H. N. SETH J. - At the instance of the assessee, Messrs. Raghunath Das Prahlad Das of Mathura, the Income-tax Appellate Tribunal, Delhi Bench B, has referred the following Question in respect of the assessment year 1963-64 for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding in law that the loss of Rs. 46,275 arose to the assessee from speculative transactions within the meaning of section 43(5) of the Income-tax Act, 1961, and, consequently, could not be set off against other income of the assessee ?'
The assessee is a registered firm working as commission agent in a number of commodities such as coconut, munghpali, sarson, etc. It also purchased and sold those commodities on its own account. In respect of those commodities the assessee also entered into transactions which admittedly were speculative transactions. During the months of September and October of 1961, which fell within the previous year relevant to the assessment year 1963-64, the assessee had purchased certain quantity of ready sarson. It also entered into forward contracts for sale of 7,169 units of sarson (delivery to be effected during the months of November, 1961, and May, 1962). During the months of October to May, 1962, the assessee further entered into forward contracts for the purchase of 7,160 units of sarson, to be delivered during the months of November, 1961, and May, 1962. The assessee admits that all these forward contracts of sale and purchase in respect of 7,160 units of sarson were ultimately settled without taking or effecting actual delivery of the goods purchased or sold. On these transactions the assessee earned profits amounting to Rs. 2,69,047 and suffered losses amounting to Rs. 3,15,322. Net result was a loss of Rs. 46,275.
Before the Income-tax Appellate Tribunal the assessee claimed that inasmuch as on the dates on which it entered in to forward contracts for the sale of 7,160 units of sarson in the month of October, 1961, it had ample stock of ready sarson with it. These forward contracts of sale were entered into as hedge contracts to guard against the loss through future price fluctuation in respect of contracts for actual delivery of his ready goods. Accordingly, such transactions could not be considered to be speculative transactions as laid down in section 43(5), proviso, clause (a) of the Income-tax Act, 1961. The assessee entered into the forward contracts of purchase of 7,160 units of sarson during the months of October, 1961, and May, 1962, merely for settling the forward contracts of sale made by it during the month of October, 1961. In the circumstances it was entitled to adjust the losses suffered by it in respect of these forward contracts as against the profits earned by it in connection with its non-speculative business.
The case of the assessee was not accepted by the Income-tax Appellate Tribunal which held that at the time when during the month of October, 1961, the assessee entered into forward contracts of sale of sarson, it did not enter into any contract for actual delivery of sarson which was already in stock with it. Since there was no contract for sale of ready sarson it was not known what loss the assessee was going to guard against. It observed that, in the circumstances, the assessee could not claim that it sold sarson in the forward market just to protect or guard itself against the losses that may arise in respect of purchases made by it earlier, as indeed there were no prior forward purchases. As there was no contract for actual delivery of goods dealt with by the assessee the question of applicability of section 43(5), proviso, clause (a), did not arise. The Tribunal also relied upon a decision of the Gujarat High Court in the case of Chimanlal Chhotalal, wherein it had been held that the contracts contemplated by section 43(5), proviso, clause (a) were forward contracts of sale of merchandise and it was in respect of such forward contracts of sale alone that the hedging contracts contemplated by the section could be entered into by the dealers. The hedge contracts contemplated by the proviso were clearly contracts of purchases and not contracts of sale. In this view of the matter the Tribunal concluded that the forward contracts for the sale and purchase of 7,160 units of sarson, entered into by the assessee, which were ultimately settled without delivery of goods, were speculative transactions. Resultant loss because of those transactions continued to be speculation loss which could not be adjusted as against the profits of nonspeculation business of the assessee. Such losses had to be carried forward to the following year for being adjusted as against the profits of speculation business in that year.
Section 43(5) of the Income-tax Act, 1961, runs thus :
'Speculative transaction means a 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 script :
Provided that for the purposes of this clause -
(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
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member;
shall not be deemed to be speculative transaction.'
Under the main clause, whenever a transaction in which a contract for the purchase or sale of any commodity is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity, it is considered as a speculative transaction for the purpose of the Income-tax Act. But if such transactions have taken place in the circumstances mentioned in clauses (a) to (c) of the proviso to section 44(5) they will not be deemed to be speculative transactions. Clause (a) of section 13(5) applies only if the following circumstances exist;
(1) If there is a contract for actual delivery of goods manufactured by the assessee or a merchandise sold by it;
(2) the assessee must by a subsequent transaction intend to guard against losses through future price fluctuation in respect of such contract; and
(3) the transaction in question must be a contract entered into in respect of raw materials or the merchandise in the course of the assessees manufacturing business and it should have been settled otherwise than by actual delivery of goods.
