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PETITIONER: RAGHUNATH PRASAD PODDAR ETC.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, CALCUTTA

DATE OF JUDGMENT25/04/1973

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. KHANNA, HANS RAJ

CITATION:  1973 AIR 2061            1974 SCR  (1)  91  1974 SCC  (3) 205  CITATOR INFO :  O          1975 SC1996  (4)  D          1980 SC 234  (3)  O          1980 SC 483  (6)

ACT: Income-tax  Act  (1922), Sec. 24(1) Proviso,  Explanation  2 Speculative  transactions-Goods  sold by delivery  of  Pucca Delivery Orders and not by actual delivery to the  immediate buyer whether speculative.

HEADNOTE: The assessee, inter alia, deals in jute and jute goods.  For the  relevant assessment years, the assessee showed  certain amounts  as losses in its business In the sale and  purchase of gunny bags.  The Income-tax Officer treated those  losses as speculative, holding that there was no actual delivery of the-gunny  bags as the. transaction was settled only by  the delivery  of Pucca Delivery Orders (P.D.0s).  The  principal question for decision was, whether the transactions  covered by P.D.0.s were speculative transactions or not. After  the  decisions of the various  tax  authorities,  the question  was ultimately referred to the High Court for  its opinion.   Relying  on its earlier decision  in  Nanalal  M. Varma  and Co. (P) Ltd. v. Commissioner of Income-tax,  West Bengal,  (73  I.T.R.  713).  the  High  Court  answered  the question in favour of the Revenue. On appeals by special leave, allowing the appeals, HELD  : To effect a valid transfer of any commodity,  it  is not  necessary  that  the transfer  in  question  should  be followed  up  by  actual  delivery  of  the  goods  to,  the transferee.   Even  if  the  goods  are  delivered  to   the transferees’  transferee, the first transfer also will be  a valid  transfer,  on the principle of  feeding  back  title- [97B] Duni Chand Rataria v. Bhuwalka Brothers Ltd. [1955] 1 S.C.R. 1071; Bayyanna Bhimayya v. Govt. of Andhra Pradesh [1961]  3 S.C.R.  267,  State  of Andhra  Pradesh  v.  Kolla  Sreerama Murthy, [1963] 1 S.C.R. 184, relied on. Jute  and  Gunny  Brokers Ltd. v. Union of  India  [1961]  3 S.C.R. 820, distinguished. The  appeal  was allowed and the answer given  by  the  High Court was vacated.  The case was remanded to the Tribunal to

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decide a fresh enquiry as to what was the trade practice  in matters of sales by delivery of P.D.Os at the relevant  time and  whether the last buyer in the instant case,  was  given the actual possession or not.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1032  of 1970. Appeal  by special leave from the order’ dated May 30,  1969 of the Calcutta High Court in Income-tax Ref.  No.  1 1 1 of 1966 and Civil’ Appeal No. 1033 of 1970. Appeal  by special leave from the Judgment and  Order  dated Julie5, 1969 of the Calcutta High Court in I.T.R. No. 174 of 1966. CIVIL APPEAL No. 1034 of 1970. Appeal  by special leave from the Judgment and  order  dated June  & 5, 1967 of the Calcutta High Court in I.T.R, 189  of 1967 and Civil Appeal Nos. 1035 & 1036 of 1970. 92 Appeal  by special leave from the judgment and  order  dated June  12, 1969 of the Calcutta High Court in I.T.R. No.  162 of 1967 and Civil Appeals Nos. 1037 to 1039 of 1970. Appeal  by special leave from the judgment and  order  dated June 5, 1969 of the Calcutta High Court in I.T.R. No. 181 of 1966 and Civil Appeal No. 1040 of 1970. Appeal  by special leave from the judgment and  order  dated June 5, 1969 of the Calcutta High Court in I.T.R. No. 141 of 1967. Leila  Seth,  U. K. Khaitan and B. P.  Maheshwari,  for  the appellants. (in C.A. Nos. 1032-1035, 1036 & 1040). A.   K. Sen, Leila Seth, U. K. Khaitan and B. P. Maheshwari, for the ’appellants. (in C.A. Nos. 1037-39). G.   C.  Sharma,  S. P. Nayar and R. N.  Sachthey,  for  the respondents.  (in  all the appeals except C.A. Nos.  1034  & 1040). G.   C.  Sharma,  S.   P. Nayar and B. D.  Sharma,  for  the respondents, (in C.As. Nos. 1032, 1033, 1035-1039). The Judgment of the Court was delivered by HEGDE, J. These are appeals by special leave.  They raise  a ,common question of law viz. whether on the facts and in the circumstances  of  these cases the amounts  claimed  by  the appellants  (assessees) as their losses in  transactions  in gunny bags which were concluded by the transfer or  delivery of  pucca  delivery  orders were  speculative  losses  under Explanation 2 to the proviso to section 24(1) of the  Indian Income-tax  Act, 1922 (to be hereinafter referred to as  the Act). For  deciding the question of law formulated above, it  will be  sufficient if we set out the facts in Civil  Appeal  No. 1037 of. 1970.  At the hearing we were referred to the facts of that case only. The  assessee in Civil Appeal No. 1037 of 1970 is a  company dealing,  inter  alia  in  jute  and  jute  goods.   In  the assessment years 1957-58, 1958-59 and 1960-61 (corresponding accounting periods being calendar years 1956, 1957 and 1959) the  assessee,  claimed Rs. 35,578/-, Rs. 20,665/’  and  Rs. 3,849/-  respectively as losses in its business in the  sale and purchase of gunny bags.  The Income-tax officer  treated those  losses  as  speculative losses.   He  held  that  the contracts  in  respect of the gunny bags said to  have  been sold were settled only by delivery of Pucca Delivery  Orders (in  short  P.D.0s) and not by actual delivery of  the  good

