TMI Blog1975 (9) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... ush them, produce groundnut oil and sell the groundnut oil and oil cakes. It incurred a loss of Rs. 44,326 being the amount of difference paid in the various forward contracts entered into with its customers. On scrutiny of its books of accounts and other relevant documents, the Income-tax Officer found that the said loss was incurred in settlement of the transactions in which no delivery of the goods was actually taken or made. He also found that the assessee earned a profit of Rs. 5,268 in the said transactions. The net loss to the assessee in the financial year under reference was to the tune of Rs. 39,058. The Income-tax Officer held that these were illegal speculative transactions Which were prohibited by the Forward Contracts ,(Regulation) Act, 1952, and that the loss from the illegal speculative transactions could not be deducted from the other income. The Income-tax Officer, therefore, disallowed the loss claimed by the assessee for the assessment year under reference. The assessee carried the 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al and directed the Income-tax Officer to permit the assessee to set off the speculative loss against the speculative profits. The Income-tax Officer, therefore, carried the matter in appeal before the Tribunal. The Tribunal, having regard to the fact that all the transactions were recorded in the same books of accounts of the assessee, and as there was no finding by the lower authorities that the transactions which resulted in loss did not relate to the same business as carried on by the assessee, and that the department has failed to establish that the two businesses were distinct, dismissed the appeal of the Income-tax Officer following the decision of the Supreme Court in Commissioner of Income-tax v. S. C. Kothari, and directed the Income-tax Officer that the business income of the assessee should be determined after taking into account all business activities and that the losses suffered by the assessee in the illegal speculative transactions should be set off against the other business income of the assessee. The Additional Commissioner of Income-tax has, therefore, sought this reference on the following question for our opinion: Whether, on the facts and in the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not only upset all the known and settled principles and introduce new concepts which are alien and irrelevant but also result in an absurd and unfair situation inasmuch as an assessee incurring losses by indulging in illegal and void contracts would be in a better position than one carrying on legal forward business; so much so the former would have advantage of carrying forward and setting off illegal speculative losses against any head of his income in the subsequent years. On behalf of the assessee, it has been very forcefully urged that the Tribunal has rightly applied the ratio of the decision of the Supreme Court which succinctly laid down that the question of set-off of illegal speculative losses is to be examined from the angle of the provisions contained in section 24 and section 10 of the Indian Income-tax Act, 1922, and an assessee is not deprived of his rights to claim set-off of illegal losses against his other business income while computing his profits and gains under section 10(1) merely because he is not entitled to set it off against profits of legal speculative business under the proviso to section 24(1) because it is the real income in the ultimate analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t go into the question, whether the assessee was entitled to set off the losses against the whole of his income or against only that part of the profits referable to his other business in speculative transactions. On further appeal, the Tribunal held that the forward contracts were legal and valid, and, hence, the loss arising therefrom ought to be taken into account as loss from the business. The Tribunal also held that assuming the forward contracts to be illegal, the loss arising therefrom would still have to be taken into account as a business loss in computing the total income of the assessee and as the Appellate Assistant Commissioner had not gone into the question, whether the loss could be set off against the entire income or the actual income from the speculative business, the Tribunal remanded the matter to the Appellate Assistant Commissioner for a finding on this point. The Appellate Assistant Commissioner found after the remand that, as the forward contracts were speculative transactions within the meaning of the 2nd Explanation to section 24(1) of the Indian Income-tax Act, 1922, the loss arising therefrom could be set off only against the profits arising from the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising out of illegal business. The Division Bench held that illegal business is a business within the Income-tax Act and if profits from illegal business are assessable to tax, there is no reason either on principle or on authority for refusing to take into account losses from illegal business. In the opinion of the Division Bench there is in principle no distinction between profits and losses of a business and if the profits of an illegal business are assessable to tax, equally the losses arising from illegal business must be held to be liable to be taken into account in computing the income of the assessee. The Division Bench was, therefore, of the view : " ...the losses incurred in unlawful business carried on by the assessee are liable to be taken into account in computing the business income of the assessee and the loss of Rs. 3,40,443 arising to the assessee from the impugned contracts entered into unlawfully, was liable to be taken into account in determining the business income of the assessee subject to the provisions of the Income-tax Act." (Emphasis is ours). The Division Bench, therefore, addressed itself to the material question as to what is the profit against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tood