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Commissioner of Income-tax Vs. Agrawal Brothers - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMisc. Civil Case No. 138 of 1976 (old No. 450 of 1971, Jabalpur)
Judge
Reported in[1980]123ITR232(MP)
ActsIncome Tax Act, 1961 - Sections 43(5)
AppellantCommissioner of Income-tax
RespondentAgrawal Brothers
Appellant AdvocateK.A. Chitale, Adv.
Respondent AdvocateA.M. Mathur, Adv.
Cases Referred(See Stock v. Frank Jones
Excerpt:
- - act of 1922 and the board of revenue on the question of hedging contracts observed that hedging contracts could be both purchase as well as sale. ..16. now, this part of the proviso, as it refers to a manufacturer as well as a merchant, has used the phrase 'raw materials or merchandise 'apparently, this part refers to such transactions which are entered into to guard against loss through future price fluctuations. ' this, therefore, clearly refers to contracts which are for actual delivery of goods as opposed to contracts which are settled otherwise than by actual delivery and the term 'goods',it appears, has been qualified by the phrase 'manufactured by him or merchandise sold by him 'these two phrases, therefore, manufactured by him 'or 'merchandise sold by him 'in my opinion,.....oza, j.1. this is a reference made by the income-tax appellate tribunal, indore bench, at the instance of the department.2. the facts giving rise to this reference are that the assessee returned income of rs. 12,811 after charging to the accounts loss, claimed to be hedging loss, amounting to rs. 93,554. the ito observed that the loss arose from forward contracts entered into by the assessee which were settled otherwise than by actual delivery of transfer of goods. the losses were claimed by way of difference in the accounts dealt with by the assessee. before the ito, it was, however, claimed that to the extent of rs. 38,230, the difference in price debited to the difference account, pertained to the ready business and the balance of rs. 56,248 was covered by prov. (a) to section 43(5) of.....
Judgment:

Oza, J.

1. This is a reference made by the Income-tax Appellate Tribunal, Indore Bench, at the instance of the department.

2. The facts giving rise to this reference are that the assessee returned income of Rs. 12,811 after charging to the accounts loss, claimed to be hedging loss, amounting to Rs. 93,554. The ITO observed that the loss arose from forward contracts entered into by the assessee which were settled otherwise than by actual delivery of transfer of goods. The losses were claimed by way of difference in the accounts dealt with by the assessee. Before the ITO, it was, however, claimed that to the extent of Rs. 38,230, the difference in price debited to the difference account, pertained to the ready business and the balance of Rs. 56,248 was covered by prov. (a) to Section 43(5) of the I.T. Act, 1961, which corresponds to prov. (a) to Expln. 2 to Section 24(1) of the Indian I.T. Act of 1922. The ITO held that whole of the loss of Rs. 98,091 arose from speculative transactions and could not be set off against other business income 'or other heads of income and that the same was liable to be carried forward to be set off against income from specultive transactions in future years.

3. On appeal before the AAC, it was pointed out that to the extent of Rs. 38,230 the type of losses were such that they arose from purchase of goods from one party and sale to another party, the losses arising therefrom only being debited to the trading account. It was further shown that the said loss arose in respect of some 42 transactions. The AAC further found that in all these cases there was a contract for purchase of goods and the goods were actually delivered. He, accordingly, held that to the extent of Rs. 38,230 the loss was a regular trading loss.

4. In regard to the transactions resulting in a loss of Rs. 56,248, the AAC found that the goods had not been delivered. Since the assessee was neither a manufacturer nor a stockist the AAC did not accept the submission that the forward contracts for purchase or sale were hedging transactions to guard against loss through future price fluctuations. He was of the opinion that the purchase contract could not be considered to be the assessee's stock and held that the loss of Rs. 56,248 could not be allowed as a hedging loss.

5. On appeal, the Tribunal accepted the submission of the assessee that the above transaction was typical and that the same characteristics obtained in several other transactions which were the subject-matter of appeal. The Tribunal, analysing one of such transactions, ultimately found that the sum of Rs. 56,248 was a loss covered by prov. (a) to Section 43(5) of the Act of 1961, and could not be regarded as loss in a speculative transaction.

