1. The question that has been referred for our determination by the Tribunal is :
'Whether the loss of Rs. 63,892 in hessian cloth suffered by the applicant was rightly treated as a speculation loss ?'
2. The short facts leading to the question may be stated. The question relates to the assessment year 1955-56, the relevant accounting year being calendar year 1954. The assessee, M/s. Madanlal Nemani Pvt. Ltd., as a private limited company having manifold business activities. Its main business was to act as the selling agents of the textile mill named New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. The assessee also carried on speculation business in cotton and several other commodities such as castor seed, bullion, shares, etc. Except in the year in question the assessee did not do any business either ready or speculative in jute. During the accounting year under telephonic instructions which were issued by the assessee to M/s. Ispahani Ltd., a company at Calcutta which was carrying on business as exporters of hessian to foreign buyers, M/s. Ispahani Ltd., purchased 900 bales of jute on December 11, 1953, and intimated the assessee-company as follows :
'Bought for you 900 bales Hessian cloth 40' x 10' oz. @ Rs. 46-10-0 per 100 yds. January delivery.'
3. The transaction was acknowledge by the assessee-company by its letter dated December, 18, 1953. It appears that this purchase of 900 bales by M/s. Ispahani Ltd., on behalf of the assessee was in fact a part of a larger purchase of 1,500 bales by it (M/s. Ispahani Ltd.) from M/s. Girdharlal & Co., on December 11, 1953. It further appears that M/s. Girdharlal & Co., issued a pucca delivery order for 1,500 bales to M/s. Ispahani Ltd., on January 30, 1954. M/s. Ispahani Ltd., debited the total cost price of the said bales (1,500 bales), viz., Rs. 13,98,750 to its gunny account and the said amount was paid by M/s Ispahani Ltd., to M/s. Ispahani Ltd., informed the assessee-company that they were holding 900 bales of hessian cloth bought for the assessee and on the assessee's account and that the cost of Rs. 8,39,250 had been debited to the assessee. The assessee was further informed that interest at the rate of 6% per annum will be charged on the outstanding amounts. The assessee-company acknowledged this communication and agreed to pay interest, by its letter dated February 8, 1954. On March 5, 1954, pursuant to the telephonic instruction issued by the assessee, M/s. Ispahani Ltd., confirmed having sold on assessee's account 600 bales of hessian cloth 40' x 10' oz. at Rs. 46-1-0 per 100 yards March delivery. This sale was acknowledged by the assessee by its letter dated March 9, 1954. Again, on March 25, 1954, under instruction from the assessee, M/s. Ispahani Ltd., confirmed having sold for the assessee 300 bales of hessian cloth 40' x 10' oz. at the rate of Rs. 41-14-0 per 100 yards March delivery. This sale was also acknowledged by the assessee by its letter dated March 30, 1954. In other words, the purchase of 900 bales made on December 11, 1953, was squared up by sales of 600 and 300 bales on March 5, 1954, and March 25, 1954, respectively.
4. In respect of the aforesaid squaring up of the transaction, M/s. Ispahani Ltd., sent a statement of account to the assessee in which after indicating the debit entries pertaining to the value of 900 bales purchased and interest and after referring to the credit entries relating to the sale proceeds of 300 and 600 bales claimed a remittance of loss of Rs. 63,892-8-0 being the difference between the total of the debit entries and the total of the credit entries. No items like brokerage or commission figured in the statement. The assessee-company paid this amount to M/s. Ispahani Ltd., and claimed the loss as business loss and wanted it to be set off against its other business profits of the same year. The Income-tax Officer refused to allow the set-off of the said loss against other business income of the year on the ground that the same was speculation loss. In appeal the Appellate Assistant Commissioner agreed with the view of the Income-tax Officer that the loss in question was speculation loss and consequently upheld the action of the Income-tax Officer. The matter was carried further by the assessee-company to the Tribunal in second appeal and the Tribunal by its order dated July 18, 1959, remanded the matter back to the Appellate Assistant Commissioner to make further enquiries and consider further evidence and decide the principal point afresh. The Tribunal observed that the evidence which consisted of correspondence that was produced was taken delivery of as well as goods having been actually sold and given delivery of, and it felt that further enquiries were necessary to be made before the loss in question was held to be speculation loss within the meaning of section 24(1) of the Indian Income-tax Act, 1922. In his own turn the Appellate Assistant Commissioner by his order dated January 29, 1960, directed the Income-tax Officer to submit a remand report. Pursuant to the order of the Appellate Assistant Commissioner after making due enquiries and after considering the certificate dated July 8, 1959, from East India Commercial Co. Pvt. Ltd., filed by the assessee before him at that stage, the Income-tax Officer submitted the remand report ultimately supporting the earlier view taken by him. The matter was then considered by the Appellate Assistant Commissioner in the light of the remand report. Before the Appellate Assistant Commissioner it was contended on behalf of the assessee that mere possession of the pucca delivery order was treated in the market as tantamount to obtaining the actual possession of the goods purchased, that is to say, it was contended that handing over of the pucca delivery order issued by the seller to the seller to the purchaser amounted to delivery of the goods to the purchaser and in that behalf strong reliance was placed upon the certificate dated July 8, 1959, that had been issued by the East India Commercial Co. Pvt. Ltd. The Appellate Assistant Commissioner on consideration of the materials