TMI Blog1983 (8) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred the following losses which, according to the assessee, partook the nature of hedging losses, and the assessee claimed that it was entitled to deduct the same from its business profits Rs. A. Lahi sarson vaida-net loss 2,35,882 B. Moongphali vaida-loss 13,605 -------- Total 2,49,487 -------- The ITO disallowed the claim of the assessee. In appeal, the AAC agreed with the reasons given by the ITO. He observed: "Whatever may be the position in the commercial world, it seems to me from a reading of s. 43(5)(a) that in the case of a manufacturer only forward purchase contracts in raw material against contracts to make actual supply of manufactured goods are hedging transactions." The appellant's attempt to extend the definition to forward sale contracts in raw materials is not justified by the wordings in the section and upheld the order passed by the ITO. In second appeal, the Income-tax Appellate Tribunal came to the conclusion that the assessee had suffered the loss in question as a result of certain forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Tribunal indicates that so far as the second question is concerned, the main difference between the assessee and the Department was in respect of the interpretation of the provisions contained in s. 43(5) of the Act. Whereas according to the assessee, in the case of manufacture, contracts both for sale and purchase of raw materials if entered into with a view to safeguard the future price fluctuation in respect of contracts for actual delivery of goods manufactured by it are taken out of the ambit of speculative transaction as defined by s. 43(5) of the Act, the case of the Department is that it is only such contracts for purchase made by the assessee that qualify for not being treated as speculative transactions. Section 43(5) provides that speculative transaction means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares, is periodically and ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Clause (a), however, provides that the transaction of the nature mentioned above will not be deemed to be speculative transaction if the contract in respect of raw materials or merchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y mean that future price fluctuation in respect of the manufactured product must correspond to price fluctuation in respect of the raw material. There can be cases where even while the price of raw materials falls, the price of the manufactured goods contracted to be delivered may go up resulting in loss to the manufacturer. In such a case, the loss that is likely to be occasioned to a manufacturer in respect of price fluctuation of the goods contracted to be delivered can be safeguarded by entering into hedging contract by way of sale of the raw materials. In our opinion, there exists no valid reason for, in the case of a manufacturer, excluding from the ambit of hedging contracts contemplated by s. 43(5)(a), hedging contracts in respect of raw materials that are entered into by way of sale and confining the same to hedging contracts by way of purchases of such raw materials alone. It will depend upon the facts of each case whether a particular transaction by way of forward sale, which is mutually settled otherwise than by actual delivery of the said goods, has been entered into with view to safeguard against loss through price fluctuation in respect of the contract for actual del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In our opinion, such an assumption is not justified. As already indicated by us, there can be cases where while the price fluctuation of manufactured goods may be having an upward trend, the price of raw materials may have a downward trend and in such cases one can enter into forward contracts for sale of raw materials to cover up a possible loss that the manufacturer may suffer in respect of his contract for actual delivery of manufactured goods by reason of the price of such goods going up in the meantime. In CIT v. SK. AR. K. AR. Somasundaram Chettiar Co. [1975] 101 ITR 832, the Madras High Court was required to consider the question as to whether in the case of a trader, a loss on account of price fluctuation in respect of a contract for actual delivery of merchandise could be safeguarded by entering into a hedging contract by way of sale of merchandise. It came to the conclusion that since contracts for delivery of merchandise are necessarily contracts for sale, the corresponding hedging contracts in respect of such merchandise must necessarily be by way of purchases. Again, the underlying assumption being that loss suffered on account of fluctuation in the price of good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the proviso is concerned. The ultimate conclusion that the hedging contract could only be for purchase and not for sale, it appears, has been derived from the last part of this clause where it is stated 'merchandise sold by him'. And because the phrase uses the words 'sold by him' it is understood to mean that the contract for actual delivery of goods which could be protected could only be a contract of sale and not of purchase. In fact, it appears that because the manufacturer and merchant both have been put together, what ordinarily happens with a manufacturer has been considered and the sale has been made applicable to the case of a merchant although, with respect to the decisions quoted above, in our opinion, it does not appear to be the true interpretation of this clause of the proviso. In fact the term 'goods' has been qualified by two phrases. In the case of a manufacturer the phrase used is 'manufactured by him' and in the case of merchant the phrase used is ' merchandise sold by him '. And this clearly goes to show that these two phrases qualify the term 'goods' about which there is a contract for actual delivery. And if this contract for actual delivery is for sale, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts for sale of goods or of raw materials. We are accordingly of opinion that none of the aforementioned three cases, cited by the learned counsel appearing for the Revenue, are helpful to him. In the case of Kirtilal Jaisinglal Co. v. CIT [1980] 121 ITR 279 (Bom), while dealing with a similar question a Bench of the Bombay High Court referred to Circular No. 23 (XXXIX-4)-D of 1960, issued by the CBR which stated that the intention of cl. (a) of the proviso to Expln. 2 to s. 24(1) of the Indian I.T. Act, 1922, has always been that where bona fide forward sales are entered into with a view to guarding against the risk of raw materials or merchandise in stock falling in value, the loss arising as a result of such forward sale should not be treated as a speculation loss. Further, that hedging sales can be taken to be genuine only to the extent the total of such transactions does not exceed the total stocks of raw materials or merchandise in hand. If the forward sales exceed the ready stock, the loss arising from the excess transactions should be treated as loss arising from speculative transactions and not from genuine hedging transactions. It held that that the circular was bin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contracts were for delivery of raw materials or goods produced. There is bound to be some time lag in the production of the goods and during that period prices may fall and in order to safeguard against the same, the assessee deals in forward sale of raw materials... " Again in para. 16 (p. 66 of the paper book) of its order, the Tribunal went on to observe thus, " The proviso provides for certain exceptions and one of them, with which we are concerned in this appeal is a contract in respect of raw materials entered into by a person in the course of his manufacturing business to guard against Loss through future price fluctuations in respect of its contract for actual delivery of goods manufactured by him, ...... .." These observations go to indicate that the Tribunal accepted the assessee's case that the concerned contracts claimed to be hedging contracts in respect of raw materials had been entered into with a view to guard against future price fluctuation of the manufactured goods contracted to be sold by him. The Commissioner, in the statement of case in respect of the two questions of law for the opinion of this court, stated thus: " ...the Tribunal has allowed the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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