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PETITIONER: NIRMAL TRADING COMPANY

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, CENTRAL (CALCUTTA)October 10, 19

DATE OF JUDGMENT10/10/1979

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. UNTWALIA, N.L.

CITATION:  1980 AIR  234            1980 SCR  (1) 900  1980 SCC  (1) 119

ACT:      Indian Income  Tax Act  1922 S.  24(1)  Explanation  2- Transactions of  purchase and  sale between the same parties by  mere   transfer  of  delivery  orders  without  physical delivery of goods-Transactions if speculative.

HEADNOTE:      The assessee  carried on  business in purchase and sale of gunnies.  By four  different contracts it purchased gunny bags from  one party and sold them to the same party by four different contracts,  all of which resulted in a loss of Rs. 2.75  lakhs.   The  contracts   were  transferable  specific delivery contracts  falling within the scope of the bye-laws of the East India Jute & Hessain Exchange Limited which were approved  by   the  Forward   Market  Commission.  In  these transactions there  was no  physical delivery  of goods  and there was a transfer of delivery orders only.      Before the Income Tax officer, the assessee claimed the loss as  an ordinary  business loss  on the  ground that the transactions were  entered into  in the  ordinary course  of business.      The Income Tax officer rejected the claim and held that the transactions  in which delivery were handed over without physical   delivery   of   the   goods   were   "speculative transactions" within  the meaning  of Explanation  2  to  S. 24(1) of the Indian Income Tax Act.      The Appellate  Assistant Commissioner held in favour of the assessee  and his  order was  upheld by  the Income  Tax Appellate Tribunal.  The High  Court  however  answered  the reference by  the Tribunal  in favour  of  the  Revenue  and against the assessee.      Dismissing the appeal this Court, ^      HELD: 1.  The High  Court was  right in  answering  the question in favour of the Revenue. [905 G]      2. Explanation  2 to  S. 24(1)  defines  a  speculative transaction as  "a  transaction  in  which  a  contract  for purchase and  sale of  any  commodity  including  stock  and shares is  periodically or ultimately settled otherwise than by the  actual delivery  or transfer  of  the  commodity  or scrips.." What  is contemplated by the explanation is a real or factual  delivery or  transfer of the commodity and not a

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notional delivery or transfer. [905 A]      3. Over-ruling  its earlier  view in  Raghunath  Prasad Poddar v.  Commissioner of  Income Tax,  Calcutta, (1973) 90 I.T.R. 140,  this Court  in Davenport  &  Co.  (P)  Ltd.  v. Commissioner of  Income Tax,  West  Bengal  11,  (1975)  100 I.T.R. 715,  upheld the view of the Calcutta High Court that ’unless the  transaction was settled by delivery or transfer of the  commodity it  would be  a speculative transaction by reason of Explanation 2 to 5. 24(1)’. [905 B-E] 903      In the  instant case,  the seller  and the buyer of the gunny bags  was the  same. There  was no  actual delivery or transfer of  the gunny  bags, but the contracts were settled between the  parties by  transfer of  pucca delivery  orders only.                                                     [905]      Wadhwana (D.  N.) v.  Commissioner of  Income Tax  W.B. (1966) 61  I.T.R. 154  Budge Budge  Investment Co.  Ltd.  v. Commissioner of  Income Tax West Bengal I Calcutta (1969) 73 I.T.R. 772  Nanalal M.  Barma & Co. (p) Ltd. v. Commissioner of Income  Tax West  Bengal-II  (1969)  73  I.T.R.  713  and Murlidhar Jhunjhunwala  v. Commissioner  of Income  Tax West Bengal-11 (1969) 73 I.T.R. 727; approved.

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2259 of 1972.      From the  Judgment and  Order  dated  6-1-1971  of  the Calcutta High Court in I.T.R. No. 86/671. C      P. V.  Kapoor Anil Sachthey Miss Bina Gupta and Praveen Kumar for the Appellant.      P. A. Francis and Miss Subashini for the Respondent.      The Judgment of the Court was delivered by      PATHAK, J.-This  appeal by  certificate under s. 66A(2) of the  Indian Income  Tax Act,  1922  raises  the  question whether the tractions in which the assessee was engaged were "speculative transactions"  as defined  by Explanation  2 to section 24(1) of that Act.      The assessee  carries on business in gunnies. The total purchased disclosed  by the assessee for the year ended June 30, 1960  amounted to  Rs. 1,01,51,225  and the  total sales during  that   year  were  shown  at  Rs.  1,03,27,208.  The purchases  and  sales  included  certain  transactions  with Messrs Kesardeo  Shyamsunder. Under  contract Nos.  96 dated November 11,  1959, 108  dated November  12, 1959  43  dated April 27,  1960 and  836 dated  May 25,  1960, the .assessee claimed that  5,700 bales  of gunny  bags were purchased for RS. 22,05,000/-.  The assessee says that he sold them to the same party under contract Nos. 520 dated March 30, 19607 540 and 541 dated April 1, 1960 and 610 dated April 19, 1960 for Rs. 19,79,550.  The result  was a  loss of Rs. 2,25,450. The contracts  were  transferable  specific  delivery  contracts falling within  the scope  of the bye-laws of the East India Jute and  Hessian Exchange Limited, the bye-laws having been passed  with   the  concurrence   of  the   Forward   Market Commission. Admittedly in the aforementioned transactions of purchase and  sale there  was no physical delivery of goods. There was a transfer of delivery orders only.      In the  income tax  assessment for  the assessment year 1961-62, the  relevant previous  year being  the year  ended June 30, 1960, the 904 assessee showed  the loss  of Rs.  2,25,450/- as an ordinary