6. After the decision of the Tribunal, the department approached the Tribunal for making a reference and the Tribunal has submitted statement of the case and referred the following questions for opinion of this court:

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a contract of sale subsequent to the contract of purchase was within the terms of the proviso to Section 43(5) of the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 56,248 was a loss covered by proviso (a) to Section 43(5) and was to be regarded as a normal business loss '

7. One of the specimen transactions, which has been considered by the Tribunal in its judgment, is that the assessee entered into a forward contract of purchase on August 24, 1960, with Dewas Flour and Oil Mills at the rate of Rs. 59.75, delivery to be given in November, 1960. Soon after this the assessee to guard against any fall in price entered in a forward contract to sell on September 2, 1960, at the rate of Rs. 64.62. Ultimately, instead of a fall in price the prices went up and the assessee felt that it was sufficiently protected as a result of the purchase and sale contracts. This contract of sale was entered into by it with one Brijlal Pannalal of Dhuliya and it could have waited and delivered the goods to Brijlal Pannalal on November 15, 1960, when it was to get delivery from the Dewas Flour and Oil Mills. But the assessee, in view of the upward trend of the market, settled this contract of sale with Brijlal Pannalal on October 27, 1960, at the rate of Rs. 69 by paying a difference of Rs. 2,187.50 and to this extent the assessee incurred a loss. The assessee waited thereafter, in due course, till the delivery by Dewas Flour and Oil Mills and sold the ready goods on November 15, 1960, to Bhojumal and Sons, Indore, at the rate of Rs. 68.12. The effect of the contract of this sale of goods ultimately meant a profit of Rs. 4,085 in the goods account and loss of Rs. 2,187.50 in the difference account. The assessee's contention before the Tribunal was that this loss was in the nature of hedging loss. It was also explained by the assessee that if it had waited till November 15, 1960, and delivered the goods to Brijlal Pannalal, at the contract rate of Rs. 64.62, the result would have been a profit of less than Rs. 2,000 and by settling the hedging contract on October 27, 1960, the assessee had tried to gain more in its goods account. It was on these facts that the learned Tribunal accepted the contention of the assessee.

8. The learned counsel for the department contended that in view of the language of Section 43(5), prov. (a) of the Act of 1961 only speculative transactions of purchase would be excluded from the mischief of the section as hedging contracts. But a contract for sale could not be saved within the meaning of the prov. (a) to Sub-section (5) of Section 43. And in support of his contention the learned counsel placed reliance on the decisions reported in Chimanlal Chhotalal v. CIT [ : [1968]69ITR129(Guj) and CIT v. Sk. Ar. K. Ar. Somasundaram Chettiar & Co. : [1975]101ITR832(Mad) .

9. The learned counsel for the assessee, on the other hand, contended thatthe first part of prov. (a) to Section 43(5), apparently talks of contracts for purchaseand, therefore, hedging contracts could only be contracts for sale. He alsocontended that the view taken in the two decisions cited by learned counselfor the department does not appear to be correct. He further contendedthat the provisions contained in Section 43(5), prov. (a) of the I.T. Act of 1961, are identical to prov. (a) to Expln. 2 to Section 24(1) of the Indian I.T. Act of 1922 and the Board of Revenue on the question of hedging contracts observed that hedging contracts could be both purchase as well as sale. The learned counsel referred to this view of the Board from Iyengar's Commentary on the Income Tax Act (6th Edn., Vol. II, pp. 1109-10), and contended that if the highest executive in the department has interpreted the language of the proviso in a particular manner it should be accepted, except when accepting the interpretation would mean doing violence to the language itself. In support of his contention the learned counsel placed reliance on the rule of construction enunciated by Crawford in his work on Statutory Construction, para. 219, p. 393.

10. It was not disputed before us that the transactions, one of which in detail has been quoted above, as referred to by the Tribunal in its judgment, are transactions the total loss of which, which is the subject-matter of this reference, comes to Rs. 56,248. It is also not in dispute that the only question in the reference is as to whether a contract of sale subsequent to the contract of purchase was a contract which would fall within prov. (a) to Section 43(5) of the Act and in fact this is what one of the questions referred to us is.

11. Section 43(5) of the I.T. Act of 1961 reads :

'43. In sections 28 to 41 and in this section, unless the context otherwise requires--...

