VENKATESAM J. - The only question referred to this court for decision under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act') is, 'Whether, on the facts and in the circumstances of the case, the assessee was entitled to the set-off of the loss of Rs. 12,300.' The relevant facts which appear from the agreed statement of the case drawn up by the Tribunal are as follows :
The assessee is a firm carrying on business in turmeric. The assessment year is 1956-57, for which the corresponding previous year is the Diwali year ended November 14, 1955. One of the contentions before the department as well as before the Tribunal related to the disallowance of Rs. 22,257, which was the loss incurred in a business of speculation. The loss other than Rs. 12,300 was incurred in respect of contracts admittedly in the nature of teji-mandi contracts prohibited by section 19 of the Forward Contracts (Regulation) Act, 1952, and was disallowed by the department on the ground of its being an illegal loss. The contention that that loss also should be allowed was given up even before the Tribunal, and also before us, and the argument on behalf of the assessee is confined to the loss of Rs. 12,300. That loss arose in respect of two contracts for future delivery of turmeric, and they resulted in payment of the difference in price of Rs. 10,500 in respect of one contract, and Rs. 1,800 in respect of the other, totalling Rs. 12,300. Both the contracts provided for delivery of the goods but the goods in fact were not delivered, though the assessee had stock of the same, because he anticipated that by delivering the goods on the scheduled dates, he would have suffered heavy losses, and hence paid the price differences.
The department as well as the Tribunal rejected the assessees contentions, and held that the two transactions were speculative transactions, and the loss resulting therefrom could not be treated as a trading loss in computing the profits or gains of any business, profession or vocation carried on by him under section 10(1) of the Act. They also held that the transactions did not amount to hedging transactions protected by clause (a) of the proviso to Explanation 2 to section 24(1). The Tribunal, however, differing from the departmental officers, held that the speculation loss having been proved, it should be allowed to be carried forward and set off against future speculation profits under section 24(1) of the Act.
The assessee is aggrieved by this order, and hence this reference.
Sri Swaminathan, the learned counsel for the assessee, raised the following contentions :
(1) The two transactions are not speculative, but simply forward contracts, as the test of a speculative or wagering contract is proof of the fact that the common intention of the parties, even at the inception, was only to deal in difference, and in no circumstances to call for or give delivery, which is not the fact in the instant case, and that the test is the same even in income-tax law. He, therefore, contends that the sum of Rs. 12,300 representing the loss on the two contracts should be treated as trading loss in computing the profits under section 10(1).
(2) Even assuming the transactions are speculative within the meaning of Explanation 2, they are protected by clause (a) of the proviso to that Explanation.
(3) It is incidentally argued that the loss of Rs. 12,300 only consists of two transactions, and cannot be said to constitute the business in speculative transactions within the meaning of Explanation 1 to section 24(1) of the Act.
In order to appreciate these contentions, it is necessary to extract the relevant provisions of the Act. Section 6, with the marginal note 'Heads of income chargeable to income-tax', enacts thus :
'Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely :-.......
(iii) Income from property.
(iv) Profits and gains of business, profession or vocation.
(v) Income from other sources.'
Section 10, with the marginal note 'business', lays down :
'10. (1) The tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation, in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely :....'
Section 24, with the marginal note 'Set-off of loss in computing aggregate income', reads thus :
'24. (1) 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......
Explanation 1. - 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.
Explanation 2. - A speculative transaction means a transaction in which a contract for purchase and 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 :
Provided that for the purposes of this section, -
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or....
shall not be deemed to be a speculative transaction.'
It may be noted that the first proviso to section 24(1) as well as Explanations 1 and 2 to that sub-section and section 24(1) were inserted by the Income-tax (Amendment) Act, 1953, with effect from 1st April, 1952.
It is now well-settled that under section 6, which classified income under six heads, income-tax is only one tax which is levied on the sum total of the income classified under the several heads enumerated therein, and is not a collection of distinct taxes levied separately on each head of income. This position is apparent from section 24(1) of the Act.
