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Commissioner of Income-tax Vs. Sri Venkateswara Rice and Oil Mills - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberReferred Case No. 186 of 1979
Judge
Reported in[1985]154ITR756(AP)
Acts Income Tax Act, 1961 - Sections 2(13), 28, 43, 43(5), 73 and 73(1)
AppellantCommissioner of Income-tax
RespondentSri Venkateswara Rice and Oil Mills
Appellant AdvocateM. Suryanarayana, Adv. and ;A.V. Krishna Koundinya Standing Counsel
Respondent AdvocateM.J. Swamy, Adv.
Excerpt:
(i) direct taxation - speculative transaction -sections 2 (13), 28, 43 and 73 of income tax act, 1961 - contract for delivery of goods between a and b - b refused to delivery on plea that good were sub-standard - a paid certain sum to b in settlement of claims arising under contract - whether transaction was speculation transaction - contract was put to end at moment breach was committed - amount paid to b merely in settlement of claims partaking nature of damages - held, transaction not speculative transaction. (ii) breach of contract - assessee failed to supply goods due to non-availability of railway wagons - settlement took place as result of breach of contract - immaterial whether settlement took place before or after the date on which delivery of goods was to be effected - held,.....anjaneyulu, j.1. at the instance of the commissioner if income-tax, the income-tax appellate tribunal referred the following questions of law to this court for its opinion under s. 256(1) of the i.t. act, 1961 (for short 'the act') : 'whether, on the facts and in the circumstances of the case, the appellate tribunal was justified in holding that the assessee has not carried on any business in speculation and, hence the loss claimed should be allowed as business loss ?' 2. the reference relates to the assessment years 1969-70 to 1974-75 (both years inclusive). the question arising for consideration is whether the assessee is entitled to claim loss suffered by him in respect of certain contracts entered into by him which were eventually settled otherwise than by delivery. the revenue.....
Judgment:

Anjaneyulu, J.

1. At the instance of the Commissioner if Income-tax, the Income-tax Appellate Tribunal referred the following questions of law to this court for its opinion under s. 256(1) of the I.T. Act, 1961 (for short 'the Act') :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee has not carried on any business in speculation and, hence the loss claimed should be allowed as business loss ?'

2. The reference relates to the assessment years 1969-70 to 1974-75 (both years inclusive). The question arising for consideration is whether the assessee is entitled to claim loss suffered by him in respect of certain contracts entered into by him which were eventually settled otherwise than by delivery. The Revenue contends that, inasmuch as these contracts were settled otherwise than by delivery, the loss arising in respect of such transactions, being transactions of a speculative nature within the terms of s. 43(5) of the Act, cannot be set off against the assessee's income from business in view of the provisions contained in s. 73(1) of the Act. The assessee resisted the above view of the Department and contended that the impugned transactions were not speculative in character and, in any event, the transactions do not constitute 'speculation business' within the meaning of Explanation 2 to s. 28 of the Act. The facts concerning the assessment year 1969-70 were slightly different from the facts relating to the other assessment year 1970-71 to 1974-75.

3. Sofar as the assessment year 1969-70 is concerned, the assessee entered into two contracts for the supply of groundnut kernel at agreed rates. In pursuance of the contracts, the assessee carrying on business in the manufacture and sale of groundnut oil at Anantapur dispatched the goods contracted to M/s. Ravindra Oil Mills, Hyderabad. On receipt of the goods at Hyderabad, M/s. Ravindra Oil Mills refused to take delivery on the plea that the goods supplied were sub-standard and were not in accordance with the specifications agreed under the contract. Consequent on the refusal of M/s. Ravindra Oil Mills to take delivery, the assessee sold the goods to various parties at Hyderabad. A sum of Rs. 320 was paid to M/s. Ravindra Oil Mills in settlement of the claims arising under the contracts earlier referred. On these facts, the Revenue's contention that the loss suffered by the assessee is relatable to a speculative transaction within the meaning of s. 43(5) was negatived by the Income-tax Appellate Tribunal. The assessee's claim for allowance of the loss was allowed by the Income-tax Appellate Tribunal. On the aforesaid facts, we do not see on what grounds, the Revenue can contended that the transaction in question is a 'speculative transaction' within the meaning of s. 43(5) of the Act. The facts clearly indicate that the assessee offered to deliver the goods and M/s. Ravindra Oil Mills declined to take delivery on ground that the goods supplied were sub-standard. The dispute following the refusal of M/s. Ravindra Oil Mills to take delivery was settled by the payment of a sum of Rs. 320 by the assessee. We cannot accept the Revenue's contention that the contracts entered into by the assessee were settled otherwise than by delivery. Proceeding on the assumption that the assessee committed a breach when he attempted to deliver sub-standard goods, the contracts were put an end to the moment the breach was committed and the amount paid to M/s. Ravindra Oil Mills was merely in settlement of its claims partaking the nature of damages; the loss is clearly allowable. The Tribunal was perfectly justified in allowing the loss for the assessment year 1969-70 as a loss suffered by the assessee in the regular in the regular course of his business.