(5) ' 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 scrips :...'

12. This sub-section defines ' speculative transaction ' and what is provided as proviso to this sub-section appear to be those cases which ordinarily will fall within the ambit of the definition of ' speculative transaction ' but for the purpose of this sub-section they shall not be deemed to be speculative transactions. Apparently, therefore, the speculative transaction as defined in Sub-section (5) will be treated under this as speculative transaction except those which are covered under the prov. (a), (b) or (c) of this sub-section of Section 43. In the present case, we are concerned with prov. (a) which reads:

' 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 ;

shall not be deemed to be a speculative transaction.'

13. Apparently, this deals with two categories of persons:

(i) manufacturers ; and (ii) merchants; and in order to understand the true implication of this sub-section, it would be necessary to illustrate what ordinarily will be the activity of the merchant or the manufacturer. It is apparent that a manufacturer is supposed to purchase raw material and sell the goods manufactured by him, whereas a merchant ordinarily purchases the commodity in which he deals and sells it also. It is in this context that the prov. (a) to Sub-section (5) of Section 43 will have to be understood. This proviso is identical in' language to the prov. (a) to Expl. 2 to Section 24(1) of the Indian I.T. Act of 1922 :

' 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;...

shall not be deemed to be a speculative transaction.'

14. The question of interpretation of this Clause (a) arose before the taxing officers and ultimately it appears that the Board of Revenue expressed the view interpreting this proviso as quoted by Iyengar in Vol. II of his treatise on the Law of Income Tax (6th Edn. pp. 1109-10):

' Under Clause (a) of the proviso to Expln. 2 to Section 24(1) of the Income-tax Act, the Income-tax Officers exclude from the category of speculative transactions only a ' hedging purchase ' transaction entered into with reference to 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 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 Expln. 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 material 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.'

15. Looking to the proviso as it stands today, the first part of it reads:

' .....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...'

16. Now, this part of the proviso, as it refers to a manufacturer as well as a merchant, has used the phrase ' raw materials or merchandise '. Apparently, this part refers to such transactions which are entered into to guard against loss through future price fluctuations. Admittedly, therefore, these transactions could alone be said to be hedging contracts and it could not be doubted that the word ' contract ' used in this part in the very beginning could not mean a contract of purchase only. It could either be a contract of purchase or sale. Even in Chimanlal Chhotalal v. CIT : [1968]69ITR129(Guj) , Hon'ble Shri Justice Bhagwati (Acting C.J. as he then was) observed (p. 133):

'The proviso takes out of the ambit and operation of the second Explanation ' a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business ' and, prima facie, these words would include not only a contract for purchase of raw materials or merchandise but also a contract for sale of raw materials or merchandise.'

17. It, therefore, cannot be doubted that so far as this part of the proviso is concerned there appears to be no doubt.

18. Now, the second part of the proviso refers to those contracts which are to be protected against loss through future price fluctuations and this part of the clause, therefore, reads : ' ...in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him.' This, therefore, clearly refers to contracts which are for actual delivery of goods as opposed to contracts which are settled otherwise than by actual delivery and the term ' goods', it appears, has been qualified by the phrase ' manufactured by him or merchandise sold by him '. These two phrases, therefore, ' manufactured by him ' or ' merchandise sold by him ', in my opinion, qualify the term ' goods ' and not the nature of the transaction, as in the case of a manufacturer if he has entered into a contract of actual delivery of goods what those goods could be is answered by the phrase ' manufactured by him ' because apparently the manufacturer could only enter into a contract for actual delivery of goods manufactured by him. But in the case of a merchant, he can enter into a contract for actual delivery of goods. But it appears that the legislature intended to limit the definition of the term ' goods ' in the case of a merchant only to the commodities which he ordinarily sells as apparently a dealer in edible oils cannot plead that heentered into a hedging contract of some other commodity if he is not in fact dealing in that commodity. Therefore, in the case of a merchant the term ' goods ' is qualified by the phrase ' merchandise sold by him ' as admittedly a merchant is only expected to enter into a contract of actual delivery of goods with regard to the 'merchandise that he ordinarily sells. It is here, it appears that the difficulty has arisen and the decision of the Gujarat High Court referred to above felt that the phrase ' merchandise sold by him ' indicates that these contracts could only be for sale ; and if the contract for actual delivery of goods could only be for sale it is held that the contract to protect these contracts against losses from fluctuations of price could only be contracts of purchase, as it is observed in the judgment referred to above (p. 133):