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business loss. The Income Tax Officer rejected the claim and held that  the transactions  in which  delivery orders  were handed over  without physical  delivery of  the  goods  were "speculative transactions" with the meaning of Explanation 2 to s.  24(1) of  the Indian Income Tax Act. He observed that the loss  of Rs.  2,25,450/-, being  a loss  in  speculation business,  would   be  treated   separately.  The   assessee appealed, and  the Appellate Assistant Commissioner took the vie vv that as "pucca" delivery orders had been transferred, there was a transfer of documents of title to the goods and, therefore, actual  delivery of  the goods  must be deemed to have been  given. On  appeal by  the Revenue, the Income Tax Appellate Tribunal found that the only transaction which had suffered a  loss was  the transaction under contract No. 520 which was  closed by  the reverse purchase contract No. 836. The loss  suffered was  Rs. 2,99,700/- but the claim made by the assessee  quantified the  loss  at  Rs.  2,25,450/-.  In respect of  that transaction the Appellate Tribunal observed that on  purchase when  the  assessee  was  deemed  to  have received delivery  the full  amount was  paid by cheque, and similarly when  the assessee "sold forward" the full sum was also paid  through cheque.  It referred  to the  trade usage that cheques  were paid  when bills  were  received  and  on payment there  of the  pucca delivery  orders changed hands. Therefore, said  the Tribunal,  in form it was a transaction of delivery for cash, and was not a speculative transaction.      At the  instance of the Revenue, the Appellate Tribunal referred  the  following  question  to  the  High  Court  at Calcutta:-           "Whether, on the facts and in the circumstances of      the case,  the loss  of Rs.  2,25,450/- was  a loss  in      speculation  p   transaction  within   the  meaning  of      Explanation 2  to s. 24(1 of the Indian Income Tax Act,      1922 ?" The reference  was answered  by the  High Court in favour of the Revenue.      In this  appeal, it  is  contended  on  behalf  of  the assessee that  the High Court erred in holding that in order to take  a transaction out of the definition of "speculative transaction" in  Explanation 2  to s.  24(1) of  the  Indian Income Tax  Act, 1922,  there must be actual delivery of the commodity itself  and that delivery of pucca deliver; orders without anything  more did  not constitute "actual delivery" within the  meaning of  that provision. It is urged that the giving and taking of pucca delivery orders amounts to actual delivery of  goods, Pucca delivery orders, it is stated, are documents of  title to goods. In our opinion, the contention cannot be accepted. Explanation 2 to s. 905 24(1) defines a speculative transaction as "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..  ". It  is apparent  that what is contemplated is  a real or factual delivery or transfer, and not a notional delivery or transfer.      The Calcutta  High Court,  in  a  series  of  decisions including Wadhwana  (D.M.) v.  Commissioner of Income Tax W. B. Budge Budge Investment Co. Ltd. v. Commissioner of Income Tax, W.  Bengal 1, Calcutta, Nanalal M. Varma & Co. (P) Ltd. v. Commissioner  of Income-lax  West  Bengal  and  Murlidhar Jhunjhunwala v.  Commissioner of  Income Tax  West Bengal 11 held that  unless the  transaction  was  settled  by  actual delivery  or  transfer  of  the  commodity  it  would  be  a speculative transaction  by reason  of Explanation  2 to  s.

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24(1).  Subsequently,   in  Raghunath   Prasad   Poddar   v. Commissioner of Income Tax Calcutta the Supreme Court took a more liberal  view  and  laid  down  that  if  the  original transaction of  sale and  purchase of  goods was followed by one or  more subsequent  contracts in  respect of  the  same goods the  original transaction  would not  be a speculative transaction  if  actual  delivery  of  the  goods  sold  was effected to  the ultimate  purchaser of  the pucca  delivery orders. The restricted view taken by the Calcutta High Court in Nanalal  M. Varma  & Co.  (P) Ltd. (supra) was disproved. But recently a larger bench of this Court in Davenport & Co. P. Ltd.  v. Commissioner  of Income  Tax West  Bengal II has overruled Raghunath  Prasad Poddar (supra) and preferred the strict view  adopted by  the Calcutta  High Court.  The case before us,  however, is  a simple one. The transactions took place between  the assessee  and Messrs Kesardeo Shyamsunder alone. It  is not disputed that there was no actual delivery or transfer  of the  gunny bags.  The contracts were settled between the parties by transfer of pucca delivery orders.      Accordingly, we  hold that  the High Court was right in answering the  question in favour of the Revenue and against the assessee.      The appeal is dismissed with costs. N.V.K.                                     Appeal dismissed. 906