TMI Blog1979 (2) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... against similar profits in future. The assessee then appealed to the AAC. The contentions of the assessee were rejected by the AAC who confirmed the conclusion which the ITO reached earlier. The assessee then appealed to the Tribunal. Before the Tribunal it was submitted on its behalf that it had adequate stocks of sugar to cover all the contracts. It was submitted further that the contracts were not carried out purely out of business considerations in the expectation that the prices would improve. Accordingly, it was contended that these were normal contracts of sale which would not come within the mischief of speculative contracts in s. 24(1). According to the assessee, therefore, the loss in question was a normal trading loss deductible under s. 10(1) itself. By its order dated 30th July, 1959, the Tribunal rejected the several contentions advanced on behalf of the assessee. It appears that being aggrieved by that decision the assessee wanted the Tribunal to make a reference by an application under s. 66(1) of the Indian I.T. Act, 1922, which was rejected by the Tribunal. The assessee then moved the High Court and the High Court by its order dated 22nd August. 1961, direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ober 18, 1951, and a letter dated 20/22nd November, 1951, issued by the Joint Secretary to the Government of India to all the sugar factories together with the copies of the orders dated May 17, 1951. It was pointed out that as far as the portion of production required to be distributed at controlled prices was concerned, the Government control did not bring about the transactions between the assessee and the purchasers but only permitted the transactions. It was pointed out further that the price fixed was Rs. 31.50 per md. (i.e., Rs. 86 per bag) of sugar. It was pointed out by the assessee's case that in the relevant accounting year there was a bumper crop of sugarcane and consequentially high production of sugar therefrom. The assessee-company at its factory manufactured 1,16,207 bags of sugar. The basic quota which had been fixed, viz., 6,430 tonnes, was equivalent to 63,657 bags and thus there was excess production of 52,550 bags of sugar over and above its basic quota. Under the Government policy out of this excess of 52,550 bags of sugar, 26,275 bags (being 50% of the excess) together with the basic quota making in all 89,932 bags were reserved for controlled distribution an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge stocks left unsold and not lifted by the allottees. The controlled price was higher than the open market price. There were reports of huge stocks lying with the Government and it was apprehended that these stocks would also come in the market. It was in these circumstances that the assessee, after considering the gravity of the situation, deemed it prudent to enter into the twelve Bombay contracts which were entered through brokers, M/s. Shamji Premji Co. for 20,700 bags of sugar to five parties whose names would be found in Ex. " G " to the affidavit annex. " D " to the statement of case. A specimen of one of such contracts is to be found in annex. " F " to the said affidavit and this would show that quality of D-27 sugar (or higher quality in dry condition) had to be delivered in Bombay and the delivery date is mentioned as Shrawn Sud 15. We have ascertained that the equivalent date by the Gregorian calendar comes to 5th August, 1952. It is the assessee's case that all the contracts entered into through these brokers were not transferable and were arrived at for specific quality, condition and definite delivery of the quantities and qualities of sugar indicated therein ex- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 52. According to the assessee, it was a manufacturer of sugar and at the relevant time it held with itself more than the quantity which had been sold to the five Bombay dealers under the twelve contracts. According to the assessee, it does not do any speculative business in sugar and in fact no speculation business in sugar was at all possible. According to the assessee, further as mentioned in the said affidavit, these were genuine and bona fide transactions under which the assessee had entered into contracts to supply and deliver sugar in Bombay because of the circumstances already adverted to, and subsequently, these contracts were cancelled from time to time because the assessee found that course more advantageous in the changing circumstances. The assessee submitted, therefore, that the transactions ought to be viewed in the light of commercial principles, the circumstances prevailing at the relevant time, the intentions in entering into such transactions and the trade practice in the sugar market. According to the assessee, after the transactions are properly appreciated they could not be regarded as speculation or business of speculation and the loss suffered by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of Rs. 1,68,731 ? " The proper determination of the question turns upon the proper interpretation or construction to be placed upon the statutory provision which may be fully set out. Section 24 of the Indian I.T. Act, 1922, makes provision for setting off of losses under one head of the income against profit or gains made by the assessee under any other head in that year. This enabling provision, however, is subject to a restrictive proviso which provides that any loss sustained in speculative transactions which are in the nature of business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions. It is in this connection that we have Explns. 1 and 2 and prov. (a) to Expln. 2 which assume considerable importance and significance. " Explanation 1.--Where the speculative transactions carried on are of such a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expression " speculative transaction " for income-tax purposes only. The larger Bench of the Supreme Court in Davenport Company's case [1975] 100 ITR 715 extracted with approval a passage from D. M. Wadhwana v. CIT [1966] 61 ITR 154, where the Calcutta High Court had dealt with the Explanation. According to the Supreme Court, the extracted passage represented the correct statement of the law. It was further pointed out that such transactions were not invalidated by the Explanation but only branded as " speculative transactions " to be put in a special category for income-tax purposes. The aforesaid decision of the Supreme Court was considered by a Division Bench of this court (to which I was a party) in CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465. On facts it had been found in Indian Commercial Company's case that the assessee-company had committed a breach of contract and it thereafter paid liquidated damages for such breach to Messrs. Hindustan Steel Ltd. It was held in the above case that once the contract was broken, there could be no cause of action founded on the contract which can be said to be capable of settlement. What had been settled was only the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Expln. 