TMI Blog1978 (11) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 98,091 arose from speculative transactions and could not be set off against other business income or other heads of income and that the same. was liable to be carried forward to be set off against income from speculative transactions in future years. On appeal before the AAC, it was pointed out that to the extent of Rs. 38,230 the type of losses were such that they arose from purchase of goods from one party and sale to another party, the losses arising therefrom only being debited to the trading account. It was further shown that the said loss arose in respect of some 42 transactions the AAC further found that in all these cases there was a contract for purchase of goods and the goods were actually delivered. He accordingly, held that to the extent of Rs. 38,230 the loss was a regular trading loss. In regard to the transactions resulting in a loss of Rs. 56,248, the AAC found that the goods had not been delivered. Since the assessee was neither a manufacturer nor a stockist the AAC did not accept the submission that the forward contracts for purchase or sale were hedging transactions to guard against loss through future price fluctuations. He was of the opinion that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course, till the delivery by Dewas Flour and Oil Mills and sold the ready goods on November 15, 1960, to Bhojumal and Sons, Indore, at the rate of Rs. 68.12. The effect of the contract of this sale of goods ultimately meant a profit of Rs. 4,085 in the goods account and loss of Rs. 2,187.50 in the difference account. The assessee's contention before the Tribunal was that this loss was in the nature of hedging loss. It was also explained by the assessee that if it had waited till November 15, 1960, and delivered the goods to Brijlal Pannalal, at the contract rate of Rs. 64.62, the result would have been a profit of less than Rs. 2,000 and by settling the hedging contract on October 27, 1960, the assessee had tried to gain more in its goods account. It was on these facts that the learned Tribunal accepted the contention of the assessee. The learned counsel for the department contended that in view of the language of s. 43(5), prov. (a) of the Act of 1961 only speculative transactions of purchase would be excluded from the mischief of the section as hedging contracts. But a contract for sale could not be saved within the meaning of the prov. (a) to sub-s. (5) of s. 43. And in suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section defines " speculative transaction " and what is provided as proviso to this sub-section appear to be those cases which ordinarily will fall within the ambit of the definition of " speculative transaction " but for the purpose of this sub-section they shall not be deemed to be speculative transactions. Apparently, therefore, the speculative transaction as defined in sub-s. (5) will be treated under this as speculative transaction except those which are covered under the prov. (a), (b) or (c) of this sub-section of s. 43. In the present case, we are concerned with prov. (a) which reads : " Provided that for the purposes of this clause-- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business 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 ; shall not be deemed to be a speculative transaction." Apparently, this deals with two categories of persons : (i) manufacturers ; and (ii) merchants ; and in order to understand the true implication of this sub-section, it would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceed the total stocks of raw material 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." Looking to the proviso as it stands today, the first part of it reads : " ......a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations..." Now, this part of the proviso, as it refers to a manufacturer as well-as a merchant, has used the phrase " raw materials or merchandise ". Apparently, this part refers to such transactions which are entered into to guard against loss through future price fluctuations. Admittedly, therefore, these transactions could alone be said to be hedging contracts and it could not be doubted that the word " contract " used in this part in the very beginning could not mean a contract of purchase only. It could either be a contract of purchase or sale. Even in Chimanlal Chhotalal v. CIT [1968] 69 ITR 129 (Guj), Honble Shri justice Bhagwati (Acting C.J. as he th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im " indicates that these contracts could only be for sale ; and if the contract for actual delivery of goods could only be for sale it is held that the contract to protect these contracts against losses from fluctuations of price could only be contracts of purchase, as it is observed in the judgment referred to above (p. 133) : " But such contract, under the proviso, has to be hedging contract entered into by the person concerned for the purpose of guarding himself against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him'. It is by way of hedging 'against contracts for actual