Generally speaking, where an assessee sustains a loss, it may be set off against profits in one of four ways, viz. :
1. If loss is incurred in respect of any source of income, it must be set off against the profit from the same source before the income from the source can be arrived at. This set-off is also appropriately called 'deduction', and is allowed on ordinary commercial principles of computing profits.
2. If after allowing the aforesaid set-off or deduction, the net result is still a loss, that loss may be set off against profits from another source under the same head, and this is allowed because income under each head is computed by adding together the profits from the several sources falling under the same head. For example, where a person carries on several businesses, or both business and profession, he is entitled, apart from section 24, to set off the losses in one business against profits in another, or losses in business against professional earnings, and tax is leviable only on the balance of profits after deducting such losses. In such a case, section 24(1) would not be attracted.
3. After setting off losses against profits under the same head, if the net result is still a loss, it may be set off under section 24(1) against profits of the same year under any other head. For example, loss in business may be set off against income from property, and loss under the head 'income from other sources' may be set off against profits of 'Business'. The exceptions to this rule, however, are speculative loss, and loss falling under the head 'Capital gains', which cannot be set off against income falling under any other head.
4. If the loss cannot be set off under sub-section (1) of section 24 because of the absence or inadequacy of profits of the same year under any other head, it may, under sub-section (2), be carried forward and set off against the profits or a subsequent year (vide Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax.
It may be mentioned that the Supreme Court in the aforesaid case held that the right of carrying forward of loss could be claimed under section 24(2) only if there were profits under another head against which part of the loss could be set off under sub-section (1), and if there was no income under any head at all, the loss could not be carried forward. This decision is however superseded by the Income-tax (Amendment) Act, 1953, by amending sub-section (2) of section 24, which in terms provides that the whole loss can be carried forward where the assessee had no other head of income, though the right of carrying forward of losses is made subject to the restrictions enumerated in the proviso to that sub-section.
The contention on behalf of the assessee is that even after the amendment to section 24 in 1953, the loss in question cannot be said to be the result of speculative transactions, but is an ordinary trade loss. For this purpose, the petitioners counsel relies upon the decision of this High Court in Alapati Ramamurthi Gelli Krishna Murthi and Co. v. Maddi Seetharamayya wherein it was laid down, on a review of the case-law, as follows :
'It is also well settled that a contract cannot be held to be a wagering contract without any proof of the deal in differences and in no circumstances to call for or give delivery.....
The mere fact that on settlement of some contracts, the differences were entered in the books does not establish that it was the intention of the parties not to call for and give delivery.'
In that case, a claim was made for damages on the ground that the defendant committed breach of a contract to sell gunnies, and it was resisted on the ground that the contract was a wagering contract. Subba Rao C.J. (as he then was), speaking for the court, made the above observations, and, on an examination of the evidence, held that the contract was not a wagering contract. No exception can be taken to the test laid down in that decision for deciding whether or not a particular contract is a wagering contract within the meaning of section 30 of the Indian Contract Act.
The other decision relied on by the learned counsel for the assessee is Soundarapandia Nadar and Brothers v. Commissioner of Income-tax. In that case, the assessees who were carrying on business in grain and rice at Tuticorin in British India, bought the goods at Rangoon through their agents and imported them to Tuticorin where they were sold. The assessees were also entering into forward contracts in respect of these goods through their agents at Rangoon, who sent to them from time to time statements of account in respect of these transactions which were entered in separate folio in the same account books at Tuticorin. The financing of all the transactions was from Tuticorin and the control of all the transactions was under a single management. In 1937-38 the assessee carried on business in forward contracts but they stopped it in 1938-39. They again carried it on in the years 1939-40 and 1940-41 when it resulted in a loss. In 1941-42 the assessee did not deal in forward contracts but they claimed under section 24(2) of the Act that the unadjusted balance of loss carried forward from 1939-40 and 1940-41 should be set off against the profits of the year 1941-42. The department and the Appellate Tribunal disallowed the claim. But a Bench of the Madras High Court held that the dealing in forward contracts carried on by the assessee in the Rangoon grain market was a part of the general business of the assessee as dealers in rice and grain, and they were therefore entitled to set off the loss against the profits of the year 1941-42 under section 24(2) of the Act.