4. So far as the assessment years 1970-71 to 1974-75 (both assessment years inclusive) are concerned, it would appear that, in the normal course of the assessee business, he entered into a large number of contracts for the sale of the commodities being dealt in by him. Most of the contracts were executed by actual delivery. It, however, appears that, in each of the previous years relevant to the abovementioned assessment years, the assessee could not supply commodities in respect of a small number of contracts. The Tribunal furnished particulars of the relevant contracts. This information may be extracted below for ready reference :

----------------------------------------------------------------------'Asst. Total number Number of Amount of netyear of transactions transactions differencesettled without paiddelivery----------------------------------------------------------------------Rs.1970-71 124 6 28,5131971-72 192 19 7,0911972-73 136 10 3,8921973-74 163 8 4,4671974-75 23 1 3,600'----------------------------------------------------------------------

5. The assessee explained before the income tax authorities that the above contracts for the supply of commodities were entered into in the normal course of the assessee's ready business and that, owing to non-availability of railway wagons at the appropriate time, the assessee could not deliver the commodities in respect of a few contracts. It was claimed that the assessee has not been carrying on any 'speculation business' as such and that the mere omission to give delivery in respect of a small number of contracts in each year for reasons beyond the control of the assessee would not bring the transaction within the meaning of s. 43(5) of the Act as a 'speculative transaction'. The assessee explained that, even if technically the transaction should be considered to be 'speculative transaction' for the purposes of s. 43(5), still the transactions do not constitute 'speculation business' within the meaning of Explanation 2 to s. 28. It was pointed out that, under s. 73(1) of the Act, any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off against the income arising from the regular course of business. The assessee claimed that, on the facts above stated, no loss was incurred on speculation business carried on by him and, consequently, the loss was liable to be set off against the income derived by the assessee from his regular business. The Tribunal accepted the assessee's contention that, taking into consideration the nature of the transactions settled otherwise than by delivery of the goods, it could not be said that the assessee was carrying on speculation business. Accordingly, the Tribunal held that the assessee is entitled to claim set-off against the loss suffered in the course of the above transaction. The Commissioner of Income-tax is aggrieved by this finding of the Income-tax Appellate Tribunal.

6. We have heard the learned standing counsel for the Revenue, Sri M. Suryanarayana Murthy. According to the learned standing counsel, if a contract for supply of commodities is settled otherwise than by delivery, that is enough to make it a 'speculative transaction' within the meaning of s. 43(5). It was pointed out that all the contracts in question were settled otherwise than by delivery; consequently, they are bound to be treated as 'speculative transactions' for purposes of s. 43(5) of the Act. According to the learned standing counsel, if an assessee is carrying on business and enters into a contract either for purchaser sales of commodities, which was ultimately settled otherwise than by delivery, it automatically follows that such an assessee is carrying on 'speculation business' with the meaning of Explanation 2 to s. 28 of the Act. No other tests are required to be applied according to the learned standing counsel. Reliance is placed on the judgment of this court in CIT v. Puttaiah Seshaiah and Co. : [1984]146ITR168(AP) .