delivery of goods manufactured by him or merchandise sold by him' that a person can enter into a contract in respect of raw materials or merchandise' within the meaning of the proviso. Now in the case of a person carrying on manufacturing business 'contracts for actual delivery of goods manufactured by him', would obviously be contracts of sale by such person and in respect of such forward contracts of sale he is permitted to enter into a hedging contract and the hedging contract in such a case must, therefore, nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o and apparently manufacturer is expected to purchase raw material and sell the goods manufactured by him . But in the case of a merchant it could not be doubted that the normal merchanting activity that he does is purchase of commodities and sale also. And if the proviso is read in this context the question arises as regards the qualifying clause of the word " goods " in the second part of the proviso. A person may have contracts for actual delivery of goods but in order to protect these contracts of actual delivery of goods the Legislature never intended that a hedging contract, which apparently will be a speculative contract, could be brought within the scope of this proviso if it is altogether of different goods. If the phrase " merchandise sold by him " is not read as a phrase qualifying the word " goods ", the result may be that if a merchant has entered into a contract of actual delivery of goods for sale he may enter into a hedging contract of any other merchandise although he may not be a merchant in that commodity. In fact, in this proviso so far as a manufacturer is concerned two phrases have been used, " raw material " in the first part and " goods manufactured by him " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n either by way of purchase or sale is entered into with a view to guard against any future loss in that particular line of business. The Tribunal also took the view that the words 'in respect of his contracts for actual delivery...' occurring in clause (a) ought to be given a wider interpretation, that what the proviso intended was not a specific correlation contract to contract--but a general correlation, that what it required was that the speculation should not be a general and wide one but one consistent with and incidental to the assessee's transaction in ready goods as a trader and that the transactions entered into by the assessee fell within the scope of clause (a) of the third proviso to section 24(1). But we are inclined to think that we will be doing, considerable violence to the language used in clause (a) if it is understood to cover all cases of purchases and sales entered into by an assessee with a view to guard against his future loss in general in that line of business. It is true, a correlation tract to contract may not be necessary. But the contract or contracts contemplated by clause (a) has or have to be proved to have been entered into with a view to guard aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 was " manufactured by him " and in the case of a 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, naturally a hedging contract could be for purchase. But if this contract for actual delivery happens to be one for purchase, then the hedging contract is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to us, is in the affirmative as in our opinion, the Tribunal was right in holding that a contract of sale subsequent to the contract of purchase was right terms of proviso (a) to s. 43(5) of the I.T. Act, 1961. The question follows from our answer to the first question and we answer it also in, the affirmative. In the circumstances of the case, parties are directed to bear their own costs. SOHANI J. (2-12-77).--I have had the advantage of reading the judgment prepared by my learned brother, Oza J. I regret my inabilty to agree with him. By this reference under s. 256(1) of the Iucgme-tax Act, 1961 (hereinafter referred to as " the Act ") the Income-tax Appellate Tribunal has referred the following questions to this court at the instance on the Commissioner of Income-tax, Madhya Pradesh, Bhopal. " (i) Whether, on the facts and in the circumtances of the case, the Tribunal as right in holding that a contract of sale subsequent to the contract of purchase was within the terms of proviso (a) to section 43(5) of the Income-tax Act, 1961 ? (ii) Whether, on the facts and in the circumstance of the case, the Tribunal was correct in law in holding that the sum of Rs. 56, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts for purchase or sale on the date of contracts ; Hedging loss can be allowed only if it is proved that the dealer is either a manufacturer, or a stockist and he had entered into a forward contract to safeguard against the risk of raw materials, or merchandise in stock failing in value. The purchase contracts cannot be considered as appellant's stock and therefore I reject Shri Goyal's contention that the loss of Rs. 56,248 should be allowed as hedging loss." Against the order passed by the AAC, the assessee preferred an appeal