Learned counsel appearing for the assessee contended that the expression 'to guard against loss thorough future price fluctuation in respect of the contract for actual delivery of goods manufactured by him or merchandise sold by him,' does not necessarily mean that the assessee should only have intended to guard against loss through future price fluctuation in correct of some existing contract for delivery of goods. These words are wide enough to include within their ambit a case where an assessee has a ready stock of merchandise dealt with by it and although there is no existing contract for the sale of the merchandise, it intends enter into contracts for their sale in future. If, as a result of future price fluctuation, the assessee is likely to suffer any loss in respect of such future contracts for delivery of goods, a transaction entered into by the assessee with a view to safeguard such loss would still be a contract to safeguard against loss due to future price fluctuation in respect of contracts for actual delivery of goods sold by the assessee and the transaction would be of the nature described in section 43(5), proviso, clause (a) and will not be considered to be a speculative transaction.
We are unable to accept this submission. Section 43(5), proviso, clause (a) merely applies to a case where there exists a contract for actual delivery of merchandise sold by a dealer and it is in order to safeguard the loss through future price fluctuation in respect of such a contract, that a transaction which is ultimately settled without actual delivery of goods is entered into. It is only such subsequent transaction which is taken out of the ambit of speculative transaction. This position becomes clear if one compares the language of clause (a) of the proviso to section 43(5) with that of clause (b) wherein it has been laid down that a contract in respect of stocks and shares entered into by a dealer or investor therein, to guard against loss in respect of his holding of stocks and shares through price fluctuations would not be considered to be speculative transaction. It is clause (b) which contemplates a transaction being entered into safeguard the fall in price of the holding of Shares. Clause (a) on the other hand does not safeguard loss in the value of the goods or merchandise in stock (as is the case before us); but it contemplates loss likely to be suffered in respect of a particular contract. Assessees contention would have had some force if clause (a) had been enacted on the lines of clause (b). Accordingly, unless the assessee shows that there was some existing contract in respect of which he was likely to suffer a loss because of future price fluctuation and that it was to safeguard such loss that it entered into the alleged forward contracts of sale during the month of October, 1961, he cannot claim the benefit of section 43(5), proviso, clause (a) and to say that the transaction should not be considered to be speculative transaction even if it was ultimately settled without actual delivery of goods. According to the findings recorded by the Income-tax Appellate Tribunal, there was no contract for actual delivery of goods which the assessee had entered into and to safeguard the loss of which, through future price fluctuation, the assessee had entered into the forward contracts in question. The assessee is, therefore, not entitled to claim that the transaction ceased to be a speculative transaction under clause (a) of the proviso to section 43(5) of the Income-tax Act, 1961.
A provision similar to that contained in section 43(5), proviso, clause (a) was also there in section 24 of the Indian Income-tax Act, 1922, and the Explanation added thereto. The Andhra Pradesh High Court interpreted that provision in a manner similar to that in which we have interpreted section 43(5), proviso, clause (a) of the Income-tax Act, 196l : vide the case of Juvvi Subbaramaiah and Co. v. Commissioner of Income-tax and Omkarmal Agarwal v. Commissioner of Income-tax. Decision of the Gujarat High Court in the case of Chimanlal Chhotalal v. Commissioner of Income-tax also supports the same view. Learned counsel for the assessee urged that in Chimanlal Chhotalals case The Gujarat High Court erred in observing that in order to attract the provision of section 24 of the Indian Income-tax Act, 1922, the transaction which was ultimately settled without actual delivery of goods must be a forward contract of purchase alone and not that of sale, inasmuch as future price fluctuation in respect of a contract of actual delivery of goods can be safeguarded both by entering into contracts for purchase as also for that of sale, depending upon the facts and circumstances of each case. However, it is not necessary for us to go into this question as we have found that the transactions which are apparently speculative transactions within the meaning of section 43(5), proviso, clause (a) have not been entered into in order to safeguard loss through future price fluctuation in respect of any existing contract for actual delivery of merchandise sold by the assessee. On this point the view expressed by the Gujarat High Court is in consonance with that of the Andhra Pradesh High Court with which we respectfully agree. Since in this case the Tribunal has recorded a finding that there was no such contract of ready goods in existence to safeguard the loss of which through future price fluctuation the forward contracts of sale and purchase were entered into, the question, viz., whether such subsequent transaction could also be a transaction of forward contracts of sale does not arise for consideration.
We are, therefore, of opinion that the Income-tax Appellate Tribunal did not commit any mistake in holding that the assessees case was not covered by section 43(5), proviso, clause (a) of the Income-tax Act, 1961.
In the result, we answer the question referred to us in the affirmative and in favour of the department. The assessee shall pay the costs of this reference to the department, which we assess at Rs. 200.
Question answered in the affirmative.