7. Sri Ch. Sreerama Rao, learned counsel for the assessee, reiterated the pleas urged before the lower authorities. He firstly contended that the transactions in question are not 'speculative transactions' within the meaning of s. 43(5) of the Act and, in any event, the so-called speculative transactions do not constitute 'speculation business' within the meaning of Explanation 2 to s. 28 of the Act. According to the learned counsel, the payments in question represented damages paid pursuant to a breach committed by the assessee. The amounts paid by way of damages following a breach committed, learned counsel contends, cannot be treated as losses arising in the course of speculative transactions. Reliance was placed by him on a decision of the Division Bench of this court in CIT v. Andhra Oil and Fertilisers Company : [1983]143ITR661(AP) and also on the decision of the Supreme Court in CIT v. Shantilal P. Ltd. , in support of the proposition that, even if the transactions were to be regarded as 'speculative transactions' within the meaning of s. 43(5) of the Act, they still do not constitute 'speculation business' within the meaning of Explanation 2. to s. 28 of the Act. Learned counsel relied on the decision of this court in Addl. CIT v. Maggaji Shermal : [1978]114ITR862(AP) and also on the decision of the Bombay High Court in CIT v. India Commercial Co. P. Ltd. : [1977]106ITR465(Bom) .

8. We have considered the submissions of the learned counsel for both sides. We are unable to accept the Revenue's contention that the transactions under consideration could be held to be 'speculative transactions' within the meaning of s. 43(5) of the Act. The assessee carries on business in the manufacture and sale of groundnut oil and, in the nature of business carried on by the assessee, it entered into a number of contracts for the purchase as well as sale of commodities dealt in. In respect of a small moiety of the contracts each year, delivery did not take place. The assessee's explanation was that it was due to the non-supply of railway wagons and that explanation was found to be true. We may quote below the finding recorded by the Income-tax Appellate Tribunal in this connection :

'It (the assessee) further stated that it had entered into a number of contracts and a few of the contracts could not be fulfilled for reasons beyond assessee's control, namely, non-availability of railway wagons. This plea raised by the assessee has been amply proved and, in fact, it is not disputed by the Revenue.'

9. Because of the non-supply of railway wagons, the assessee had to commit a breach in the execution of a few contracts entered into by it. The Tribunal observed that, out of the transactions which were settled without delivery, some were after the breach occurred, that is to say, after the due date of delivery, and some were prior to the date of delivery. We are unable to appreciate this distinction sought to be made out. Once the breach occurred and following the breach, mutual claims were settled by the parties resulting in payment of monies by the assessee, it is immaterial whether the settlement took place before or after the due date. The due date obviously refers to the date on which delivery of the goods was agreed to be effected under the contract. It cannot be said that the breach occurs only on the due date when the the goods were not supplied. A person entering into a contract may commit a breach well prior to the date for delivery of goods by unilaterally repudiating the contract for a variety of reasons. Anticipating that it will not be possible to deliver goods on the due date as per the contract, a person can always inform the other contracting party that he is not in a position to fulfil the obligations arising under the contract. As soon as the contracting party is informed that delivery will not be made according to the contract, the breach is committed unilaterally and the contract between the parties is put to an end to. Thereafter, it is merely a question of settling the mutual claims of the parties following the breach. The claims may be settled either before or after the due date. In our opinion, the date of actual settlement makes little difference. What is crucial is to find out when a breach had occurred, whether such breach occurred on the due date or well before the due date. If the facts and circumstances of a case indicate that a breach had occurred, whether by repudiation or otherwise of a contract unilaterally by one of the parties to the contract, nothing survives for settlement of the contract thereafter and what has to be settled subsequently is not the contract as such which was entered into, but the disputes arising out of the breach committed by one of the parties to the contract. In the present case, the material on record would indicate that the goods were not dispatched because the railway authorities would not supply wagons. If the assessee had informed well before the due date the parties with whom the contracts were entered into that he would not be delivering the commodities as per the contracts entered into because of the non-availability of railway wagons and consequently settled the dispute arising on account of the non-delivery of the commodities by payment of a sum of money, it does not amount to a settlement of a contract for the supply of goods, but is a settlement of the claims arising out of the breach committed by the assessee in the matter of supply of the goods. In that view, it makes very little difference whether the settlement was effected before the due date or after the due date so long as the settlement took place as a result of the breach committed by the assessee. In our opinion, the principle enunciated by the Calcutta and Mysore High Courts in CIT v. Pioneer Trading Co. P. Ltd. : [1968]70ITR347(Cal) and Bhandari Rajmal Kushalraj v. CIT : [1974]96ITR401(KAR) and approved by the Supreme Court in CIT v. Shantilal P. Ltd. and also the principle followed by this court in CIT v. Andhra Oil and Fertilisers Company : [1983]143ITR661(AP) equally applies. It is not necessary to further look into the question whether the actual settlement of the claims was effected before the due date or after the due date. The settlement may take place at any time and that settlement is of the dispute between the parties.