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covered  by those documents.  He accordingly refused to  set off  those losses towards the profits made by the assess  be in  its  non-speculative business.   The  assessee  appealed against  those assessment orders.  The  Appellate  Assistant CommisSioner  found  that  the assessee  had  purchased  the P.D.0s. from various parties after paying the full price  of the goods mentioned therein and transferred those P.D.Os  to his buyers after receiving the price fixed 93 for  the  sale of those goods.  The A.A.C. opined  that  the transactions, in question represented purchases and sales of jute  goods.  The A.A.C. consequently held that  the  losses claimed by the assessee were losses; from the ready business in jute goods.  In pursuance of those findings, he  directed the Income-tax Officer to allow the losses claimed as  busi- ness loss.  The Department appealed against the order of the A.A.C  to the Income-tax Appellate Tribunal.   The  Tribunal following  the decision of the Calcutta High-Court in D.  N. Wadhwana  v.  Commissioner  of  Income-tax,  West  Bengal(1) allowed  the appeals filed by the Department.  It held  that the sales in question were ’speculative’ as contemplated  by S.  24  of the Act.  Consequently the  losses  in  question, cannot be set off towards the profits made in the assessee’s nonspeculative  business.  Similar orders were made  by  the Tribunal in the case of other assessees.  At the instance of the  various  assessees, questions similar to  the  question formulated  above  were  submitted  to  the  High  Court  to ascertain  its  opinion.   The  High  Court  following   its decision in Income-tax Reference No. 88 of 1967 (Nandlal  M. varma and Co. (P.) Ltd. v. Commissioner of Income-tax,  West Bengal  II)  (2) answered those questions in favour  of  the Department.   We have now to see whether the  Calcutta  High Court’s  decision in Nanalal Varma’s, case (supra)  and  the other  decisions  relied on in that case lay  down  the  law correctly.   If  those  cases were  correctly  decided,  the appeals, before us must fail.  On behalf of the  appellants, it was contended that Naralal Varma’s case and the decisions relied  on  therein were riot correctly  decided.   For  the reasons  to  be  stated  hereinafter  we  agree  with   that contention of the assessee. Section  24  of  the Act deals with set  off  of  losses  in computing the. aggregate income of an assessee.  Sub-S.  (1) of S. 24 reads :               "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 year :               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."               (The  second proviso is not relevant for  our.               present purpose).               Explanation 1 to that section says               "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"