' But such contract, under the proviso, has to be hedging contract entered into by the person concerned for the purpose of guarding himself against loss through future, price fluctuations in respect of his ' contracts for actual delivery of goods manufactured by him or merchandise sold by him '. It is by way of hedging ' against contracts for actual delivery of goods manufactured by him or merchandise sold by him' that a person can enter into ' a contract in respect of raw materials or merchandise ' within the meaning of the proviso. Now in the case of a person carrying on manufacturing business ' contracts for actual delivery of goods manufactured by him , would obviously be contracts of sale by such person and in respect of such forward contracts of sale he is permitted to enter into a hedging contract and the hedging contract in such a case must, therefore, necessarily be a forward contract of purchase. Similarly, when we turn to ' contract for actual delivery of merchandise sold by him ', that is, by a person carrying on merchanting business, it is clear that the contracts which are contemplated are forward contracts for sale of merchandise and in respect of such forward contracts of sale, a hedging contract of purchase can be entered into by such person within the meaning of the proviso. '

19. It is further observed in this judgment (p. 134):

' But this contention fails to give due effect to the words ' merchandise sold by him ' and equates them with the words ' merchandise dealt in by him'. The words, 'merchandise sold by him' in the context and collocation of the words ' contracts for actual delivery of goods manufactured by him' leave no doubt that the ' contracts for actual delivery' referred to in the last part of the proviso are forward contracts of sale and they do not include forward contracts of purchase. If forward contracts of purchase were intended to be included, it is difficult to see why the legislature should have used the words ' contracts for actual delivery of merchandise sold by him '. These words would be quite inappropriate when used in reference to forward contracts of purchase. It is, therefore, clearthat proviso (a) takes out from the scope and ambit of the second Explanation only forward contracts of purchase of raw materials or merchandise entered into by an assessee in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his forward contracts of sale for actual delivery of goods manufactured by him or merchandise sold by him. Where forward contracts of sale are entered into by an assessee as hedge contracts for the purpose of guarding him against loss through future price fluctuations in respect of his forward contract of purchase, such forward contracts for sale are not covered by proviso (a) and they are not taken out of the definition of speculative transactions in the second Explanation.'

20. It appears that the phrase ' merchandise sold by him ', has been used as an indication that the contracts for actual delivery of goods could only be contracts for sale which could be guarded against. It appears that a little difficulty has arisen because the manufacturer and merchant both have been put in the same category in this proviso and apparently manufacturer is expected to purchase raw material and sell the goods manufactured by him. But in the case of a merchant it could not be doubted that the normal merchanting activity that he does is purchase of commodities and sale also. And if the proviso is read in this context the question arises as regards the qualifying clause of the word ' goods ' in the second part of the proviso. A person may have contracts for actual delivery of goods but in order to protect these contracts of actual delivery of goods the Legislature never intended that a hedging contract, which apparently will be a speculative contract, could be brought within the scope of this proviso if it is altogether of different goods. If the phrase ' merchandise sold by him ' is not read as a phrase qualifying the word ' goods ', the result may be that if a merchant has entered into a contract of actual delivery of goods for sale he may enter into a hedging contract of any other merchandise although he may not be a merchant in that commodity. In fact, in this proviso so far as a manufacturer is concerned two phrases have been used, ' raw material ' in the first part and ' goods manufactured by him' in the second part But as regards merchant the phrase used is ' merchandise ' in the first part of the proviso and again ' merchandise ' in the second part of the proviso, further qualified by the phrase ' sold by him '. It appears, therefore, that the terminology 'merchandise ' used in both the parts of the proviso qualified by the phrase ' sold by him ' has been provided only to make it clear that a hedging contract is only permissible with regard to the commodity which ordinarily the merchant is selling or in which the merchant is dealing. It cannot be doubted that a hedging contract of any other commodity, which is not the merchandise in which a particular merchant deals, could be protected under this proviso. And this inference could be drawn only if ' merchandise sold by him ' is read as a qualifying phrase, qualifying the term ' goods ' occurring in the second part of the proviso.