10. We may refer to the decision of the Delhi High Court in CIT v. Bhagwandass Rameshwar Dayal : [1984]149ITR387(Delhi) . That was a case where the assessee entered into a contract for delivery of some edible oils on August 30, 1968. Well before the due date, on August 22, 1968, the assessee informed the party with whom the contract was entered into that there was some failure by some oil suppliers and there was difficulty for the assessee to make more supplies for some other reasons also. Considering the explanation of the assessee, the parties mutually settled the claim whereby the assessee agreed to pay Rs. 25,000. The question arose whether the sum of Rs. 25,000 paid by the assessee by way of settlement without actual delivery of goods represented loss arising from a 'speculative transaction' within the meaning of s. 43(5) of the Act. The Delhi High Court held that the assessee committed a breach of the contract when it informed on August 22, 1968, that it would not be in a position to deliver the goods and the settlement by payment of Rs. 25,000 on account of non-supply of goods is relatable to the breach committed by the assessee. The Delhi High Court, therefore, held that the sum of Rs. 25,000 paid by the assessee represented loss arising in the course of the assessee's business and was not loss in a speculative transaction. We may usefully quote below the observations of the Dehli High Court (p. 392) :

'A contract is speculative if it is settled without actual delivery. If the contract is broken, i.e., for any reason one party is unable to give delivery or the other party is unable to take delivery, it is a cased of breach of contract. It depends, therefore, on the facts and circumstances of the case as to whether there has actually been a 'breach' of the contract or a 'settlement' of the contract. A breach takes place on account of repudiation of the contract or failure to perform it or contract may be terminated through frustration, impossibility or through any other cause which ends the contract under the Contract Act or the Sale of Goods Act. When the obligation to supply or take delivery, as the case may be, comes to an end by operation of law, it does not make the transaction speculative. However, if the parties mutually settle the contract without any intervening circumstances, then it may be a speculative transaction if all the other conditions of s. 43(5) are satisfied. The material question in this case is : Why was the contract settled If it was settled by mutual consent to avoid delivery, then it would be speculative. If it was settled because of inability of the assessee to supply or on account of the fact that it did not have the necessary resources to give the delivery, then it would be a breach of contract.'

11. We are in respectful agreement with the above view of the Delhi High Court. If we ask the question in the present case 'why was the contract settled ?', the only answer is that it was settled because of the inability of the assessee to supply the commodities on account of the non-availability of the railway wagons. That would make it a breach of contract and whatever was paid by way of settlement subsequently is traceable to the breach committed by the assessee and cannot be held to be in pursuance of the settlement of the contract. We are, therefore, clearly of the view that the losses incurred by the assessee in respect of the impugned transactions for the assessment years 1970-71 to 1974-75 represented losses in the course of the assessee's business and cannot be held to be losses arising in respect of 'speculative transactions' within the meaning of s. 43(5) of the Act. This finding itself is sufficient to entitle the assessee to claim the losses as deductions.

12. Arguments were advanced at considerable length by the learned counsel for both sides on the question as to what constitutes 'speculation business' for purposes of s. 73(1) of the Act. We are unable to accept the submission of the learned standing counsel for the Revenue that every contract entered into by an assessee for the purchase and sale of commodities in the course of business, which is settled otherwise than by delivery, would itself constitute 'speculation business' for purposes of s. 73(1) read with Explanation 2 to s. 28 of the Act. In our opinion, it is necessary to examine the nature and the course of speculative transactions in any given year in order to determine whether the assessee is carrying on speculation business. Section 73(1) of the Act provides that any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. While s. 43(5) of the Act provides an artificial definition of 'speculative transaction', s. 73(1) does not in terms provide that any loss in respect of a speculative transaction carried on by the assessee shall not be set off except against the profits and gains, if any, of another speculative transaction. The expression used in s. 73(1) is 'speculation business'. If speculation business is to be understood in the normal commercial parlance, the ingredients are totally different and a 'speculative transaction' artificially defined in s. 43(5) of the Act does not amount to 'speculation business' as is commercially understood. A Full Bench of the Gujarat High Court in Pankaj Oil Mills v. CIT : [1978]115ITR824(Guj) has succinctly explained what is understood to be a speculative transaction in the ordinary commercial sense. We may quote below the observations of the Gujarat High Court (p. 828) :