that were placed before him and considering the rival submissions made before him ultimately upheld the order of the Income-tax Officer and dismissed the assessee's claim. In further appeal before the Appellate Tribunal the principal question that was debated was whether actual delivery of 900 bales of hessian cloth had been taken and given at the time of making purchase and effecting sale or not. The assessee contended that it had taken delivery of the goods, inasmuch as delivery of the goods had been taken effectively by its agent, M/s. Ispahani Ltd., on the basis of the pucca delivery of 900 bales of hessian cloth was taken or given while settling or squaring up of the two transactions of purchase and sale effected by the assessee had taken the position that the transaction between M/s. Ispahani Ltd., on the one hand and itself on the other was a transaction between principal to principal but that stand was later on given up and the assessee contended that M/s. Ispahani Ltd., had acted as its agent or broker and on that basis it argued that it had taken delivery of 900 bales of jute and, therefore, the loss sustained could not be regarded as speculation loss. The Tribunal found that at no time M/s. Ispahani Ltd., gave any pucca delivery order to the assessee in respect of 900 bales so that the assessee could sell the said bales by tendering the said order to any one it liked. It also noticed that the Income-tax Officer's remand report had found that M/s. Ispahani Ltd., had not been holding continuously any stock to show that they had in fact made purchases for and on behalf of the assessee and were holding such stocks continuously till they were disposed of under the instruction of the assessee. Counsel for the assessee also made a fair concession before the Tribunal that at one time during the period February 1, 1954, and March 31, 1954, stocks in ready held by M/s. Ispahani Ltd., in its general hessian purchase account were less than 900 bales. Proceeding on the assumption that tendering of pucca delivery order received from a mill amounted to delivery of goods in ready and further proceeding on the basis that M/s. Ispahani Ltd., was acting all along as agent of the assessee in the transaction of purchase and sale of 900 bales, the Tribunal found it impossible to hold that the assessee at any time took actual delivery of 900 bales or that there was any transfer of that commodity to it. It took the view that the bill given by M/s. Girdharlal & Co., to M/s. Ispahani Ltd., was between the two parties and beyond Ispahani Ltd.'s stated that it included 900 bales purchased on behalf of the assessee there was nothing to earmark that lot of 900 bales from the total lot of 1,500 bales purchased by Ispahani Ltd. From the letter dated November 9, 1959, which had been written by Ispahani Ltd., to the Income-tax Officer, Calcutta, which had been produced on record, the Tribunal found that it was abundantly clear that at no stage Ispahani Ltd., earmarked a lot of 900 bales that it claimed to have held for and on behalf of the assessee. In this state of the material on record the Tribunal held that on its own showing Ispahani Ltd., had at no time earmarked 900 bales having been purchased on behalf of the assessee and naturally there could not be any question of giving delivery of 900 bales when January delivery purchase of 900 bales was covered by two lots of 600 and 300 bales for March delivery sale and, therefore, the transactions of purchase and sale of hessian cloth effected by the assessee-company pertained to speculative business indulged in by the assessee resulting in speculation loss. It, therefore, did not allow the set-off claimed by the assessee. At the instance of the assessee, therefore, the aforesaid question has been referred to us.
5. Mr. Munim on behalf of the assessee has contended before us that the transaction of purchase of 900 bales and sale of 900 bales in two lots of hessian cloth entered into by the assessee cannot be regarded as falling within the mischief of Explanation 2 to section 24(1) of the Act. He contended that if once the Tribunal decided to proceed on the assumption that Ispahani Ltd., had acted as agent or broker of the assessee in the matter of the aforesaid transaction, which the Tribunal did make, the Tribunal ought to have held that the pucca delivery order issued by Girdharlal & Co., to Ispahani Ltd., amounted to actual delivery or transfer of commodity from Girdharlal & Co., to Ispahani Ltd., as the agent of the assessee and similarly when the transaction was squared up by effecting sales of 600 and 300 bales on March 5, 1954, and March 25, 1954, respectively, Ispahani Ltd., could be said to have effected actual delivery of the goods back to Girdharlal & Co., and, therefore the transaction because the contract for purchase and sale ought to have been regarded as having been settled by actual delivery or transfer of commodity. In support of this contention strong reliance was placed upon the decision of the Supreme Court in Raghunath Prasad Poddar v. Commissioner of Income-tax Mr. Munim pointed out that in that case the assessee, a dealer in jute and jute goods, purchased pucca delivery orders relating to gunny bags from various parties after paying the full price of the goods covered by the order and transferred those orders to buyers after receiving the price fixed for the sale of those goods and the Tribunal's view that since the goods covered by the delivery orders were not actually delivered to the buyers the loss incurred in those transactions was speculative as contemplated by section 24(1) of the Act, was negatived by the Supreme Court. He further pointed out that the Supreme Court has held that to effect a valid transfer of commodity it was not necessary that the transfer in question should be followed up by actual delivery of the goods to the transferee and that even if the goods were delivered to the transferee's transferee, the first transfer would be a valid transfer and would not be a speculative transaction, and he urged that the same principle should be invoked in this case.
