1. This is a reference at the instance of the assessee under s. 66(1) of the Indian I.T. Act, 1922. There are two questions referred to us and they read as follows :
'(1) Whether, on the facts and in the circumstances of the case, the loss of Rs. 43,285, Rs. 55,781, Rs. 87,280 for assessment years 1959-60, 1960-61 and 1961-62 was loss from speculative transactions within the meaning of the first proviso to section 24(1) read with Explanation 2 below that section
(2) Whether in any case a part of losses mentioned in question No. (1) in respect of transactions which could be related to the stocks on hand should be allowed to be deducted in computing the assessee's income for the three years ?'
2. The assessee before us is a registered firm doing business in bullion, both ready and forward. We are concerned with three assessment years, viz., 1959-60, 1960-61 and 1961-62. It may be mentioned that the corresponding previous year of the assessee is the Samvat year. In these three years the assessee claimed losses resulting from forward dealings in bullion in the amounts of Rs. 43,285, Rs. 55,781 and Rs. 87,280, respectively. Before the ITO, the assessee claimed that the forward dealings in bullion were hedging transactions. It was explained to the ITO that the assessee had regular business in gold and silver and as such it held large stocks of the same. In order to protect itself from losses on account of market fluctuations the firm was required to enter into hedging transactions. According to the assessee, forward sales were effected against the stocks on hand. It was conceded that at times the forward sales would exceed the stocks on hand, but despite this it was submitted that they were mainly in the nature of hedging transactions against ready stocks of gold. The ITO asked the assessee to file details showing the day to day stock position against which forward sales were made. The ITO found from such statements filed by the assessee that the forward sales exceeded the stocks available. Accordingly, the ITO felt himself unable to accept that those forward sales were hedging transactions. In his view, since the transactions were not specifically against the stocks held by the assessee, they had to be regarded as speculative in nature. Accordingly, he held that this was a speculative loss to be carried forward. Similar orders were passed for all the three assessment years.
3. The matter was carried in appeal to the AAC where the assessee urged the same contention as has been urged on its behalf before the ITO. Before the AAC assessee relied upon a circular of the Central Board of Revenue No. 23 (XXXIX-4) D of 1960. Despite the circular, the AAC held that those were not genuine hedging transactions since the forward transactions were effected irrespective of the stock on hand. It was also contended before the AAC that the losses suffered by the assessee on account of excess sales, i.e., forward sales in excess of the stock in hand, only should be treated as speculative losses and the losses arising from forward transactions up to the stock on hand should be treated as genuine hedging transactions and not speculative transactions. This submission also was rejected by the AAC who dismissed the appeal of the assessee.
4. The matter was carried in further appeal to the Income-tax Appellate Tribunal which has given a consolidated order for all the three years under consideration. The Tribunal extracted the relevant statutory provisions and held that these were speculative transactions as defined in Explanation 2 to sub-s. (1) of s. 24. It was held further that these transactions were not covered by prov. (a) to the said Explanation. In the view of the Tribunal, forward contracts entered into with a view to guard against losses through further price fluctuations in respect of stocks held by a trader could be regarded as proper hedging contracts in the commercial sense of the term, but prov. (a) did not exclude all such hedging contracts as accepted in the commercial sense but only a limited category as explained by the Tribunal. In the view of the Tribunal, forward contracts against stocks carried by the assessee were not covered by the phraseology utilised by prov. (a) and in that view of the matter the assessee's appeals failed.
