am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by it is in an illegal transaction, it is entitled to claim deduction of the loss while computing its profits for the purpose of working out income chargeable to tax under section 28(i) of the Act. This submission cannot be upheld in view of the decision of the Supreme Court in S. C. Kothari's case [1971] 82 ITR 794. The decision of the Supreme Court in S. C. Kothari's case [1971] 82 ITR 794, was rendered in the context of the Indian Income-tax Act of 1922 ("the Act of 1922" for short). This decision would be applicable even in the case of a claim in respect of speculative losses under the Income-tax Act, 1961. The scheme of set off of speculative losses contained in section 24(1) of the Act of 1922 is retained in the Act and the corresponding provisions which have a bearing in this reference are almost the same. Section 28(i) of the Act corresponds to section 10(1) of the Act of 1922, whereas section 43(5) of the Act corresponds to section 24(1) of the Act of 1922. In S. C. Kothari's case [1971] 82 ITR 794 before the Supreme Court, during the assessment year 1958-59, the assessee, S. C. Kothari, entered, inter alia, into two classes of contracts in ground-nut oil, ground-nut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g from other speculative transactions by reason of the first proviso to section 24(1). The Tribunal agreed with this finding and permitted set off of the loss only in respect of the profits in speculative business and disallowed the claim of set off of the balance of loss against the other income of the assessee. On a reference sought by both the assessee and the Revenue, four questions were referred to this court for its opinion. At the instance of the Revenue, the following two questions were referred to this court (at p. 797 of 82 ITR) : "(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 ?" The Tribunal also referred, at the instance of the assessee, the following two questions, as questions Nos. 3 and 4, for the opinion of this court (at p. 798 of 82 ITR): "(3) Whether, on the facts and in the ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mphasis supplied). The Division Bench, therefore, addressed itself to the material question as to what is the profit against which the loss of Rs. 3,40,443 could be set off. According to the Division Bench, having regard to the decision of the Bombay High Court in Keshavlal Premchand v. CIT [1957] 31 ITR 7 and the decision of this court in CIT v. Kantilal Nathuchand [1964] 53 ITR 420, if there is a loss in speculative transactions, it can be set off on against the profit from other business consisting of speculative transactions under the proviso to section 24(1) and it cannot be set off against other business income of the assessee. In that view of the matter, the Division Bench answered the respective questions as under (at p. 31 of 69 ITR) : "Question No. 1 : It is not necessary to decide whether the contracts in respect of which the loss of Rs. 3,40,443 was claimed were illegal contracts but they were entered into in contravention of the provisions of section 15(4) of the Forward Contracts (Regulation) Act, 1952, and were, therefore, not validly entered into in accordance with those provisions. Question No. 2 : Even though the said contracts were not validly entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 10(1), the losses which have actually been incurred in carrying on a particular business must be deducted before the true figure relating to the profits which have to be brought to tax can be computed or determined. The Supreme Court, thereafter, said that, in order to claim the set-off, the meaning of 'speculative transaction' has to be first looked into, and it found that under, Explanation 2, a speculative transaction means a transaction in which a contract for purchase and sale of any commodity is periodically or ultimately settled otherwise than by actual delivery. Since the contract has necessarily to be an enforceable contract and not an unenforceable one by reason of any taint of illegality resulting in its invalidity and as the court has also found that the contracts in question were illegal and unenforceable on account of contravention of section 15(4) of the Act, in the opinion of the Supreme Court, this court was in error in considering that any set off could be allowed in that case under the first proviso to section 24(1), which, according to the Supreme Court, was always to be read with Explanation 2. The Supreme Court was of the view that though the assessee was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter in appeal before the Appellate Assistant Commissioner who, by his order of November 18, 1967, held that, though the loss incurred in the forward transactions was speculative loss, the assessee was entitled to set off this loss against the speculative profits in view of the decision of this court in CIT v. S. C. Kothari [1968] 69 ITR 1. The Income-tax Officer, therefore, carried the matter in appeal before the Tribunal. The Tribunal found that there were no findings made by the lower authorities that the transaction which resulted in loss, did not relate to the same business carried on by the assessee. It also noted the nature of the business of the assessee which was to manufacture and deal in ground-nut oil and oil cakes. Having regard to the fact that all the transactions were to be found from the same books of account of the assessee, it appeared to the Tribunal prima facie that the transactions in question related to the same business as was carried on by the assessee. The Tribunal also noted that the income-tax department had not been able to establish whether the two businesses were distinct. In that view of the matter, the Tribunal, relying upon the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsequent years. On behalf of the assessee, on the other hand, it was urged that the Tribunal had rightly applied the ratio of the decision of the Supreme Court which has succinctly laid down that the question of set off of illegal speculative losses was to be examined from the angle of the provisions contained in section 24 and section 10 of the Act of 1922, and the assessee was not deprived of its rights to claim set off of illegal losses against its other business income while computing its profits and gains under section 10(1) merely because it was not entitled to set it off against profits of legal speculative business under the proviso to section 24(1) because it was the real income in the ultimate analysis which is to be brought to tax. This court, after referring to the decision of the Supreme Court in S. C. Kothari's case [1971] 82 ITR 794, observed that the Tribunal, in the three references before this court, had read the decision of the Supreme Court as laying down the broad proposition that, if forward contracts in which losses have been incurred by the assessee are illegal contracts, the assessee would not be entitled to claim illegal speculative loss under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, however, felt that it is in the ultimate analysis that the real income which is to be brought to tax and, therefore, if the illegal transaction in which losses arise are part and parcel of the same business in which profits have arisen in legal and valid contracts, the assessee is entitled to claim deduction of such loss notwithstanding its illegality. This court observed that it would not be correct to read the judgment of the Supreme Court in S. C. Kothari's case [1971] 82 ITR 794 as laying down a principle that illegal losses can be set off against other business income. It was observed that to read such a broad proposition in the judgment would result in upsetting all the known and settled legal principles and it would introduce certain new concepts which are irrelevant and alien to the income-tax law. This court, therefore, held that the assessee was not entitled to set off loss in respect of illegal speculative transactions against other income of the assessee. It becomes clear that, so far as speculative transactions are concerned, section 28(i) of the Act corresponding to section 10(1) of the Act of 1922 would not come into play for setting off of loss in computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be any question of carrying forward of such loss, as held by the Supreme Court in CIT v. Kurji Jinabhai Kotecha [1977] 107 ITR 101, We, however, find that the Tribunal proceeded to allow the claim of loss of Rs. 27,035 claimed by the assessee-firm on the ground that it related to the assessee-firm's business and, therefore, it was allowable. In view of the finding of facts adverted to above and the decision of the Supreme Court in the case of S. C. Kothari [1971] 82 ITR 794, such a conclusion could not have been reached. What was required to be considered was whether the loss of Rs. 27,035, which the assessee had suffered in an illegal speculative business could be set off against the profits and gains of the same business, i.e., illegal speculative business. This aspect of the case has not been considered at all by the Tribunal. In other words, it has not applied its mind to the question whether the loss of Rs. 27,035, which the assessee-firm had suffered in the illegal speculative transaction could be set off against profits and gains of the same business, i.e., illegal speculative business. It appears that the Tribunal had earlier considered the above question and it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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