'In speculative transactions the modus operandi of persons indulging in them is that when one enters into a contract of purchase, he also simultaneously enters into one or more contracts of the sale against the same quantity deliverable at the same time either to the original vendor or to someone else, so as either to secure profit or to minimise loss, before the vaida day; and similarly when he enters into a contract of sale, he simultaneously enters into one or more contracts to purchase the same quantity before the vaida day. The result of such dealings, when the sale and purchase are to and from the same person, has the effect of cancelling the contracts leaving only differences to be paid (vide Tod v. Lakhmidas Purshotamdas ILR [1892] Bom 441 Perosha Cursetji Parakh v. Manekji Dossabhai Watcha [1898] ILR 22 Bom 899 and Sasson v. Tokersey Jadhawjee ILR [1904] 28 Bom 616.'

13. When a person enters into transactions of the above nature, he is said to be carrying on speculation business. We have already invited attention to the artificial definition of 'speculative transaction' in s. 43(5) of the Act, which renders every transaction, in which a contract for the purchase or 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, a speculative transaction. The emphasis is, therefore, on the settlement of the contract without actual delivery. Having defined 'speculative transaction' in the above terms, the Legislature proceeded to explain through Explanation 2 to s. 28 of the Act that, where speculative transactions carried on by an assessee are of such a nature as to constitute a business, such business referred to as 'speculation business' shall be deemed to be distinct and separate from any other business. So, the fiction introduced by Explanation 2 to s. 28 is only to ensure that, if the speculative transactions falling within the meaning of s. 43(5) of the Act are of such a nature as to constitute a business, then it would amount to the assessee carrying on a speculative business, although, in normal commercial sense, such speculative transactions are not recognised as speculation business. Explanation 2 to s. 28 does not have the effect of deeming every speculative transaction as speculation business, as canvassed by the learned standing counsel for the Revenue. What is required for speculation business is that the course of speculative transactions carried on by an assessee is of such a nature as to constitute a business. It is, therefore, necessary in each case to examine and find out whether the speculative transactions carried on by an assessee are of such a nature as to constitute a business. It may be that, in a given case, a single speculative transaction, on application of proper tests, may be found to constitute 'speculation business'. It may equally be true that a plurality of speculative transactions, on application of proper tests, constitute 'speculation business'. It would depend upon the facts of each case. It is not possible to accept the submission of the learned standing counsel for the Revenue that no recognised tests are applicable for the purpose of determining whether an assessee is carrying on speculation business by reference to the nature of the speculative transactions carried on by him. We do not find direct acceptance of such a proposition, as contended by the learned standing counsel for the Revenue, in the decision of this court in CIT v. Puttaiah Seshaiah and Co. : [1984]146ITR168(AP) . On the contrary, the principle enunciated by this court Addl. CIT v. Maggaji Shermal : [1978]114ITR862(AP) recognises the need to independently examine whether the nature of speculative transactions carried on by an assessee constitutes 'speculation business'. In that case, an assessee was found to have entered into an isolated transaction, which was settled otherwise than by actual delivery and, on the facts of that case, this court came to the conclusion that it could not be said that the assessee was carrying on speculation business. We may also refer to the decision of the Bombay High Court in CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 456 wherein it was held that whether a particular source of income is 'business' or not must be decided according to ordinary notions as to what constitutes a 'business'. Courts have recognised certain tests to determine whether an assessee could be said to be carrying on business and the Bombay High Court referred to the decision of the Supreme Court in Narain Swadeshi Weaving Mills v. CEPT : [1954]26ITR765(SC) where the Supreme Court has approved and laid down (at pages 772-773), the position that the term 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. We are in respectful agreement with the view of the Bombay High Court that in order to determine whether the speculative transactions carried on by an assessee are of such a nature as to constitute 'business', it is necessary to apply the recognised tests and then determine the question. The Bombay High Court also rightly observed that even a single or isolated transaction can, in a conceivable case, amount to 'business'. We may not agree with the observations of the Bombay High Court that, because of the expression 'speculative transactions', Explanation 2 to s. 28 requires plurality of transactions for the purposes of constituting 'business'. This, however, does not make any dent on the principle set out by the Bombay High Court that, in order to determine whether an assessee is carrying on 'speculation business', the nature of speculative transactions carried on by him (whether it is a single or isolated transaction or more) should be examined. This principle enunciated by the Bombay High Court accords with the view taken by this court in Addl. CIT v. Maggaji Shermal : [1978]114ITR862(AP) . We may also refer to the decision of the Madhya Pradesh High Court in CIT v. Bhikamchand Jankilal : [1981]131ITR554(MP) . The Madhya Pradesh High Court clearly held that a speculative transaction would amount to speculation business if it fulfils the definition of 'business' under s. 2(13) of the I.T. Act, 1961, or if it amounts to an adventure or concern in the nature of trade. We are, therefore, fortified in our view that the question whether an assessee is carrying on speculation business can be determined by the application of recognised tests, viz., whether the speculative transactions carried on by the assessee connote some real, substantial and systematic or organised course of activity or conduct with a set purpose. In the application of this test, it can conceivably be found that even a single or isolated transaction constitutes 'speculation business'. All that we wish to state is that, without application of tests, it will be impermissible to come to a conclusion that every speculative transaction carried on by an assessee in the course of his ordinary business amounts to 'speculation business'. In the present case, the Tribunal came to the conclusion that the speculative transactions carried on by the assessee in each of the assessment years 1970-71 to 1974-75 do not constitute 'speculation business'. Our attention has not been invited to any material on record which would indicate that the assessee has been carrying on speculative transactions which connote some real, substantial and systematic or organised course of activity or conduct with a set purpose. All that is said is that, because delivery was not effected in respect of certain contracts, the assessee must be considered to be carrying on speculation business. In our opinion, this falls short of the requirement for determination that the alleged speculative transactions carried on by the assessee constitute 'speculation business'.