5. It may be mentioned that the learned solicitor who appeared on behalf of the assessee before the Tribunal relied on the circular which had been earlier relied on, shown to and considered by the AAC. The circular, however, could not be produced before the Tribunal. The Tribunal, however, appears to be of the view that it was not concerned with what had been provided by the circular, and was required to apply the statutory provisions as were found on the statute book. The Tribunal indicated its opinion that if the claim of the assessee was not warranted by the express phraseology of Expln. 2 to sub-s. (1) of s. 24 and prov. (a) thereto, then the assessee was not entitled to succeed even though the CBR may have expressly, by a circular, indicated that the taxing authorities should give relief in cases similar to those of the assessee. A copy of this circular has been, by consent, annexed with the statement of case in this court and marked as annex.'D'. Before us Mr. Dastur appearing on behalf of the assessee made a number of submissions with regard to the proper meaning to be put on prov. (a) and it was submitted that it was not confined or limited to cases where the forward transactions were entered into against actual or existing practice of sales of merchandise. Similarly, it was submitted that, on a fair reading, the proviso could not be confined or limited to cases of forward contracts for the purchase of raw materials or merchandise. It was submitted that future contracts which can be reasonably referable to the stocks on hand ought properly to be regarded as covered by prov. (a) and, therefore, outside the ambit of speculative transaction as defined by Expln. 2. However, after giving these alternative submissions we were ultimately informed by learned counsel for the assessee that as this court had taken a clear position with regard to the binding effect of circulars such as the one on which the assessee was relying which had been marked by consent as annex.'D' to the statement of case, the assessee would rest content with such relief as in the opinion of the court was available to him under the said circular and would not call upon the court to decide these various interesting alternative submissions which had been advanced on the proper meaning to be ascribed to prov. (a). It was pointed out further that this very circular had been referred to by another Division Bench of this court (although on a different point, viz., point (v) in Navnitlal Ambalal v. CIT : 105ITR735(Bom) . The Division Bench in the said case considered the circular as being of a type covered by a decision of another Bench of this court in Tata Iron & Steel Co. Ltd. v. N. C. Upadhyaya : 96ITR1(Bom) , where following the two decisions of the Supreme Court which need not be adverted to here, it was held that such circular issued by the Board would be binding on the ITOs and must be given effect to by this court. It was explained that the circulars which were within the compass of the decisions were circulars for the purpose of giving administrative relief to the taxpayer. In connection with circular dated September 12, 1960 (annex.'D') the Division Bench observed in Navnitlal Ambalal's case  105 ITR 735 that if the circular was sufficient to decide the question, then it was unnecessary to consider and construe the provisions of s. 24 of the Indian I.T. Act, 1922, which may arise otherwise for consideration. In view of these observations and in view of the definite statement made by the counsel on behalf of the assessee that he is content with such relief as is available to the assessee under the circular, we will refrain from expressing any opinion on the proper construction to be placed either on Expln. 2 to s. 24(1) or on prov. (a) thereto.
6. The relevant portion of the circular may be fully set out :
'F. No. 4(124)-60/TPL CENTRAL BOARO OF REVENUE New Delhi, the 12th September, 1960 21 st Bhaira 1882 (Saka) CIRCULAR NO. 23 (XXXIX-4) D of 1960
Sub : Section 24 of the Income-tax Act - Hedging and speculative transactions - Representations regarding.
A number of representations and suggestions have been received by the Board from associations and chambers of commerce regarding the manner in which the provisions of section 24 of the Income-tax Act, particularly those of Explanation 2 to sub-section (1) thereof, are being interpreted and applied by the Income-tax Officers. The Direct Taxes Administration Enquiry Committee have also made a few suggestions on this subject in Chapter III of their report. The Board have carefully considered the points involved and their decisions thereon are given below : Point (i) :
Under clause (a) of the proviso to Explanation 2 to section 24 (1) of the Income-tax Act, the I.T.O.s exclude from the category of speculative transactions only a 'hedging purchase' transaction entered into with reference to the specific contracts for sale of goods but do not so exclude a 'hedging sale' transaction made against stocks in hand or against contracts for purchase of ready goods. The latter type of transactions are also genuine hedging transactions and should be excluded from the category of speculative transactions so that any losses sustained therein will be allowed to be set off against other income. Board's decision : The intention has always been that where bona fide forward sales are entered into with a view to guarding against the risk of raw materials or merchandise in stock falling in value, the losses arising as a result of such forward sales should not be treated as speculation losses. Accordingly, Income-tax Officers should not treat such transactions as speculative transactions within the meaning of Explanation 2 to section 24(1). It is to be noted in this connection that hedging sales can be taken to be genuine only to the extent the total of such transactions does not exceed the total stocks of raw materials or merchandise in hand. If the forward sales exceed the ready stock, the loss arising from the excess transactions should be treated as loss arising from speculative transactions and not from genuine hedging transactions'.
