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PETITIONER: SK. AR. K. AR. SOMASUNDRAM CHETTIAR AND  CO., MADURAI

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, MADRAS

DATE OF JUDGMENT15/01/1992

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) RAMASWAMY, K.

CITATION:  1992 SCR  (1)  49        1992 SCC  Supl.  (2)  54  JT 1992 (1)    93        1992 SCALE  (1)12

ACT:      Income Tax Act, 1922-Section 24, third proviso,  clause (a)-Requirement under-Contract-Construction-Contract  spoken in first part and in second part-Co-relation-When the clause applies to speculative transaction, indicated.      Income Tax Act, 1922-Section 24, third proviso,  clause (a)-Transactions  entered  into by  assessee  whether  saved under.

HEADNOTE:      The appellant-assessee, was a registered firm.  It  was carrying on business in cloth and yarn.  Its cloth  business consisted mainly in Gada manufactured by certain Mills.      The  Income  Tax Officer while  making  the  assessment relating  to  the assessment years of 1960-61  and  1961-62, held  that  the  losses  of  Rs.  2,04,746  and  Rs.  17,000 respectively sustained by the assessee in the two assessment years constituted losses in speculative transactions in  the nature  of  business and, therefore, could not  be  set  off except against profits from speculation.  He carried forward the said loss to be set off against speculation profits,  if any, in subsequent assessment years.      The  assessee’s appeal was dismissed by  the  Appellate Tribuanl,  though  its further appeal to  the  Tribuanl  was upheld.      Before  the Tribunal, the assessee, conceding that  the transactions in question are speculative transactions within the  meaning of the Explanation 2 to section 24, Income  Tax Act, 1922, contended that the transactions in question  were saved  under clause (a) of the proviso to Section 24 of  the Act.      The Tribuanl held that the transactions entered into by the  assessee  were in the nature of the  hedging  contracts and, therefore, saved under clause (a) of the proviso.      The  Revenue obtained a reference to the High Court  on the                                                   50 question, "whether on the facts and in the circumstances  of the  case,  the  transaction resulting in the  loss  of  Rs. 2,04,746  in the previous year relevant for  the  assessment year 1960-61 and in the loss of Rs. 17,000 in the assessment year  1961-62 were saved from being treated  as  speculative

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transactions  by clause (a) of the third proviso to  Section 24(1) of the Income Tax Act, 1922."      The   assessee  conceding  that  the  transactions   in question were speculative transactions, contended before the High Court that the transaction were saved by clause (a)  of the third proviso to Section 24.      The  High  Court answered the  reference  in  negative, i.e.,   in   favour  of  the  Revenue,  holding   that   the transactions in question were not saved by clause (a) of the third proviso.      The  assessee-appellant challenged  the view  taken  by the High Court in these appeals by special leave.      On  the question, whether the transactions in  question were saved by clause (a) of the third proviso to Section  24 of  the  Income Tax Act, 1922, dismissing the  appeals,  the Court,      HELD  : 1.01. When the first part of clause (a)  speaks of  a  contract in respect of merchandise, it  refers  to  a contract  falling  within  the  definition  of   speculative transaction.   But the further requirement of clause (a)  is that  such  a contract in respect of merchandise  must  have been  entered  into  by the merchant in the  course  of  his business  to guard against loss through future  fluctuations "in  respect of his contracts for actual delivery  of  goods sold  by  him." Clearly, the contracts referred  to  in  the latter  part  of  clause (a) must be  contracts  for  actual delivery  of  goods  sold  by  him.   It  necessarily  means contracts  of  sale by him and such contracts  must  be  for actual delivery of goods.  The words "for actual delivery of goods" have evidently been put in designedly. [55D-E]      1.02. There need not be co-relation between contract to contract  but  there ought to be a co-relation  between  the contracts spoken to in the first part of clause (a) and  the contracts  spoken  to in the latter part.  Unless  such  co- relation exists between two sets of contracts, the clause is not attracted. [55E-F]      2.  The  assessee entered into a contract  of  purchase with  the mills and a contract of sale with another  person. Then he entered into a                                                   51      contract of purchase with such person in respect of the same goods.  He then obtained delivery of the cloth from the mills  and  sold them to the third parties.  So far  as  the first  mentioned  party is concerned he settled the contract by paying the difference ,resulting in loss.  It is  evident that the course of transactions do not attract and cannot be made  to  fall within the four corners of clause  (a).   The contracts  entered into by the assessee do not  fall  within nor  are they saved by clause (a) of the proviso.  [55H-56B, 55G]