21. And it,appears that it is in this view of the matter that the Board interpreting Section 24(1), Expln. 2, prov. (a) of the Indian I.T. Act of 1922 expressed the view quoted above.

22. The decision reported in Gomraj Fatehchand v. CIT : [1976]102ITR131(Mad) , has taken the same view as of the Gujarat High Court referred to above. In this decision reliance was placed on an earlier decision of the Madras High Court reported in CIT v. Somasundaram Chettiar & Co. : [1975]101ITR832(Mad) . In Somasundaram Chettiar's case, while considering the scope of prov. (a) it has been observed (p. 837);

' This makes it clear that it is only those contracts of purchase entered into by an assessee to guard against loss through future price fluctuations in respect of his contracts of sale for actual delivery of the goods which can be taken to be covered by Clause (a). On the wording of Clause (a) it is not possible to accept the view of the Tribunal that it covers both purchase and sale transactions. For a transaction to come under Clause (a) it should be one entered into by an assessee to guard against loss through future price fluctuations in respect of his sale contracts and, therefore, Clause (a) cannot at all take in a sale contract, even though it is intended to guard against loss through price fluctuations in respect of the contract for the purchase of the goods. The Tribunal has also expressed the view that there need not be actual correlation--contract to contract--but that it is sufficient if a transaction either by way of purchase or sale is entered into with a view to guard against any future loss in that particular line of business. The Tribunal also took the view that the words ' in respect of his contracts for actual delivery...'occurring in Clause (a) ought to be given a wider interpretation, that what the proviso intended was not a specific correlation--contract to contract--but a general correlation, that what it required was that the speculation should not be a general and wide one but one consistent with and incidental to the assessee's transaction in ready goods as a trader and that the transactions entered into by the assessee fell within the scope of Clause (a) of the third proviso to Section 24(1). But we are inclined to think that we will be doing, considerable violence to the language used in Clause (a) if it is understood to cover all cases of purchases and sales entered into by an assessee with a view to guard against his future loss in general in that line of business. It is true, a correlation--contract to contract--may not be necessary. But the contract or contracts contemplated by Clause (a) has or have to be proved to have been entered into with a view to guard against loss through future price fluctuations in respect of contract or contracts of sale entered into by him of the same goods.'

23. The question has also been considered in a decision reported in Raghunath Das Prahlad Das v. CIT : [1976]104ITR95(All) , by the Allahabad High Court, and in this decision also the Allahabad High Court following the Gujarat High Court and the earlier decision of the Andhra Pradesh High Court took the view that the hedging contracts could only be contracts of purchase although in the peculiar facts of that case it was held that the transactions are such which do not fall within the ambit of the provisions contained in Section 43(5), prov. (a) (p. 99):

' 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 thejncome-tax Act, 1961, '

24. Unfortunately, none of the decisions referred to above have considered the proviso to indicate as to whether the phrase ' merchandise sold by him ' was a clause qualifying the term ' goods ' It is also clear that so far as the first part of the proviso is concerned, in none of these decisions it has been held that when the proviso talks of a contract in the beginning of the proviso, it is limited to one kind of contract. In fact, the decision of the Gujarat High Court clearly rules that this contract could be both ways so far as the interpretation of the first part of the proviso is concerned. The ultimate conclusion that the hedging contract could only be for purchase and not for sale, it appears, has been derived from the last part of this clause where it is stated ' merchandise sold by him ' And because the phrase uses the words ' sold by him ' it is understood to mean that the contract for actual delivery of goods which could be protected could only be a contract of sale and not of purchase. In fact, it appears that because the manufacturer and merchant both have been put together what ordinarily happens with a manufacturer has been considered and the sale has been made applicable to the case of a merchant although, with respect to the decisions quoted above, in our opinion, it does not appear to be the true interpretation of this clause of the proviso. In fact the term ' goods ' has been qualified by two phrases. In the case of a manufacturer the phraseused as ' manufactured by him ' and in the case of a merchant the phrase used is ' merchandise sold by him '. And this clearly goes to show that these two phrases qualify the term ' goods ' about which there is a contract for actual delivery. And if this contract for actual delivery is for sale, naturally a hedging contract could be for purchase. But if this contract for actual delivery happens to be one for purchase, then the hedging contract is bound to be for sale as in the present case. And this interpretation put on Section 24(1), Expln. 2, third prov., Clause (a) by the Board appears to be reasonable. It appears that this interpretation has been followed by the executive authorities under the department and it could not be said that the interpretation is such which is not justified within the meaning of the words used in the statute.