before the Tribunal. The assessee filed before the Tribunal an extract of transactions making up the loss of Rs. 56,248. The Tribunal accepted that the following transactions was typical and that the characteristics obtained in the other transactions were the same : Rs. 2,187.50 hedge loss paid to Brijlal Pannalal of Dhulia. One tank G. N. Oil sold on 2/9/60 @ 64.62 Settled on 27/10/60 @ 69 This contract of hedge was against the following contract of purchase from Dewas Flour and Oil Mill, Dewas. Date of contract 24/8/60 @ 59-75 Delivery taken on 15/11/60 Note:--This tank was sold to Bhorjumal and Sons, Chhawani, Indore 151-1-1960 @ 68.12 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " Provided that for the purpose of this clause-- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business 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 ........" From a bare reading of the aforesaid clause, it would be clear that the provisions of the said clause are attracted only if the following circumstances exist : (i) There are contracts for actual delivery of goods manufactured by the or of merchandise sold by the assessee. (ii) The assessee has by a subsequent transaction intended to guard against losses through price fluctuations in respect of contracts for actual delivery entered into by him ; and (iii) the transaction in question must be a contract entered into in respect of raw materials or merchandise in the course of the assessee's manufacturing business or merchanting business and it should have been settled otherwise than by actual delivery of goods. According to the finding recorded by the Tribunal, there was no existing contract for actual delivery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f goods can be safeguarded both by entering into contracts for purchase as also for that of sale, depending upon the facts and circumstances of each case. However, it is not necessary for us to go into this question as we have found that the transactions which are apparently speculative transactions within the meaning of section 43(5), proviso, clause (a) have not been entered into in order to safeguard loss through future price fluctuation in respect of any existing contract for actual delivery of merchandise sold by the assessee. On this point the view expressed by the Gujarat High Court is in consonance with that of the Andhra Pradesh High Court with which we respectfully agree." I respectfully agree with the aforesaid observations. The learned counsel for the assessee strenuously contended that the view of the Gujarat High Court in the decision reported in Chimanlal Chhotalal v. CIT [1968] 69 ITR 129, that cl. (a) was intended to cover only purchase contracts and not sale contracts was erroneous. It is, however, not necessary to decide that question in the instant case because, in view of the findings of the Tribunal the sale contract. entered into by the assessee was not int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot binding on this court and are only meant for the guidance of the departmental authorities, I am unable to appreciate as to how the decision of the Board 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 material on " merchandise in hand " can be pressed into service in the instant case when the facts found in the present case disclose that the assessee is not a stockist and that at the time, when it entered into hedging transactions, it was not proved that the assessee had " merchandise in hand " and that it had entered into any contract for actual delivery of merchandise sold by it. The words " actual delivery ", occurring in s. 43(5) of the Act, mean real as opposed to notional delivery, as held by the Supreme court in Davenport Co. P. Ltd. v. CIT [1975] 100 ITR 715. The Tribunal erred in law in construing the proviso in question because the Tribunal held that it was permissible to read prov. (a) after recasting it as follows : " Provided that for the purpose of this clause a contract (for purchase or sale) in respect of merchandise entered into by a person in the course of his merchanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see with a view to guard against his future loss in general in that line of business." I respectfully agree with the aforesaid observations. In my opinion, therefore, the questions referred to this court must be answered in the negative and in favour of the department. In the circumstances of this case, parties shall bear their own costs of this reference. G. P. SINGH C. J. (20-10-78)-- This reference under s. 256(1) of the I. T. Act, 1961, comes up before me on a difference of opinion between Hon. Oza J. and Hon. Sohani J. The assessee is a partnership firm carrying on business in grains, oil, commission and speculative transactions. The relevant assessment year is 1961-62, the previous year for which ended on 31st March, 1961. The income returned by the assessee was Rs. 12,811 after charging to the accounts loss, claimed to be hedging loss. amounting to Rs. 98,904. The ITO held that the entire loss of Rs. 98,691 arose from speculative transactions and could not be set