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.  1109- 10 of 1976.      From  the  Judgment and Order dated  19.4.1973  of  the Madras High Court in Tax Case NO. 278 of 1967.      A.T.M. Sampath for the Appellant.      Dr  V. Gaurishankar, P. Parmeswarn, S. Rajappa and  Ms. A. Subhashini for the  Respondents.      The Judgment of the Court was delivered by      B.P. JEEVAN REDDY, J. These appeals by the assessee are preferred  against  the judgment of the  Madras  High  Court answering  the  question  referred to it in  favour  of  the

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Revenue.   The question stated for the opinion of  the  High court  under  Section 66 (1) of the Indian Income  Tex  Act, 1922 was "whether on the facts and in the circumsstances  of the  case,  the transactions resulting in the  loss  of  Rs. 2,04,746  in the previous year relevant for  the  assessment year 1960-61 and in the loss of Rs. 17,000 in the assessment year  1961-62 were saved from being treated  as  speculative transactions  by Clause (a) of the third proviso to  Section 24(1) of the Income Tax Act, 1922."      The assessee is registered firm carrying on business in cloth and yarn.  Its Head-Office is at Madurai with branches at Vijayanagaram and Calcutta.  Its trade in cloth consisted mainly  in  Gada  manufactured by  certain  mills  including Meenakshi  Mills Ltd., Virudhanagar Textiles Ltd. and  Loyal Textiles  Mills Ltd. The assessment yeras  concerned  herein are 1960-61 (previous year ending on 12.4.1960) and  1961-62 (pervious  year  ending on 12.4.1961).   In  his  assessment orders,  relating to these two assessment years, the  Income Tax  Officer  held that the losses of Rs. 2,04,746  and  Rs. 17,000  respectively sustained by the assessee in  the  said two  assessment  year  constituted  losses  in   speculative transaction in the nature of business and, therefore,  could not                                                    52 be  set  off except against profits  from  speculation.   He carried  forward  the  said  loss  to  be  set  off  against speculation  profits,   if  any,  insubsequent    assessment years.   The  assessee’s appeal to  the  Appellate  Tribunal proved unsuccessful. However, his further appeal to Tribuanl was  upheld.   Before  the Tribunal,  the  counsel  for  the assessee  conceded  that "the transactions in  question  are speculative   transactions   within  the  meaning   of   the explanation." (The reference is to Explanation-2 to  Section 24).  His contention, however, was that the transactions  in question  are  saved  under Clause (a)  of  the  proviso  to Section 24.  The Tribunal examined the said contention  with reference  to the facts of the case and concluded  that  the transactions entered into by the assessee were in the nature of the hedging contracts and, therefore, saved under  Clause (a)  of  the proviso.  Dissatisfied with the  order  of  the Tribunal,  the  Revenue  asked for and  obtained  the  above reference.   Before the High Court as well, counsel for  the assessee  conceded  that the transactions  in  question  are speculative  transactions but contended that they are  saved by  Clause (a) of the third proviso to Section 28.  This  is what the High Court has recorded :           "In  this case it has been conceded at all  stages           by  the assessee that the transactions in  respect          of  which the losses in question have occurred  are          speculative transactions as defined in  Explanation          2,  and  therefore, it is not necessary for  us  to          consider   the  scope  of  the  Explanation  2   to          Section  24.  The only question  for  consideration          is  whether the transactions which  are  admittedly          speculative coming within Explanation 2 to  Section          24(1), Will fall within the scope of Clause (a)  of          the  third proviso to that section."      The High Court disagreed with the interpretation placed by the Tribunal upon Clause (a) of the said proviso and held that on the material placed before it, it is not possible to hold that the transactions in question were saved by  clause (a)  of  the third proviso.  Accordingly,  it  answered  the question  referred  n  the  negative-that  is  against   the assessee  and in favour of Revenue.  The correctness of  the view taken by the High Court is challenged in this appeal.