14. For the aforesaid reasons, we hold that the transactions in question relating to the assessment years 1969-70 to 1974-75 (both years inclusive) cannot be considered to be 'speculative transactions' within the meaning of s. 43(5) of the Act and, in any event, there is no material to come to the conclusion that the alleged speculative transactions carried on by the assessee are of such a nature as to constitute them into a distinct 'speculation business'. The Tribunal was justified in allowing the loss claimed by the assessee. We answer the question referred to us in the affirmative, that is to say, in favour of the assessee and against the Revenue. In the circumstances of the case, we direct the parties to bear their own costs. Advocate's fee Rs. 500.

Raghuvir, J.

15. I am in agreement with the answer indicated in the opinion of my brother Anjaneyulu J. The justification for writing a separate order is to restate some of the trends in the reasoning affecting the conclusions relevant to 'speculation business' and to be precise as to when and what circumstances indicate that a business is a speculation business within the meaning business within the meaning of Explanation 2 to s. 28 and sub-s.(1) of s. 73 of the I.T.Act, 1961 (the Act).

16. The assessee in this case is a registered firm running the business of rice and oils in the name of M/s. Sri Venkateswara Rice and Oil Mills, Anantapur. The miller in 45 transactions amongst a host of thousand transactions whether he did not speculation business. The Revenue seeks to thwart the attempt of the miller to set off the losses in 45 transactions from the profits of business. In the assessment year 1969-70, one transaction is referred. The loss in that is Rs. 320. In 1970-71, in 6 transactions, the loss is Rs. 28,513. In 1971-72, in 19 transactions, the loss is Rs. 7,091. In 1972-73, in 10 transactions, the loss is Rs. 3,892. In 1973-74, in 8 transactions, the loss is Rs. 4,467 and in 1974-75, in a transaction, the loss is Rs. 3,600. In the 45 transactions, the loss claimed is Rs. 47,883. The question referred is whether the 45 transactions are speculative transactions or not and whether the losses incurred in the transactions are hit by sub-s.(1) of s. 73 of the Act is the question at issue.

