1. This is a reference at the instance of the assessee under s. 66(1) of the Indian I.T. Act, 1922.
2. We are concerned in this reference with assessment year 1961-62. The assessee-company deals in sugar, hessian, gunny, gold, tea, jaggery, etc. It has is head office at Bombay with branches at several places such as Calcutta, Kanpur, Ahmedabad and Muzaffarnagar. It deals in both ready and forward business. The assessee's accounting year relevant to the assessment year 1961-62 is the one ending on July 31, 1960. During this year the assessee-company claimed loss of Rs. 1,08,222 in forward transactions in jute and hessian. The case of the assessee-company initially before the ITO was that they were in the nature of hedging transactions and so this loss could be set off against other business income of the assessee-company. This plea was negatived by the ITO. He held that this loss had been suffered by the assessee in certain forward transactions where differences only had been paid and actual delivery of the goods had not been given or taken. In his view, therefore, these were speculative transactions as defined by Expln. 2 of s. 24(1) of the Indian I.T. Act, 1922.
3. At the stage of assessment the ITO also found that the assessee had made a claim in respect of brokerage and commission in the amount of Rs. 74,221. He sought particulars, but these were not forthcoming. As some of the transactions of the assessee had been held to be speculative transactions, he apportioned 50% of the amount as relatable to such transactions and the balance 50% to non-speculative transactions. Similar other expenses claimed by the assessee came to Rs. 2,57,412. Out of these the ITO notionally estimated 5% as relatable to speculation business and, therefore, the said amount, viz., Rs. 12,871, was reduced form the gross figure of expenditure claimed, viz., Rs. 2,57,412.
4. The assessee-company appealed to the AAC where the practice of the assessee-company was explained. It was contended that these were forward transactions and in the ultimate transaction the assessee had effected delivery.
5. However, to the intermediary parties differences were paid. Accordingly, it was contended that the loss of Rs. 1,08,222 paid to the intermediary parties was not a speculative loss. In the alternative, relying presumably upon the proviso to Expln. 2 to s. 24(1), it was contended that the transactions were in the nature of hedging transactions and, therefore, ought not to be regarded as speculative. Both these contentions were rejected by the AAC. The AAC relied on the decision of the Calcutta High Court in D. M. Wadhwana v. CIT : 61ITR154(Cal) and, applying Expln. 2 to s. 24(1), held that these transactions must be regarded as speculative inasmuch as they were settled otherwise than by actual delivery of the goods in respect of which they were entered into. He also found the apportionment made by the ITO in order inasmuch as necessary details were not furnished by the assessee even before the AAC.
6. The assessee carried the matter in further appeal to the Tribunal. The Tribunal considered the provisions of s. 24(1) of the Indian I.T. Act, 1922, and held that the transactions pursuant to which loss had accrued to the assessee fell squarely within Expln. 2 to s. 24(1). In the view of the Tribunal this Explanation was exhaustive and did not permit the importing into income-tax law of the general notions of wagering or speculative transactions in the domain of contract law. The alternative contention that these were hedging transactions and, therefore, covered by prov. (a) to the Explanation was expressly given up before the Tribunal by the learned representative of the assessee. The Tribunal also upheld the order of the AAC regarding the disallowance of 50% of commission and brokerage and 5% of the other expenses. It is from this order that the following two questions of law have been referred to us :
'1. Whether, on the facts and in the circumstances of the case, the loss in question of Rs. 1,08,222 is a speculative loss within the meaning of Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922
2. Whether, on the facts and in the circumstances of the case, the disallowances based on apportionment between speculative and business income were justified ?'
7. Mr. Vakil on behalf of the assessee submitted that the transactions in which loss had occurred were intermediate transactions or link transactions and ultimately in the final transaction delivery had been effected. Facts, according to the learned counsel for the assessee, were similar to the facts in the Supreme Court case of Raghunath Prasad Poddar v. CIT. It appears, however, that in a later decision of the Supreme Court in Davenport & Co. P. Ltd. v. CIT : 100ITR715(SC) , the Supreme Court has expressly overruled its earlier decision in Raghunath Prasad Poddar's case : 90ITR140(SC) . In Davenport & Co.'s case : 100ITR715(SC) , the observations of the Calcutta High Court in D. M. Wadhwana's case : 61ITR154(Cal) , on which reliance was placed by the Tribunal, have been extracted with approval. In the words of the Supreme Court, the passage which is quoted by the Tribunal represents the correct statement of the law.
8. It may be noted further that the decision in Davenport & Co.'s case : 100ITR715(SC) , has been considered by a Division Bench of this court (to which I was a party) in CIT v. Indian Commercial Co. P. Ltd. : 106ITR465(Bom) . The Supreme Court decision in Davenport & Co.'s case : 100ITR715(SC) , has been read and explained in that decision to mean that the question whether a transaction is a speculative transaction in a general commercial sense under the Contract Act is irrelevant whilst considering the provisions of the I.T. Act. According to the Division Bench, a transaction which is otherwise speculative would not be speculative within the meaning of Expln. 2 to s. 24(1) if actual delivery of the commodity takes place; on the other hand, a transaction which is not otherwise speculative in nature may yet have to be regarded as speculative according to the Explanation if there is no actual delivery of the commodity. Mr. Vakil submitted that the word 'ultimately' in the Explanation was required to be understood properly and if it was properly understood, the intermediate transaction which were settled on payment of differences would have to be considered as non-speculative if, in the ultimate transaction, delivery was effected. This view runs counter to the decision of the Supreme Court in Davenport & Co.'s case : 100ITR715(SC) , as understood by the Division Bench of this court in Indian Commercial Company's case : 106ITR465(Bom) . It may be pointed out that in Thakurlal Shivprakash Poddar v. CIT : 116ITR190(MP) , a view has been taken which may help the assessee. However, in our opinion, the said decision, where Sohani J. agreed with Oza J., on a difference of opinion between Kondiah J. and Oza J., runs counter to our reading of Davenport & Co.'s case : 100ITR715(SC) and we have expressly so held in our judgment in Seksaria Riswan Sugar Factory Ltd. v. CIT (Income-tax Reference No. 111 of 1970 decided on 5-2-1979) : 121ITR196(Bom) . Applying the principles laid down clearly by the Supreme Court in Davenport & Co.'s case : 100ITR715(SC) , the contentions advanced on behalf of the assessee cannot be accepted and the transactions, where delivery is not effected but differences paid will have to be regarded as speculative transactions in view of the language employed in Expln. 2 to s. 24(1). If that be so, the ITO, the AAC and the Tribunal were all right in holding that the loss suffered by the assessee in such transactions could not be set off against its other income but would be required to be considered separately as is provided by s. 24(1).
9. On the question of apportionment it appears to us that there is nothing much which can be said by the assessee. It was the assessee who failed to give necessary particulars as was sought for by the ITO and subsequently by the AAC. In the absence of such details which were sought, a rough and ready method of apportionment has been adopted and i is impossible to say that what has been done is not equitable or so improper that it must be corrected or characterised as such in the reference jurisdiction of the High Court. Thus, on the second question also, the decision of the ITO which was subsequently upheld by the AAC and the Tribunal will be required to be confirmed.
10. In the result, the two question referred to us are answered as follows :
Question No. 1. - In the affirmative and against the assessee.
Question No. 2. - In the affirmative and against the assessee.
11. The assessee will pay to the Commissioner the costs of this reference.