7. A plain reading of the circular would indicate that the ITOs were directed to treat bona fide forward sales entered into with a view to guard against the risk of raw materials or merchandise-in-stock falling in value as normal business losses and not as speculative losses. The clarification, however, to give relief in point (i) decided by the Board was clearly restricted to hedging sales limited to the extent that the total of such transactions did not exceed the total of raw materials or merchandise-in-hand. It was accordingly clarified in the last sentence of the decision of the Board on point (i) that if the forward sales exceed the ready stock, the loss arising from the excess transactions, i.e., transaction to the extent that it exceeds the stock, should be treated as loss arising from speculative transactions and not from genuine hedging transaction. In other words, according to the Board, in such a case, the loss was required to be bifurcated. To the extent that the loss could be attributed to the forward sales to the extent of the ready stock, it would have to be allowed as a business loss being considered as a hedging transaction and covered by the Board's clarification for giving relief to the assessee. To the extent of the excess the loss would not be entitled to relief and would, according to the decision of the Board, be required to be treated as a speculative loss.
8. Mr. Dastur, however, submitted that the proper manner in which to apply and give effect to this decision was to consider the decision as giving relief in respect of hedging sales as indicated in the decision. It was submitted that if the Board had decided and instructed the ITO to treat such commercial hedging sales as not being speculative in nature, it was not open for the Board thereafter to restrict the relief in the manner it has been done, restricting it only to the extent of the hedging sales to the extent of the total stock of raw material or merchandise-in-hand. We have been unable to accept such submission advanced on behalf of the assessee. Such decisions of the Board which may even go beyond the language of the statutory provision, are required to be read as a whole and no sentence or part thereof can be read in isolation from the remaining portion. It is, therefore, not permissible to hold that the Board had decided and directed the ITOs to treat all genuine hedging transactions in the commercial sense as non-speculative and, therefore, to hold the losses resulting therefrom as not being losses arising from speculative transactions. This the Board had done only to a limited extent and the assessee which relies on the circular would be entitled to avail of the relief conferred by the circular only to that limited extent. It may be pointed out that it is this aspect which is substantially covered by and reflected in question No. 2 referred to us.
9. It may be pointed out further that a Full Bench of the Gujarat High Court had occasion to consider this very circular in Pankaj Oil Mills v. CIT : 115ITR824(Guj) . The relevant portion of the report of the Direct Taxes Administration Enquiry Committee which resulted in the issue of the said circular, has been noted by the said decision on page 834 onwards and the circular on page 835. Applying the circular, the court dealt with several facts of such transactions with which we are not concerned, but reference may be made only to conclusion No. 3 set out at page 841 of the report. According to the Full Bench :
'In order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as the stocks acquired under the firm contracts of purchases'.
10. This conclusion is earlier borne out by a passages to be found at page 839 of the report. Mr. Dastur who appeared on behalf of the assessee submitted that even if the wider effect of the circular as was propounded by him was not acceptable to the court, as it is not, the assessee was entitled to the effect given to the circular by the Full Bench of the Gujarat High Court, viz., that the losses suffered by the assessee from the hedging sales are to be regarded as non-speculative to the extent of its total stock-in-trade of the item which would include the existing stock as well as stocks being acquired under firm contracts for purchase of gold.
11. It appears to us that the incremental stocks contemplated by the Gujarat High Court as covered by the words 'as well as stocks acquired under firm contracts of purchases' will generate a second round of controversy when the matter goes back to the Tribunal for necessary reconsideration. Does a contract of purchase include a mere agreement to purchase It would appear to us that, if understood in this large sense, the relief given to the assessee would go beyond the limit contemplated by the circular of the CBR. The circular clearly restricts the application of the decision on point No. (i) to 'merchandise-in-hand'. It also uses the words 'ready stock' and thus it would seem to be restricted to the items of stock which are of the ownership of the assessee, merchandise in respect of which property has already passed to the assessee as distinguished from such items in respect of which he may merely have an agreement to purchase. The effect of the circular, in our opinion, is required to be restricted to such items of the assessee's stock which are of his ownership although the phrase 'in hand' may perhaps be understood in a commercial sense as implying within his control. To that extent we must express our difference in approach from conclusion No. 3 as indicated by the Full Bench of the Gujarat High Court.
12. It would appear to us that in view of the clear position taken by the learned counsel for the assessee, question No. 1 need not be answered. Accordingly, question No. 1 is not answered.
13. Questioned No. 2 is answered in the affirmative and in favour of the assessee.
14. The Tribunal will work out the allowable part of losses in accordance with the aforesaid circular of the Central Board of Revenue as explained by us earlier in this judgment.
15. Parties will bear their own costs of the reference.