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    Section  24 of the 1929 Act insofar as it  is  relevant reads as follows :           "24. Set off of loss in computing aggregate income           (1)   where  any  assessee  sustains  a  loss   of           profits  or  gains in any year under  any  of  the           heads mentioned in section 6, he shall be entitled           to have the amount of the loss set off against his           income,  profits or gains under any other head  in           that years :                                                   53           Provided  that in computing the profits and  gains           chargeable  under the head ‘profits and  gains  of           business,   profession  or  vocation’,  any   loss           sustained in speculative transactions which are in           the  nature of a 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.      Explanation  2  :  A speculative  transaction  means  a transaction in which a contract for purchase and sale of any commodity  including  stocks and shares is  periodically  or ultimately settled otherwise than by the actual delivery  or transfer of the commodity or scrips.      Provided that for the purposes of this Section :          (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          (b)  a  contract in respect of  stocks  and  shares          entered  into  by a dealer or investor  therein  to          guard  against loss  in his holding of  stocks  and          share through price fluctuations; or          (c)  a  contract  entered into by  a  member  of  a          forward market or a stock exchange in the course of          any  transactions  in  the  nature  of  jobbing  or          arbitrate to guard against loss which may arise  in          the ordinary course of his business as such member,"      Explanation 2 to Section 24 defines what a  speculative transaction is.  It corresponds to the definition  contained in Clause 5 or Section 43 of the Income Tax Act, 1961.   The Mardas  High Court has taken the view that by virtue of  the definition contained in Explanation 2, "whenever there is no actual  delivery or transfer of the goods,  the  transaction should  be taken to be of a speculative nature.......If  the actual  delivery  of  the  goods  is  not  given  under  the settlement  of  the  contract, then  the  intention  of  the parties  at the time of contract is immaterial."  It is  not necessary for us to express any opinion on this aspect since it  was conceded by the assessee’s counsel before  the  High Court   that  the  transactions  in  question  were   indeed speculative  transactions as defined by Explanation 2.   The only  question with which we are concerned-and  which  alone has  been  considered by the High Court too-is  whether  the transactions  in  question are saved by Clause  (a)  of  the third proviso to Section 24.                                                   54      The Tribunal was of the opinion that Clause (a) of  the third  proviso is intended to save hedging  contracts  among others.  It dealt with the concept of hedging contracts  and held  that  for attracting Clause (a) of  the  proviso,  the "contracts for actual delivery of goods manufactured by  him or  merchandise  sold by him" need not necessarily  by  sale