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             Explanation  2  is important for  our  present               purpose.  It says               "A speculative transaction means a transaction               in  which a contract for purchase and sale  of               any commodity including-. (1) 61, I.T.R. 154. (2) 73, I.R.T. 713. 94               stocks   and   shares   is   periodically   or               ultimately  settled  otherwise  than  by   the               actual  delivery or transfer of the  commodity               or script." The  remaining part of that section is not relevant for  our present purpose. We  have  now  to  see whether on the  facts  found  by  the Tribunal, it can be said that the transactions with which we are  concerned  can be said to have been  "periodically  or ultimately settled otherwise than by the actual delivery  or transfer of the commodity"-. The Tribunal has found that, when the assessees  transferred the P.D.0s. to their buyers they had not actually  delivered to  the  buyers  the  goods  covered  by  the  P.D.0s.  That conclusion  was not challenged.  But it was urged on  behalf of  the assessees that the Tribunal’s finding by  itself  is not  conclusive.   They complain that the Tribunal  has  not gone  into the question whether the last transferees of  the P.D.0s.  had,  taken  actual delivery or not  of  the  goods covered by the P.D.Os. It cannot be disputed that if any  of the  transactions  were settled by actual  delivery  of  the goods sold or transfer of that commodity, those transactions do not come within the scope of Explanation 2 to the proviso to s. A4(1).  In our judgment to effect a valid transfer  of any  commodity,  it is not necessary that  the  transfer  in question  should be follOWing up by actual delivery  of  the goods to the transferee.  Even if the goods are delivered to the transferees’ transferee, the first transfer also will be a valid transfer.  Therefore, we have to see whether in  the cases  before us, the ultimate purchaser of the P.D.0s.  has taken  actual delivery of the goods sold.  The  Tribunal  as well as the High Court were of opinion that if any  transfer of the P.D.0s. is not followed up by actual delivery of  the goods  to the transferee, that transaction has to be  consi- dered as speculative.  This is an erroneous conclusion. According to the appellants, the transactions in jute or  in jute  gunny  bags are usually conducted in Calcutta  in  the following manner : Jute  Mills  sell  in presenti or in future  jute  goods  to buyers and issues P.D.0s. in their favour.  If the sales are in presenti, the buyers if they so choose can take immediate delivery  of the goods sold.  If the delivery of  the  goods sold  is to be given on a future date, the buyers  can  take delivery of those goods on the date specified.  But  usually the  buyers  of jute goods in Calcutta transfer  the  P.D.Os from  one  buyer to another and ultimately  P.D.0s.  in  the generality of cases, are purchased by the Shippers who  take actual  delivery  of  the  good  sold.   According  to   the appellants  every transfer of a P.D.O. result Its in a  sale though  at the time the intermediate sales take  place,  ’he title to goods sold is defective for want of delivery of the goods.  That title gets perfected as soon as the goods  sold are actually delivered. In  support  of the trade practice pleaded, Mr.  Ashok  Sen, learned Counsel for the appellants relied on the decision of this Court in Duni  Chand Rataria v. Bhuwalka Brothers  Ltd. (1)  Therein Bhagwati J. speaking for the Court quoted  with