17. In the case of Chinnaswami Chettiar v. CIT : [1974]96ITR353(Mad) the Madras High Court referring to the provisions of s. 28, s. 43 and s. 73 of the Act applied a literal interpretation to the provisions. The Supreme Court in CIT v. Shantilal P. Ltd. : [1983]144ITR57(SC) was reluctant to 'endorse' the method adopted. The reluctance was to hold when goods are not delivered in a transaction per se under the I.T. Act, 1961, whether a transaction is a speculative transaction

18. This Court in CIT v. Andhra Oil and Fertilisers Company : [1983]143ITR661(AP) at page 668, held 'Taxing law, it is well settled, has to be construed literally'. This approach, in my view, requires a restatement. In that decision, cases are cited where the literal interpretation was adopted by the Madras High Court and by a single judge of the Mysore High Court in Bhandari Rajmal Kushalraj v. CIT : [1974]96ITR401(KAR) . These cases are referred and it is found that the Supreme Court was not prepared to endorse the cases.

19. In the case of Addl. CIT v. Maggaji Shermal : [1978]114ITR862(AP) this court observed 'the intention of parties is immaterial and irrelevant' in deciding a transaction whether it is a speculative business (speculative transactions). With great respect, the principle requires a restatement. The fact 'delivery' was not made go goods per se, the transactions for the reason does not become a speculative transition. The law on the subject is, it is for courts to consider cognate circumstances of each case and find out how the breach occurred. Was it due to circumstances beyond the control of the assessee - the vendor Whether non-delivery occurred due to repudiation of the contract or because of failure to perform the contract or because the contract was terminated due to frustration or because the contract was impossible of performance or because the breach resulted due to inability of the supplier. Most of these circumstances enter the judicial verdict in this area. To say, in such a field, the intention is not material and circumstances are not relevant is not correct.

20. In the course of five or six decades in this country, the tests were laid the numerous cases to determine when a single or certain transaction is a business and in the other cases what indicia determines the business, whether business is real, a substantial or systematic, whether there was an organised course of activity. If it is conduct, whether set pursuit of profit was discernible even when an adventure is an isolated transaction. My learned brother, in his opinion, elaborated this aspect with which I am in agreement.

21. The question is whether the same indicia or test is applicable to determine 'speculation business'. I am of the view that the tests and indicia are the same. But, in the case of CIT v. Puttaiah Seshaiah and Co. : [1984]146ITR168(AP) , it was held (p. 171) :

'In other words, if several speculative transactions are connected by a common thread and by themselves constitute a speculative business as such, Expln. 2 is superfluous. Parliament would not have put in the Explanation merely for affirming an obvious and existing fact......... The three provisions (ss. 28, 43 and 73) referred to above are parts of a single scheme. Parliament has first defined what is a speculative transaction and in doing so, as we have stated above, they have totally excluded from consideration the intention of the parties. Having so defined the speculative transactions, Parliament provided that if these transactions are business transactions, they must be treated as a separate and distinct business..... It would not be consistent or reasonable to hold that while determining whether a transaction is a speculative transaction or not, the intention of the parties is not relevant, but that such intention is relevant while determining whether the speculative transactions constitute a speculative business or not.'

21. To hold as a 'speculative business', Parliament in s. 28 and s. 73 has prescribed different indicia is not correct. It is in this regard, the view stated by the Bombay High Court in CIT v. Indian Commercial Co. P. Ltd. : [1977]106ITR465(Bom) is correct with the exception of the interpretation based on plurality transactions contained in the definition in clause (5) of s. 43. In the General Clauses Act, singular always includes plural and the vice versa is also the true in law. Therefore, the tests are the same affecting speculation business. Therefore, one transaction cannot ordinarily satisfy the definition of business. That one swallow does not make summer governs the reasoning (except in the exceptional case of adventure in the nature of trade). It is not necessary to burden with citations in this regard.

22. Relevant to speculation business in Addl. CIT v. Maggaji Shermal : [1978]114ITR862(AP) the ordinary tests were applied. The tests could not be departed without referring to a larger Bench. May be, in this case, reference to a larger Bench is not necessary, for we are following the binding decision of the highest court in the country and also for the additional reason we are following the case in Addl. CIT v. Maggaji Shermal : [1978]114ITR862(AP) of this court.


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