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contracts but can also be purchase contracts.  Applying  the said interpretation it examined the transactions in question and  held  them saved by the said Clause.  The  High  Court, however,  did  not agree with the said  interpretation.   It took  the view that ’for a transaction to come under  Clause (a),  it should be one entered into by an assessee to  guard against  loss through future price fluctuations  in  respect of  his  sale  contracts".  It,  however,  agreed  with  the Tribunal  that  there  need  not  be  actual    co-relation, contract   to  contract,  between  the  purchase  and   sale contracts  contemplated  by  the  Clause  and  that   it  is sufficient  if  a transaction 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.  It held  "for  a transaction  to  come  under Clause (a)  it  should  be  one entered  into by an assessee to guard against  loss  through future   price   fluctuations  in  respect   of   his   sale contracts.........there  need  not  be  actual  co-relation, contract  to  contract,  but  that it  is  sufficient  if  a transaction  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."  It, however, added a note  of caution which we may set out in its own words.  "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 co- relation-contract to contract-may not be necessary.  But the contract or contracts contemplated by Clause (a) has or have to guard against loss through price fluctuations in  respect of contract or contracts of sale entered into by him of  the same goods."  Applying the said test the High Court examined the transactions in question and came to the conclusion that they  were not saved under the said Clause.  It  noted  that both with respect to cotton bales and yarn, the assessee had initially  entered  into contracts of  purchase  of  certain goods  from the mills.  He then entered into a  contract  of sale of the same goods to a party. Later , he entered into a contract  to re-purchase the same goods from the same party. Subsequently  ,he  took  delivery of  the  goods   from  the mills and sold them to other parties. So far as contracts of purchase  and  sale  with  the  first  mentioned  party  are concerned , he settled them by paying the difference. In the circumstances,  the High Court held that it is not  possible to  say  either that the sale contract entered into  by  the assessee  with  the  purchaser,  or  the  purchase  contract entered into between them, would come under Clause (a).  The only  question now before us is whether the High  Court  was right  in  its  interpretation of Clause (a)  of  the  third proviso of                                                   55 Section 28 (which corresponds to Clause (a) of the   proviso to  the definition of speculative transactions contained  in Clause 5 of Section 43 of the 1961 Act)?      The proviso containing Clauses (a) to (c) is a  proviso to   Explanation   2  which  defines  what   a   speculative transaction is.  Clause (a) of the proviso contemplates  and applies  to  a  manufacturer as well  as  a  merchant.   The assesee  herein is not a manufacturer but only  a  merchant. The  said Clause insofar as it is relevant to  the  merchant would read thus :          "a contract in respect of merchandise entered into          by  a  person  in the  course  of  his  merchanting          business  to  guard against  loss  through  future

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        price fluctuations in respect of his contracts  for          actual  delivery of merchandise sold by him,  shall          not be deemed to be a speculative transaction".      When the first part of Clause (a) speaks of a  contract in  respect  of  merchandise, it  refers  undoubtedly  to  a contract  falling  within  the  definition  of   speculative transaction.   But the further requirement of Clause (a)  is that  such  a contract in respect of merchandise  must  have been  entered  into  by the merchant in the  course  of  his business  to guard against loss through future  fluctuations "in  respect of his contracts for actual delivery  of  goods sold  by  him." Clearly, the contracts referred  to  in  the latter  part  of  Clause (a) must be  contracts  for  actual delivery  of  goods  sold  by  him.   It  necessarily  means contracts  of  sale by him and such contracts  must  be  for actual delivery of goods.  The words "for actual delivery of goods" have evidently been put in designedly.  We agree with the learned Judges of the High Court that there need not  be co-relation  between contract to contract but there ought to be  a  co-relation between the contracts spoken  to  in  the first part of Clause (a) and the contracts spoken to in  the latter  part.   Unless such co-relation exists  between  two sets  of  contracts,  the  Clause  is  not  attracted.   The Tribunal was not right in holding that the words  "contracts for  actual delivery of goods" occurring in the latter  part of  the  definition do also take in contracts  of  purchase. Such  an understanding is inconsistent with the  scheme  and spirit of the Clause.      If  we  examine  the  contracts  entered  into  by  the assessee on the above touch-stone, it would be evident  that they do not fall within nor are they saved by Clause (a)  of the proviso.  The nature of transactions entered into by the assessee,  as found by the High Court, has already been  set out  by  us  hereinbefore.   The  assessee  entered  into  a contract  of the purchase with the mills and a  contract  of sale with another person.  Then he entered into a                                                   56 contract of purchase with such person in respect of the same goods.   He  then obtained delivery of the  cloth  from  the mills  and  sold them to the third parties.  So far  as  the first mentioned party is concerned he  settled the  contract by  paying the difference resulting in loss.  It is  evident that  the  said course of transactions do  not  attract  and connot be made to fall within the four corners of Clause (a)      We,  accordingly,  dismiss the appeal. No order  as  to costs. V.P.R.                                    Appeals dismissed                                                   57