Admittedly, the learned judges in that case were construing section 24(2) of the Act before its amendment in 1953, and the main question for consideration was, whether two dealings in different commodities, or the carrying on of different lines of business, would constitute the same business or not, within the meaning of section 24(2). On the facts of that case, the learned judges found that under the forward contracts the assessee had the undoubted right to demand delivery in case of purchases, and that it could not be said that from the beginning they did not entertain the intention of taking delivery under those contracts and had in view only speculation upon the fluctuations of the grain market at Rangoon, that the agents sent extracts of accounts to Tuticorin, and they were all entered in the same account books, though in a different folio, and that the financing of all the transactions, whether they related to purchases or whether they related to forward contracts, was from Tuticorin and the control of all the transactions was under a single management. It was held that the mere fact that the forward contract business could be separated, if trouble was taken to go through the accounts and to separate the dealings, does not make this business a distinct business from the other business of the assessee, as it is the common practice of every merchant to enter under separate heads each line of business in order to ascertain whether that particular line was fetching profit or ending in loss, and that circumstances did not give the business a distinctive character so as to detract from its being the same business within the meaning of section 24(2) of the Act. We fail to see how this decision assists the assessee in the interpretation of the section after the amendment.
Section 24, it must be observed, is ill-drafted. The effect of section 24(1) after the amendment in 1953, may however be stated thus :
(1) Where an assessee sustains a loss of profits or gains in any year under any of the heads 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.
(2) According to its first proviso, 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. In other words, loss sustained in speculative transactions, which are in the nature of a business, shall be taken into account to the extent of the amount of profits and gains in any other business, consisting of speculative transactions. The ingredients of the proviso, therefore, are : (i) the loss sustained should relate to speculative transactions; (ii) those transactions should be in the nature of a business; and (iii) the loss shall be taken into account only to the extent of profits and gains in any other business consisting of speculative transactions.
(3) Explanation 1 lays down that, where 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, i.e., speculative transactions in the nature of a business shall be distinct and separate from any other business.
(4) Explanation 2 gives the meaning of 'speculative transaction' as a transaction in which a contract for purchase and sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. This Explanation reveals that, if a contract for the purchase and sale of any commodity is periodically settled otherwise than by actual delivery or transfer of the commodity, or ultimately settled otherwise than by actual delivery or transfer, it is speculative transaction.
The contention of Sri Kondaiah on behalf of the revenue is that though in the law of contract, when there is not intention at the outset to accept differences, a transaction will not be speculative, in the income-tax law that is not the position, and that according to Explanation 2, even if the intention of the parties at the outset was to take delivery of the goods, if in fact the contract was settled otherwise than by actual delivery or transfer of the goods, it is a speculative transaction. This contention of the department, in our opinion, must be upheld.
It is well established that the ordinary canons of statutory construction apply to taxing Acts. But, in addition, there are some canons which have special reference to such Acts. In the construction of a taxing Act the court has primary regard to the statutory words themselves and to their proper judicial construction. Taxing Acts are to be construed strictly, in the sense that one has to look merely at what is clearly said, there being no room for any intendment; but a fair and reasonable construction must be given to the language without leaning to one side or the other. Whether in applying the terms of the charge or the terms of an exemption, no considerations of equity or hardship affect the construction of the Act (vide Halsburys Laws of England, third edition, volume XX, paragraph 32, page 27).