2 of s. 24(1). Our attention was also drawn to the commentary in A. C. Sampath Iyengar's Law of Income Tax, 6th edn., where the learned author has made observations in a similar vein. Based on this argument, it was submitted that in any case as far as 11,000 bags in respect of which contracts were cancelled in August, 1952, are concerned, there was no finding of any reverse transactions between the same parties although it may be possible to hold that as far as 9,700 bags were concerned, in para. 19 of the affidavit of Shri Rohatgi it had been stated that these were bought for ready delivery from the concerned buyers between 2nd July, 1952, and 14th July, 1952. It was accordingly submitted that as far as the loss of 11,000 bags were concerned, such loss could not be considered to be losses arising from speculative transactions as the express phraseology of Expln. 2 was not satisfied. More fundamental, however, was the contention of counsel for the assessee based upon a very recent decision of the Madhya Pradesh High Court, Indore Bench in Thakurlal Shivprakash Poddar v. CIT [1979] 116 ITR 190. There, on a difference between Kondaiah J. and Oza J. the reference was ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces, it cannot be held that the assessee settled the contract otherwise than by actual delivery of the contracted commodity so as to render the transaction a 'speculative transaction' within the meaning of that term as defined by Expln. 2 to s. 24(1) of the Act." Accordingly, Sohani J. agreed with Oza J. and held that in the facts and circumstances of the case the sum of Rs. 30,000 which had been paid by the assessee in the case before the Madhya Pradesh High Court to Messrs. Pitty Brothers, Bombay, was not a speculative loss covered by Expln. 2 to s. 24(1) corresponding to s. 43(5) of the 1961 Act. It was held to be a trading loss which could be set off against other profits and gains of the assessee. It was then submitted by the learned counsel for the assessee in the alternative that the amounts paid to the Bombay parties for cancelling the twelve contracts were or must be regarded as payments occasioned by breach of the contracts which breach the assessee was required to commit on account of business exigencies earlier referred to and which have been extensively set out in Rohatgi's affidavit. The Tribunal has substantially accepted the factual background in which the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Cal) where an amount had been received by the Indian assessee from the Japanese contracting parties as damages for breach of contract committed by the Japanese parties. In Daulatram Rawatmull's case [1970] 78 ITR 503 (Cal) the assessee had failed to supply the contracted goods and the dispute was referred to arbitration in which arbitration there was an award directing the assessee to pay the difference between the market rate and the contract rate. This was clearly in the nature of payment of damages for breach or non-performance of the contract. These two earlier decisions of the Calcutta High Court have been followed by the subsequent decision to which our attention was drawn at the Bar. In Ramjeewan Sarawgee's case [1977] 107 ITR 845 (Cal), there was a clear failure by the assessee to deliver the contracted goods on the due dates resulting in a breach of contract. Pursuant to such breach the assessee had become liable to pay Rs. 1,79,200 as damages to the other party to the contract. There was a clear finding of the Tribunal to that effect which is extracted in the judgment. A similar position exists in Arun General Industries' case [1977] 110 ITR 286 (Cal). In this case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gest that any payment made after the date of delivery cannot be regarded as a settlement of the contract, but must be accepted as a settlement of the amount of damages. With respect, it would appear to us that the phraseology employed in the said decision has too wide an import with which without the necessary background of supporting facts we may not be able to agree. In any case, the cancellation of contracts effected in July, 1952, and on 1st August, 1952, which pertained to 19,700 bags out of the total quantity of 20,700 bags of sugar are settlements before the date of delivery and must be regarded as made at the time when the contract was subsisting. Thus, in this manner the assessee had got rid of his liability to deliver the bags of sugar under the contracts and the ultimate method whereby this was effected was by entering into cross contracts for purchase which resulted in a financial or monetary liability. The facts of the present case are totally different from the facts in Indian Commercial Company's case [1977] 106 ITR 465 (Bom) and that decision, nor the other Calcutta decisions brought to our notice help Mr. Trivedi's contention. As far as the earlier contention, vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not intend to designate as speculative transactions genuine business transactions, not considered as speculative by the trade, which were entered into bona fide with a bona fide intention of giving delivery but where delivery could not be or was not given on account of commercial exigencies. This appears to us to be contrary to the plain reading of the Explanation as indicated in Davenport Company's case [1975] 100 ITR 715 (SC) and we are unable to agree with the majority view of the Madhya Pradesh High Court in Thakurlal Poddar's case [1979] 116 ITR 190 ; (2) that at least as far as 11,000 bags of sugar were concerned, there was no finding that the assessee repurchased these bags at the time when the earlier contracts were cancelled or that the earlier contractual obligation to deliver was got cancelled. This argument was based on the affidavit of Mr. Rohatgi as well as Mr. Trivedi's reading of the phraseology employed by the legislature in Expln. 2 to s. 24(1). Both on the facts and on the question of interpretation we are unable to accept Mr. Trivedi's submission for the reasons earlier noted ; (3) it must be held on the facts of the instant case that the amount of Rs. 1,68, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occasion to consider in a number of cases. It is difficult to consider the application of this 1960 circular to the assessment year 1953-54. The circular of 1954 which perhaps can be relied on by the assessee, does not further the case of the assessee at all. The transaction of the assessee is not a transaction of hedging in raw material. The assessee has rather entered into contracts with respect to sugar manufactured by it which is totally different from the situation contemplated by the circular of 1954. As at present advised, we are of opinion that the circular of 1960 cannot be pressed into service by the assessee. It is clear to us that the circular of 1954 does not assist the assessee at all. The assessee has, therefore, to fall back upon the phraseology of prov. (a) to Expln. 2 and in the view we take of the facts found by the Tribunal, the transaction entered into by the assessee does not constitute a hedging transaction as contemplated by the said prov. (a) and hence the same is not protected thereby. The result of the foregoing discussion then is that in our opinion the amount of Rs. 1,68,731 paid by the assessee must be regarded as a loss arising to the assessee from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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