6. In our view, there are more than one hurdle in accepting the contention of Mr. Munim on behalf of the assessee and the Supreme Court decision is clearly distinguishable. In the first place, though there is material on record, in the form of a photostat copy bill of the order given by Girdharlal & Co., to Ispahani Ltd., which showed that Girdharlal & Co., had given the pucca delivery order for 1,500 bales to Ispahani Ltd., on January 30, 1954, in respect of purchase of 1,500 bales affected by Ispahani Ltd., on December 11, 1953, the pucca delivery order pertained to 1,500 bales in which admittedly there is nothing to indicate that 900 bales out of those 1,500 bales had earmarked for purchase effected by Ispahani Ltd., for and on behalf of the assessee-company. The Tribunal has found as a fact that Ispahani Ltd., had admitted that at no time there was any earmarking of the said 900 bales - neither at the time of the purchase not even later - out of 1,500 bales as being held by it on behalf of the assessee company and in the absence of such appropriation there was merely an agreement of purchase in respect of unascertained lot of 900 bales and similarly there were merely agreements of sale in respect of unascertained lost of 600 and 300 bales and as such there could be no question of actual delivery or transfer of commodity - either physical or constructive - at any stage of the transactions. If the transactions in question never ripened into completed purchases or sales and merely remained agreements of purchase and sale the ratio of the Supreme Court decision cannot obviously apply. That ruling deals with a case where the assessee had purchased pucca delivery orders relating to gunny bags from various parties after paying the full price of the goods covered by the orders and had transferred those orders to buyers after receiving the price fixed for the sale of those goods. In other words, it was a case where the pucca delivery orders in question had been entirely dealt with or disposed of while selling the same after the assessee had purchased the same - a case where the transactions amounted to completed purchases and sales and as such transfer of the pucca delivery orders by negotiation and/or endorsement amounted to actual delivery constructively. In the instant case Ispahani Ltd., had in fact made a purchase of a large quantity of hessian cloth, viz., 1,500 bales, on December 11, 1953, and had obtained from M/s. Girdharlal & Co., a pucca delivery order for 1,500 bales and out of 1,500 bales 900 bales were purchased for and on behalf of the assessee company and in the absence of earmarking or appropriation of particular lot of 900 bales towards the contract it is difficult to comprehend as to how the transaction could be said to have ripened into a purchase and it if did not it merely remained an agreement to purchase and, while the transaction remained so, the bales were agreed to be sold in two lots of 600 and 300 back to M/s. Girdharlal & Co. At both stages the transactions merely remained as agreements to purchase and sell and after squaring up such transactions the difference, being the loss, was paid by the assessee which in our view has been rightly regarded as speculative loss by the Tribunal. If a separate or split pucca delivery order for 900 bales had been obtained by Ispahani Ltd. from Girdharlal & Co., the position would have been different; having obtained an omnibus order for 1,500 bales there should have been some earmarking of the lot of 900 bales towards the contract of purchase effected on behalf of the assessee which would have had the effect of converting the agreement into completed purchase so that constructive delivery on the basis of pucca delivery order could be said to have taken place but in the absence of any such material being available on record the Tribunal found if difficult to connect the pucca delivery order for 1,500 bales with constructive delivery of 900 bales agreed to be purchased for and on behalf of the assessee. Secondly, there is no material on record to show how and in what manner Ispahani Ltd., effected actual delivery, even constructively, when it agreed to sell back 900 bales to Girdharlal & Co., in two of 600 and 300 bales respectively. The third aspect of the matter which presents some difficulty in accepting Mr. Munim's contention is that there is no material on record to show that in a chain of such successive transactions even the ultimate purchaser had taken actual delivery of the bales which fact alone, if proved, would render perfect the title of intermediate transferees. It has been held by the Supreme Court in Raghunath Prasad Poddar v. Commissioner of Income-tax that 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, that even if the goods are delivered to the transferee's transferee the first transfer would also be a valid transfer and would not be a speculative transaction but that in such cases of chain transfers one has to see whether the ultimate purchaser of the pucca delivery orders has taken actual delivery of the goods sold and it is only then that the title of intermediate transferees get perfected and precisely for this very purpose the Supreme Court remanded the matter to lower authorities. In the case before us there is no material to show that the ultimate buyer of 900 bales had taken actual delivery of the goods from his immediate seller. For these reasons it is not possible to accept Mr. Munim's contention.
7. In this view of the matter, we feel that the Tribunal was right in taking the view that the loss of Rs. 63,892 in hessian cloth suffered by the applicant was a speculation loss. The question is, therefore, answered in the affirmative and against the assessee.
8. The assessee will pay the costs of the reference.