25. Crawford in his work on Statutory Construction (1940 edn.). para. 219, pp. 393-395, has observed:

'As a general rule executive and administrative officers wilt be called upon to interpret certain statutes long before the courts may have an occasion to construe them. Inasmuch as the interpretation of statutes is a judicial function, naturally the construction placed upon a statute by an executive or administrative official will not be binding upon the court. Yet where a certain contemporaneous construction has been placed upon an ambiguous statute by the executive or administrative officers, who are charged with executing the statute, and especially if such construction has been observed and acted upon for a long period of time, and generally or uniformly acquiesced in, it will not be disregarded by the courts, except for the most satisfactory, cogent or impelling reasons. In other words, the administrative construction generally should be clearly wrong before it is overturned. Such a construction, commonly referred to as practical construction, although not controlling is nevertheless entitled to considerable eight. It is highly persuasive.'

26. It is also clear that there are no impelling reasons for not accepting his construction nor could it be contended that the interpretation put by the Board is clearly wrong. It appears that before the Gujarat High Court this interpretation put by the Board was not brought to the notice of the learned judges who heard the reference.

27. It was contended by the learned counsel for the department that to accept this construction will be doing violence to the language used in the proviso. This also has been felt in the Madras decision cited above. But, in our opinion, it could not be said that the language used in the proviso does not justify this interpretation. In fact, in our opinion, the confusion has been created because the manufacturer and merchant both have been put together in the proviso.

28. In our opinion, therefore, our answer to the first question referred to us, is in the affirmative as in our opinion, the Tribunal was right in holding that a contract of sale subsequent to the contract of purchase was within the terras of proviso (a) to Section 43(5) of the I.T. Act, 1961. The second question follows from our answer to the first question and we answer it also in the affirmative.

29. In the circumstances of the case, parties are directed to bear their own costs.

Sohani, J.

30. I have had the advantage of reading the judgment prepared by my learned brother, Oza J. I regret my inability to agree with him.

31. By this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as ' the Act') the Income-tax Appellate Tribunal has referred the following questions to this court at the instance on the Commissioner of Income-tax, Madhya Pradesh, Bhopal.

' (i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a contract of sale subsequent to the contract of purchase was within the terms of proviso (a) to Section 43(5) of the Income-tax Act, 1961?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 56,248 was a loss covered by proviso (a) to Section 43(5) and was to be regarded as a normal business loss '

32. The material facts giving rise to this reference briefly are as follows : The assessee is a registered partnership firm deriving income from business in grains, oil, commission and speculative transactions. For the assessment year 1961-62, the previous year for which ended on 31st March, 1961, the assessee filed a return declaring its income as Rs. 12,811 after charging to the accounts, loss, claimed to be hedging loss, amounting to Rs. 98,091. Before the ITO, it was contended on behalf of the assessee that the loss of Rs. 56,248 sustained by the assessee, was covered by prov. (a) to Section 43(5) of the Act and that the amount of Rs. 38,230 was the loss sustained by the assessee on account of difference in prices debited to the difference in account pertaining to ready business. The ITO held that the entire loss of Rs. 98,091 arose from speculative transactions and could not be set off against other business income or other heads of income and that the same was liable to be carried forward to be set off against income from speculative transactions in future years. On appeal, the AAC held that the loss of Rs. 38,230 could not be termed as speculation loss as there was the delivery of goods in respect of those transactions. The AAC, therefore, directed that the said loss be allowed as business loss. With regard to the loss of Rs. 56,248 the AAC observed as follows:

' The second category of transactions resulted in a loss of Rs. 56,248. Here the goods were not delivered. It must be emphasised that appellant is neither a manufacturer nor a stockist. As goods were not delivered, the transaction is a speculative transaction unless it is covered under proviso (a) to Section 43(5) which reads as under :