Bearing these principles in mind, Explanation 2 may now be examined. It, no doubt, speaks of a periodical settlement of the differences in price otherwise than by actual delivery or transfer, but it also speaks of the ultimate settlement of the contract otherwise than by actual delivery or transfer of the goods. The words 'ultimately settled otherwise than by the actual delivery or transfer of the commodity' are very significant, and must be given effect to. They can only mean, by implication, that even if at the outset the parties intended the performance or to claim the difference in price, if ultimately the contract is settled otherwise than by actual delivery or transfer of the commodity, it is a speculative transaction. The reason for the Explanation is quite obvious, as the legislature is aware that, under the general law, it will not be a speculative transaction. This definition, to our minds, is exhaustive, and does not permit the importing into income-tax law the general notions of wagering or speculative transactions in the domain of contract law. The effect of this Explanation is thus two-fold : (i) where actual delivery of goods, or transfer of the commodity or scrips takes place, the transaction is not a speculative transaction, however highly speculative it may be in fact; and (ii) even if the original intention was not to gamble in differences, if in fact the contract is settled by payment of the difference, it is a speculative transaction under the Act.
On behalf of the assessee it is contended that even assuming that the transactions fall within Explanation 2, they are saved by clause (a) to the proviso to that Explanation. That proviso excludes from the definition of 'speculative transactions' what are popularly known as hedging contracts entered into by manufacturers and merchants in the course of business to guard against loss through future price fluctuations.
In order, however, to invoke the proviso the following conditions must be satisfied :
(i) There should be a contract for actual delivery of goods manufactured by the assessee or merchandise sold by him.
(ii) The assessee must have intended to guard against loss through future price fluctuations in respect of those contracts.
(iii) In order to guard himself, the assessee must have entered into a contract in respect of raw materials or merchandise in the course of his manufacturing or merchanting business.
If all these conditions are satisfied, the contract shall not be deemed to be a speculative transaction for the purpose of section 24. The very fact that the forward contracts were settled by payment of the differences cannot be deemed to be contracts entered into by the assessee to guard himself against the losses through future price fluctuations. In fact, it has not been established that there was any contract as such falling within the proviso to Explanation 2. We must, therefore, hold that the transactions are not saved by clause (a) of the proviso to Explanation 2 to section 24(1) of the Act.
Having reached the conclusion that the transactions are speculative, the effect of the first proviso to section 24(1) remains to be considered. This proviso does not apply to a case where a loss of any business is sought to be adjusted or set off against the profits of any other business, profession or vocation, as such adjustment is to be made under section 10 itself, and sub-section (1) of section 24 applies only to cases where a loss under one head is sought to be set off against profits under another head. The substantive part of sub-section (1) itself would not apply in such a case, and, consequently, the proviso thereto would not apply either.
In a recent decision of this court in Jummarlal Surajkaran v. Commissioner of Income-tax two questions of law were referred, viz. :
'(i) Whether, on the facts and in the circumstances of the case, the transactions of purchase and sale of 650 bales of gunny bags by the assessee were speculative transactions within the meaning of section 24(1) of the Income-tax Act and
(ii) Even otherwise, whether the assessee is not entitled to a set-off of this loss against his other business income falling under section 10 of the Act ?'
In that case, the assessee claimed to adjust a loss sustained in certain forward transactions relating to gunnies against other profits earned in his other business. Under the forward contract, the assessee had the option either to take delivery of the goods or to pay the difference in prices. In respect of a portion of the goods covered by the forward contracts, he settled the difference, did not take delivery, but he claimed that that loss should be taken into account in computing his business profits.
The first question that the loss did not arise out of speculative business was not pressed before this court, and it was only the second question that was argued. The learned judges considered the effect of section 24(1) and the first proviso, and held that, having regard to the clear and unambiguous language of the proviso and the scheme of the Act, there can be little doubt that the legislature enacted it as a substantive provision, and that it modifies the computation of the profits and gains under the head of 'Profits and gains of business, profession or vocation' under section 10 of the Act. Chandra Reddy C.J., who spoke for the court, followed the decision of the Bombay High Court in Keshavlal Premchand v. Commissioner of Income-tax.