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approval (at p. 1078) the finding-, (1)  [1955] S.C.R. 1071 95 of  the trial court as to the manner in which the goods  :In that  case  were  transferred.   The  learned  trial   judge observed               "Now visualize the long chain of contracts  in               which  the defendant’s contract is one of  the               contracting  links.  The defendant  buys  from               its   immediate  seller  and  sells   to   its               immediate  buyer.  As seller it is  liable  to               give  and  as  buyer it is  entitled  to  take               delivery.  As seller it receives and as  buyer               it   gives  shipping  instructions.    Similar               shipping  instruction  is given by  each  link               until it reaches the mills.  The mills deliver               the   goods  alongside  the   steamer.    Such               delivery  is  in  implement  of  the  contract               between  the mills and their immediate  buyer.               But  so  instanti it is also in  implement  of               each  of  the chain  contracts  including  the               contract   between  the  dependent   and   its               immediate  buyer and the contract between  the               defendant and its immediate seller.  Not  only               does  the  mill give and its  immediate  buyer               take  actual  delivery but  so  instanti  each               middleman  gives  and takes  actual  delivery.               Simultaneously  the  defendant  takes   actual               delivery of possession of the jute goods  from               its   immediate-  seller  and   gives   actual               delivery  of possession of jute goods  to  its               immediate buyer.  Prima facie at the moment of               the  delivery  along  the  steamer  there   is               appropriation and the passing of the  property               in  the  goods and the giving  and  taking  of               actual  delivery  of  possession  thereof  all               along the chain at the same moment."               On the basis of that finding, this Court  held               in that case               "The mate’s receipts or the delivery orders as               the  case may be, represented the goods.   The               sellers  handed  over these documents  to  the               buyers  against cash payment, and  the  buyers               obtained these documents in token of  delivery               of  possession  of the goods.   They  in  turn               passed these documents from hand to hand until               they rested with the ultimate buyer who  took               physical  or manual delivery of possession  of               those  goods.   The constructive  delivery  of               possession   which   was   obtained   by   the               intermediate parties was thus translated  into               a physical or manual delivery of possession in               the   ultimate   analysis   eliminating    the               unnecessary    process   of   each   of    the               intermediate  parties taking  and in his  turn               giving  actual delivery of possession  of  the               goods  in  the  "arrow sense  of  physical  or               manual delivery thereof." A  similar  view  was expressed by this  Court  in,  Bayyana Bhimayya  v. The Government of Andhra  Pradesh(1).   Therein Hidayatullah  J.  (as he then was) speaking  for  the  Court observed (at p. 270)               "A  delivery order is a document of  title  to               goods  (vide  s. 2 (4) of the Sale  of  Goods               Act),  and I the possessor of such a  document

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             has  the right not only to receive  the  goods               but   also  to  transfer  it  to  another   by               endorsement  or  delivery.  At the  moment  of               delivery  by the Mills to the  third  parties,               there were, in effect, two deliveries, one  by               the Mills to the Appel- (1)  [1961] 3 S.C.R. 267. 96               lants,  represented,  in so far as  the  Mills               were concerned, by the appellants’ agents, the               third   parties,   and  the  other,   by   the               appellants to the third parties as buyers from               the  appellants.  These two  deliveries  might               synchronise   in  point  of  time,  but   were               separate  in point of fact and in the  eye  of               law." Mr.  Sharma,  learned Counsel for the  Department  contended that the property in goods represented by a P.D.O. cannot be said-to pass until the actual delivery takes place, in  view of s. 18 of the Sale of Goods Act.  Hence according to  him, when  the  assessees old the P.D.0s. to  their  buyers,  the property  in  goods  did not pass.   In  support  of  that contention, he relied on the decision of this Court in  Jute and  Gunny Brokers Ltd. and anr. v. The Union of  India  and ors.(1).  That was a case of acquisition of  property  under rule  75A read with rule 119 of the Defence of  India-Rules, 1939.  Therein the Government served an order of requisition on the mills which was in possession of the goods. sought to be  acquired.  The validity of that order was challenged  by the purchaser of the goods through a P.D.O. He claimed  that he  was  the  owner  of those goods  and  as  no  notice  of acquisition had been served on him, the order acquiring  the property was invalid.  This Court upheld the validity of the order of acquisition.  It held that as the goods were in the possession  of the mills at the time the  acquisition  order was  served, the title in those goods had not passed to  the holder of the P.D.O. The rule laid down in that decision has no  relevance for deciding the question of law  that  arises for  decision in these cases.  Herein we are concerned  with the  question  whether the assessees  have  transferred  the commodity  covered  by  the P.D.0s. to  their  buyers.   For answering  that question, we have to see whether  the  goods purported  to have been sold under the P.D.O. were  actually delivered  to the last buyer of those P.D.0s. This  position in law is made clear by the decision of this Court in  State of  Andhra  Pradesh v. Kolla Sreerama Murthy(2).  It  was  a case  arising under the Madras General Sales Tax Act,  1939. Therein  the  respondent  was a dealer in  gunny  bags.   He purchased  gunnies  from  the mills on terms  of  a  written contract  which  was  on a printed form.   The  mills  after receiving  the part of the purchase price  issued  "delivery orders"  directing  the  delivery of the goods  as  per  the contract.    Instead   of  taking  delivery   himself,   the respondent  endorsed the delivery orders to  another  person for  consideration and those delivery orders passed  through several  hands  before the ultimate holder of  the  delivery orders  presented it to the mills and obtained  delivery  of the gunnies from the mills.  At the date of the contract for purchases  the  goods which were the subject matter  of  the purchase were not appropriated to the contract so that there was  no completed sale since no property in the  goods  sold passed.  There was only an agreement of sale.  The Sales-tax Officer  assessed the respondent and collected soles tax  on the  said  transactions.   The  question  was  whether   the transactions  were or were not "sales of goods" within s.  3

