TMI Blog1980 (11) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... amine the facts found by the Tribunal and also the reasonings of the Tribunal. There, the Tribunal was concerned with the loss of Rs. 8,54,063. We may incidentally point out that the reference for the same year is in the list. We have heard the reference and shall dispose of it today after this judgment. The Tribunal has noted that the assessee is a company and it has also noted the relevant assessment year. Its business consisted of the manufacture and sale of jute goods. This fact is important. By this finding the Tribunal makes it quite clear that the assessee was carrying on two types of businesses, viz., as dealer in merchandise of jute goods as well as a manufacturer of jute goods. The amounts in question, according to the ITO, were represented to be the loss from speculative transaction within the meaning of Expln. 2 to s. 28, s. 43(5) and s. 73 of the I.T. Act, 1961. But, for the assessment year 1961-62, some of the losses were claimed within the meaning of Expln. 2 to s. 24(1) of the Indian I.T. Act, 1922. As we shall presently note, the position is identical in both the Acts. The ITO was of the view that the transaction had been ultimately settled by means other than ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. Act, 1922, or prov. (a) to s. 43(5) of the I.T. Act, 1961, that the settlement of these transactions was necessary and incidental to the very carrying on of the assessee's business in the overseas supplies resulting in more profits even after setting off the loss consequent upon the settling of the contract of sale with the Indian buyers. The Tribunal thus held that the net result was admittedly a hedging profit and not a speculative loss. In that view of the matter, the Tribunal allowed these losses. The question is the propriety of this view expressed by the Tribunal. On behalf of the revenue, it was contended that the intention of the parties, as such, was not relevant. It was further submitted that the overt act of the party or the conduct of the party where there was no delivery of the goods is the most important factor in deciding the issue. On behalf of the revenue it was also urged that the contracts in question formed part of an integrated transaction was also not quite relevant. Similarly, it was urged that the finding of the Tribunal that the settlement of these transactions was incidental and necessary for carrying out the business was also relevant and it was fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; shall not be deemed to be a speculative transaction. The position which was there in s. 24, read with that Explanation, has been modified by several sections in the new Act. We must first refer to Expln. 2 to s. 28 of the I.T. Act, 1961, which provides for profits and gains of business or profession : " Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as 'speculation business') shall be deemed to be distinct and separate from any other business. " Section 43(5) of the new Act is important ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts were bad (sic); (c) that the company had got overseas orders for supply of special quality of goods where the margin of profit would be higher. The Tribunal found that the assessee had all along the intention to supply the goods as per sale contracts but considering that if it could manufacture special quality of goods to execute overseas orders it could earn better profits and the assessee switched over to the manufacture of special quality of goods and settled forward contracts with the Indian buyers. The Tribunal found that the settlement of these transactions was necessary and incidental to the very carrying on of the assessee's business of overseas supplies resulting in more profits even after setting off the loss consequent upon the settling of the contract of sale with the Indian buyers. The Tribunal in those circumstances came to the conclusion that these were hedging contracts. As we have said before, there is no question challenging that finding of the Tribunal. In this connection, reliance was placed on several decisions which we shall presently note. Reliance was first placed on a decision of the Andhra Pradesh High Court in the case of Omkarmal Agarwal v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for selling the goods to the Indian buyers and there were also contracts for buying back these contracts in order to guard against loss. So to facilitate the earning of higher profits by the assessee for the special quality of the goods the existing contract is breached. Therefore, the ratio of the decision of the Andhra Pradesh High Court would not apply to the facts found, in the instant case, by the Tribunal. On the meaning of the expression what is " a hedging contract ", our attention was drawn to a decision of the Allahabad High Court in the case of Raghunathdas Prahladdas v. CIT [1976] 104 ITR 95. There the Division Bench held that cl. (a) of the proviso to s. 43(5) of the I.T. Act, 1961, did not safeguard a loss in the value of goods or merchandise in stock; but it contemplated the loss likely to be suffered in respect of a particular contract. The clause applied only if the following circumstances existed: (1) there was a contract for actual delivery of goods manufactured by the assessee or merchandise sold by it; (2) the assessee must by a subsequent transaction intend to guard against losses through future price fluctuations in respect of such contract; and (3) the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the supply of special quality of goods, then the assessee had an option either to pay the damages or to forgo the earning of larger profits by delivery of goods or to buy back the contract in order to safeguard itself. This is precisely what the assessee did. Our