off against other business income or other heads of income and that the same was liable to be carried forward to be set off against income from speculative transactions in future years. On appeal, the AAC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h are as follows : " Rs. 2,187.50 hedge loss paid to Brijlal Pannlal, Dhulia. One Tank G.N. Oil sold on 2-9-60 @ 64.62 settled on 27-10-60 @ 69. This contract of hedge was against the following contract of purchase from Dewas Flour and Oil Mills, Dewas. Date of contract-- 24-8-60 @ 59.50 Delivery taken on 15-11-60, Note:--This tank was sold to Bhorjumal and Sons, Chhawani, Indore, on 15-11-60 @ 68.12 per md. There has been a profit of Rs. 4,085 in this contract. " It will be seen that the assessee entered into forward contracts of sale for the purpose of guarding against loss in respect of forward contracts of purchase and claimed that the loss arising from such forward contracts of sale was covered by prov. (a) to s. 43(5) of the Act. This proviso reads as follows : " Provided that for the purposes of this clause-- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his, manufacturing or merchanting business 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 ;.... shall not be deemed to be a speculative tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... handise sold by him " as they occur in the last portion of the proviso. These words describe the actual delivery contracts which can be protected by hedging contracts. If these words are expanded, they will read : " in respect of his contracts for actual delivery of goods manufactured by him or in respect of his contracts for actual delivery of merchandise sold by him ". The words " merchandise sold by him " do not qualify the word " goods ". While dealing with an assessee doing merchanting business, we are only concerned in the last portion of the proviso with the words " actual delivery of merchandise sold by him " and not with the word " goods " which is to be read along with the words " manufactured by him " while dealing with the case of an assessee doing manufacturing business. We are here concerned not with a manufacturer but with an assessee who carries on merchanting business. Contracts for actual delivery of merchandise sold by the assessee must necessarily be .contracts for sale of the merchandise and not contracts for purchase of the merchandise. In my opinion, the words " merchandise sold by him " have to be given their natural or ordinary meaning and the word " sold " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with prov. (a) to Expln 2 to s. 24(1) of the 1922 Act which is identical to prov. (a) to s. 43(5) of the 1961 Act. Bhagwati C.J. (as he then was) in negativing the argument that the words " merchandise sold by him " were intended to convey that the contracts for actual delivery against which hedging contracts are made must be in respect of merchandise usually sold by such person in the course of his merchanting business, or, in other words, ordinarily dealt in by him and that they are not intended to limit such contracts only to forward contracts of sale of merchandise observed as follows : " But this contention fails to give due effect to the words 'merchandise sold by him' and equates them with the words 'merchandise dealt in by him'. The words merchandise sold by him in the context and collocation of the words 'contracts for actual delivery of goods manufactured by him' I leave no doubt that the 'contracts for actual delivery' referred to in the last part of the proviso are forward contracts of sale and they do not include forward contracts of purchase. If forward contracts of purchase were intended to be included, it is difficult to see why the legislature should have used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng business must be against a transaction relating to merchandise in stock of the assessee which means that the proviso does not embrace hedging contracts against contracts of purchase of merchandise. However, even if the opinion expressed by the Board were in favour of the assessee. it cannot have a controlling effect in the interpretation to be adopted by this court. I have already stated that at least three High Courts have taken the same view which has been adopted by Hon. Sohani J., and which, in my opinion, is the correct view. On a question of interpretation of a fiscal legislation, like the Income-tax Act, which has an all India application, there should be unanimity, as far as possible, amongst the different High Courts. It is also a significant fact that although the decision of the Gujarat High Court was rendered in 1968, Parliament has not so far come forward to amend the proviso. This inaction gives rise to an inference that the view taken by the Gujarat High Court is in accord with the intention of Parliament. It was submitted by the learned counsel for the assessee that an assessee who carries on merchanting business enters into contracts of purchase and sale of me ..... X X X X Extracts X X X X X X X X Extracts X X X X
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