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of  the  Madras  Sales Tax Act, 1939, so as  to  enable  the turnover  represented  by those sales to be brought  to  tax under  the Act, or were mere sales or transfers of  delivery orders : and further what was the effect of the property  in the  goods passing to the ultimate endorse& of the  delivery orders.  The Court held that the principle laid (1) [1961]3,S.C.R.820.      (2) [1963] 1 S.C.R. 184. 97 down in Butterworth v. Kingway Motors Ltd.(1) which was  the basis  of the decision of this Court in Bayyanna  Bhimayya’s case (supra) would equally apply to the facts of that  case. This Court upheld the levy, of sales tax on the ground  that though  the  title to the goods sold did not pass  when  the delivery  order  passed  from  one  intermediate  dealer  to another  intermediate  dealer but  yet  those transactions became  sales of goods as.-soon as the goods  were  actually delivered  to the last buyer of the "delivery order" on  the principle  of feeding back the title.  The Court  held  that the  title acquired by the last purchaser went to  feed  the previous defective titles obtained by the previous  buyers. Consequently every transfer of the "delivery orders"  became a "sale" within the meaning of s. 3 of the Madras Sales  Tax Act, 1939. Neither the I.T.O. nor the A.A.C. and nor even the  Tribunal has  gone  into the questions firstly as to what  was  trade practice  at the relevant time and whether, the last  buyers of  t he  P.D.0s. have taken actual delivery  of  the  goods covered  by those P.D.Os They concentrated  their  attention solely.  on  the question whether the  assessees  had  given delivery  of  the  goods covered by  the  P.D.0s.  to  their transferees.  That was not the relevant issue.  The  crucial question  of fact to be decided was whether the last  buyers of  the  P.D.0s.  had taken actual  delivery  of  the  goods covered  by the P.D.Os. Mr. Sen relying on the  decision  of this  Court in Duni Chand Bataria’s case (supra) urged  that we  should  accept  the trade practice pleaded  by  him  and straightaway allow the appeals.  But no such trade  practice appears  to  have been put forward  before  the  authorities under  the Act.  That apart, the. transactions  effected  by the  assessees cannot be considered as a valid ’transfer  of the  commodity’ within the meaning of Explanation 2  to  the proviso to s. 24(1) of the Act until the actual delivery  of the   commodity   in  question  takes  place.    Under   the circumstances,  it is not possible to answer  the  questions referred to the High Court.  All that we can do is either to call  for a supplementary Statement from the Tribunal or  to remand these cases to the Tribunal for a fresh hearing.   As seen earlier, the authorities under the Act have  completely misdirected  themselves  as to the questions of fact  to  be decided.    Hence  there  is  need  for  a  fresh   enquiry. Therefore  it  will  be in the interest of  the  parties  to remand the cases to the Tribunal for a fresh enquiry on  the lines   suggested  earlier.   We  order  accordingly.    The Tribunal  may  take  additional evidence  on  the  questions mentioned  earlier  The  parties  may  be  given  reasonable opportunity  to adduce additional evidence both  documentary as   well  as  oral.   The  Tribunal  may  also  take   into consideration  the  bye-laws  of the  East  India  Jute  and Hessian  Exchange  Ltd., Calcutta which  bye-laws,  We  were told, were in force during the calendar year 1959.  We ,sure the  Tribunal  will deal with these cases  expeditiously  as they are very old cases.   In  the result we allow these appeals, vacate the  answers given  by  the  High  Court and remand  the,  cases  to  the Tribunal  for disposal according to law.  The costs in  this

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Court  as  well as in the High Court will be  costs  in  the cause. S.B.W.                  Appeals allowed. (7) [1954] 2, All E.R. 694; 8-L944 Sup.CI/73 98