attention was drawn to the decision of the Calcutta High Court in the case of Abdul Gani Haji Habib v. CIT [1969] 72 ITR 6, where the Division Bench held that the transactions were settled by payment of difference. Here, the transactions entered into, were not settlement by payment of any difference. The Division Bench further held that the proviso to s. 24 did not contemplate that the speculative transactions should form a separate unit. We are not concerned with this aspect of this argument. Reliance was placed on the decision in the case of Pankaj Oil Mills v. CIT [1978] 115 ITR 824 (FB), where the Gujarat High Court took into consideration the circular that was issued by the Central Board of Revenue being Circular No. 4(124)-60 TPL of September 12, 1960. There the assessee was carrying on business of manufacturing oil. In the previous year relevant to the assessment year 1965-66, the assessee entered into cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey were within a reasonable time not exceeding generally the assessment year. In order to be genuine and valid, the total of such transactions of hedging contracts of sales should not exceed the total stocks of raw materials or the Merchandise on hand which will include existing stocks as well as the stocks acquired under the firm's contracts of purchases. The decision of the Gujarat High Court in Chimanlal Chhotalal [1968] 69 ITR 129 (Guj) was overruled. The assessee was not entitled to the set-off. Reliance was placed on the following observations of the Full Bench in Pankaj Oil Mills' case [1978] 115 ITR 824 (Guj) appearing at pp. 829 and 830 and reliance was also placed on the meaning of the expression " Hedge " from the book Regulation of Forward Markets, at p. 9, by a well-known Economist, W.R.Natu. There it was observed: "The hedge contract is so called because it enables the person dealing with the actual commodity to hedge themselves, i.e., to insure themselves against adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction in the forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s export commitment, and as and when he buys ready castor oil he would liquidate his purchase position in the forward market. If between the time he concluded the export deal and the actual purchase of ready oil, the price of castor oil had advanced, he would incur a loss in his dealings in the ready commodity for export, but as the forward price of castor seed Also would have gone up during the time, he would realise a corresponding profit in his dealings on the forward market. Thus, by resorting to counterbalancing transactions in the market for the ready commodity on the one hand and in the hedge market on the other hand, the hedger seeks to safeguard his position. The movement of prices in the two markets may not always follow an identical course and the hedger might at times gain and at times lose but such a gain or loss would be marginal and far less than what it would be if the person had not hedged at all. While, however, the hedging operation protects the hedger against loss arising from adverse fluctuations in prices, it also prevents him from making windfall profit owing to favourable fluctuations in prices as well. The forgoing of such a possible windfall profit is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of M. R. Dhawan v. CIT [1979] 119 ITR 412. There, the facts upon which the Delhi High Court proceeded were entirely different. So far as the principle of law laid down by the Delhi High Court is concerned, we are in respectful agreement. Our attention was drawn to several decisions of the Supreme Court, namely, the decisions of the Supreme Court in Nirmal Trading Co. and Jute Investment Co. Ltd. In the case of Nirmal Trading Co. v. CIT [1980] 121 ITR 54 (SC) the assessee, who was a dealer in paper, hessian and B-Twill, entered into several transactions of sale and purchase with different parties. The transactions were settled by handing over delivery orders and payment by cheque. There was no evidence that actual delivery of the goods was ever effected. There the facts were entirely different. The Supreme Court was of the view that actual delivery was necessary. Similar is the ratio of the principle in the decision by the Supreme Court in the case of lute Investment Co. Ltd. v. CIT [1980] 121 ITR 56. Reliance was also placed on the decision of the Bombay High Court in the case of Seksaria Riswan Sugar Factory Ltd. v. CIT [1980] 121 ITR 196, where the High Court e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 465. It may be pointed out that in Thakurlal Shivprakash Poddar v. CIT [1979] 116 ITR 190 (MP), a view has been taken which may help the assessee. However, in our opinion, the said decision, where Sohani J. agreed with Oza J., on a difference of opinion between Kondiah J. and Oza J., runs counter to our reading of Davenport Co.'s case [1975] 100 ITR 715 (SC) and we have expressly so held in our judgment in Seksaria Riswan Sugar Factory Ltd. v. CIT(Income-tax Reference No. III of 1970 decided on 5-2-1979) [1980] 121 ITR 196. Applying the principles laid down clearly by the Supreme 'Court in Davenport Co.'s case [1975] 100 ITR 715, the contentions advanced on behalf of the assessee cannot be accepted and the transactions, where delivery is not effected but differences paid, will have to be regarded as speculative transactions in view of the language employed in Expln. 2 to s. 24(1). If that be so, the ITO, the AAC and the Tribunal were all right in holding that the loss suffered by the assessee in such transactions could not be set off against its other income but would be required to be considered separately as is provided by section 24(1)." As we have mentioned before, in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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