concluded by the law laid down by the Supreme Court in Sunder Lal and Sons v. Bharat Handicrafts (P.) Ltd. and, therefore, having regard to the provisions contained in section 15(4) of the Forward Contracts (Regulation) Act, 1952, so long as there was no writing recording the terms of those contracts there was no enforceable contract at all and such contracts could not be regarded as having been validly entered into under the Act. The Supreme Court therefore answered the first question in the affirmative and against the assessee. On the second question about the competency of setting off of illegal speculative losses, the Supreme Court felt that there were two aspects which had come up for consideration before the departmental authorities, the Tribunal and the High Court. The first aspect, according to the Supreme Court, related to deduction of the loss of Rs. 3,40,443 incurred in the aforesaid illegal transactions while computing the income of the assessee's speculative business under section 10(1). The other was the set off which can be allowed under the relevant part of section 24(1) of the 1922 Act. The Supreme Court concurred with the view of this court that for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alone a deduction will be possible of the loss under section 10(1). The High Court proceeded on the basis that if the business in which the profit was made and the business in which the loss was incurred were separate a set-off could be claimed by the assessee under section 24(1). If, however, the business was the same then the loss would be liable to be taken into account while computing the profits under section 10(1). As we have come to the conclusion that no set-off could be allowed under section 24(1) of the Act of 1922, it will have to be determined whether the profits and losses were incurred in the same business even though that business involved the entering into contracts some of which were, in the eye of the law, illegal. If the trade or the business, for instance, the business of commission agency or forward business, was the same in which the profits were made and the loss was incurred, then in order to arrive at the figure which can be subjected to tax, the loss will have to be deducted from the profit. For this purpose we shall have to remit the matter to the High Court to decide this point and, if necessary, after calling for a supplementary statement of the case." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o set off his illegal speculative losses against his other business income. That claim of the assessee in that case was referred to the High Court for its opinion by question No. 4. That claim of the assessee, it should be further noted, was negatived by the High Court and no appeal was preferred by the assessee against the said opinion to the Supreme Court. It was only the revenue which had gone in appeal against the decision of this High Court which had answered question No. 2 in that case in favour of the assessee, to the effect that the assessee was entitled to claim set off of the illegal speculative losses against the speculative profits only. It was, therefore, in that narrow context that the Supreme Court was giving its opinion in the appeal preferred by the revenue being aggrieved by a part of the decision of this High court in so far as it affected the revenue. It is no doubt true that the Supreme Court has said that so far as question No. 2 of the competency of set off of the illegal speculative losses was concerned, it assumed two-fold consideration; one from the angle of the provision contained in section 10 and another from the angle of the provision contained in sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount which can be subjected to tax as 'profits' under section 10(1) of the Act of 1922. The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business. We concur in the view of the High Court that for the purpose of section 10(1) the losses which have actually been incurred in carrying on a particular illegal business must be deducted before the true figure relating to profits which have to be brought to tax can be computed or determined." The third observation on which reliance has been placed is in the paragraph on page 803 of the judgment of the Supreme Court which we have set out hereinabove in this judgment. We do not think that these observations can be of much assistance to the cause of the assessee. Prima facie, they do appear to give an impression that the Supreme Court examined the question of set-off of the illegal losses from two different angles; one under section 24(1) and another under section 10(1) and, therefore, when it ultimately held that an assessee is not entitled to set off of illegal spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court decision as if the Supreme Court has ruled otherwise. It was in the limited context that the Supreme Court was trying to answer the problem which was posed before it and in the ultimate analysis it directed that though the assessee was not entitled to set off the illegal speculative losses against the speculative profits under section 24 in view of the meaning of "speculative transactions" given in Explanation 2, he was not deprived of claiming that set off for purposes of computation of the real income under section 10 of adjusting against the speculative profits. If that had not been so, the Supreme Court would not have directed this High Court to examine the question whether the legal and the illegal activities were part and parcel of the same business. Because, if the Supreme Court intended to lay down a principle that illegal speculative losses could be set off against the other business income under section 10(1), it certainly would not have asked this High Court to inquire into either by itself or by calling for a supplementary statement of the case from the Tribunal as to whether the legal or illegal activities are part and parcel of the same business. In any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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