In the aforesaid case, Chagla C.J. laid down that even though the main portion of section 24(1) of the Act provides only for cases where an assessee sustaining a loss under one of the heads of income mentioned in section 6 claims to have it set off against his income, profits or gains under all the other heads mentioned in section 6, the first proviso to that sub-section is not confined in its application to such a case, but applies also to cases where a loss in speculative transactions in the nature of 'Business' is sought to be set off against profits from other kinds of business transactions, and the profit and the loss fall under the same head, viz., 'Business'. In the words of Chagla C.J. :
'It is clear, therefore, on the language of the proviso itself and on the scheme of the Act, that the legislature in enacting the so called proviso was enacting a substantive provision dealing with the mode of computing the profits and gains chargeable under the head profits and gains of business profession or vocation, and what the legislature provided was that when you compute these profits and gains, the loss sustained in a speculative transaction must not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of a speculative transaction......
It is true that the proviso, as we have construed it, does not deal with the abridgment of the right of the assessee to set off a loss under one head against profit under another head, but it does in one important sense abridge the right of the assessee to set off under section 24(1) and that abridgment consists, if one might so put it, in the quantum of profit or loss which can be set off, and the proviso really deals with the quantum of profit or loss on which the assessee can rely for the purpose of claiming a set-off under section 24(1) against another head. Therefore, although in the larger sense the proviso is a substantive enactment, it cannot be said that the legislature in placing if after section 24(1) in the shape and form of a proviso has done something for which there is absolutely no justification.'
The learned Chief Justice also pointed out that a practice has come into vogue in recent times of businessmen buying speculative losses in order to reduce their profits, and that mischief is removed by this proviso.
In the unreported decision in R. C. No. 51 of 1960 of this court, the learned Chief Justice followed Keshavlal Premchand v. Commissioner of Income-tax and the cases of Manohar Lal Munshi Lal v. Commissioner of Income-tax, Commissioner of Income-tax v. Hukam Chand Dalal and Commissioner of Income-tax v. Ramgopal Kaniyalal, which followed the Bombay view, and answered the second question by saving that it is not open to an assessee to adjust the loss sustained in speculating business against his income derived from other businesses which are not of a speculative character, but could lay a claim to a set-off only against profits derived from a business of a speculative nature. This decision of a Bench of our High Court is binding upon us. Further, we see no reason to differ from the reasoning or conclusion in that case, and we respectfully follow it.
Even so, if was argued on behalf of the assessee that the loss sought to be set off is only the result of two transactions, which cannot be said to be speculative transactions in the nature of a business within the meaning of the first proviso. We cannot countenance this contention either. As already stated, the two transactions in question are only a part of a larger activity of the assessee, and the other transactions were found to be admittedly in the nature of teji-mandi contracts, prohibited outright by section 19 of the Forward Contracts (Regulation) Act, 1952. It cannot, therefore, be contended on behalf of the assessee that the two forward contracts are only isolated transactions, which do not constitute 'business'.
That apart, according to section 24(1) of the Act, 'business' includes any trade, commerce or manufacture or any adventure of concern in the nature of trade, commerce or manufacture. The Supreme Court in Raja J. Rameshwara Rao v. Commissioner of Income-tax laid down that even a single venture may be regarded as 'in the nature of trade or business'.
It may be mentioned that section 24 of the Act as amended in 1953 is now substantially enacted as section 73 of the Income-tax Act (43 of 1961) as follows :
'73. Losses in speculation business. - (1) 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.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as in not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and -
(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on....
(4) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.'
The terms of this section are substantially in accord with the view we have taken.
We have, therefore, no hesitation in holding that the two forward contracts are speculative transactions which are in the nature of a business. According to the first proviso to section 24(1), they shall not be taken into account except to the extent of the amount of the profits and gains, if any, in any other business consisting of speculative transactions. The Tribunal having found that the loss was sustained in speculative transactions, directed that it should be allowed to be carried forward and set off against future profits in future speculative transactions. We are, therefore, of the opinion that the view taken by the Appellate Tribunal is correct.
The question referred to us, therefore, is answered in the negative and against the assessee. As the assessee has failed, he must pay the costs of the respondent. Advocates fee Rs. 250.
Question answered in the negative.