' (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...' Shri Goyal argued that the appellant had entered into forward contracts either for purchase or for sale and to ensure or guard against loss through future price fluctuations the applicant had to enter into contracts. He stated that instead of having ready stocks on hand on the dates of contracts, he had contracts for purchase or sale on the date of contracts. Hedging loss can be allowed only if it is proved that the dealer is either a manufacturer, or a stockist and he had entered into a forward contract to safeguard against the risk of raw materials, or merchandise in stock falling in value. The purchase contracts cannot be considered as appellant's stock and therefore I reject Shri Goyal's contention that the loss of Rs. 56,248 should be allowed as hedging loss.'

33. Against the order passed by the AAC, the assessee preferred an appeal before the Tribunal. The assessee filed before the Tribunal an extract of transactions making up the loss of Rs. 56,248. The Tribunal accepted that the following transactions was typical and that the characteristics obtained in the other transactions were the same:

' Rs. 2,187.50 hedge loss paid to Brijlal Pannalal of Dhulia.

One tank G. N. Oil sold on 2/9/60 @ 64.62Settled on 27/10/60 @ 69 This contract of hedge was against the following contract of purchase from Dewas Flour and Oil Mill, Dewas.

Date of contract 24/8/60 @ 59.75Delivery taken on 15/11 /60 Note:--This tank was sold to Bhorjumal and Sons, Chhawani, Indore, on 15-11-1960 @ 68-12 per md. There has been a profit of Rs. 4,085.00 in this contract.'

34. The Tribunal held that prov. (a) to Section 43(5) of the Act was attracted if it was read as under:

' Provided that for the purposes of this clause, a contract for purchase or sale in respect of merchandise entered into by a person in the course of his...merchanting business to guard against future price fluctuations inrespect of...merchandise dealt in by him shall not be deemed to be speculative transaction.'

35. Thus, by recasting the proviso, the Tribunal held that in the typical instance cited before it, which was illustrative of other transactions as well, the contract of sale entered into by the assessee on 2nd September, 1960, subsequent to the contract of purchase entered into by the assessee on 24th August, 1960, which was not for ready delivery as the delivery was to be given in November, 1960, was covered by the terms of prov. (a) to Section 43(5) of the Act. The Tribunal, therefore, held that the loss of Rs. 56,248 sustained by the assessee was a hedging loss covered by prov. (a) to Section 43(5) of the Act. The Tribunal, accordingly, allowed the appeal of the assessee. At the instance of the Commissioner, the Tribunal has made this reference as aforesaid.

36. The short question for consideration in this case is, whether the forward contracts of sale entered into by the assessee for the purpose of guarding against loss through future price fluctuations in respect of the forward contracts of purchase are covered by prov. (a) to Section 43(5) of the Act.

37. Now, before I proceed to analyse the provisions of prov. (a) to Section 43(5) of the Act, it would be useful to emphasize that in the instant case the finding of the AAC, which has not been set aside by the Tribunal, is that the assessee is neither a manufacturer nor a stockist. It has also not been found that when forward contracts of sale were entered into by the assessee, contracts were entered into by the assessee for actual delivery of ' goods ' ' manufactured by him ' or ' merchandise sold by him ', Learned counsel for the assessee contended that the phrase ' his contracts for actual delivery of merchandise sold by him ' is descriptive of the nature of the dealings carried on by the assessee and is not indicative of the point in time when the sale is made. The contention is contrary to the plain language of prov. (a) to Section 43(5) of the Act. That clause reads as under:

' Provided that for the purpose 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......'

38. From a bare reading of the aforesaid clause, it would be clear that the provisions of the said clause are attracted only if the following circumstances exist:

(i) There are contracts for actual delivery of goods manufactured by the assessee or of merchandise sold by the assessee.

(ii) The assessee has by a subsequent transaction intended to guard against losses through price fluctuations in respect of contracts for actual delivery entered into by him ; and

(iii) the transaction in question must be a contract entered into in respect of raw materials or merchandise in the course of the assessee's manufacturing business or merchanting business and it should have been settled otherwise than by actual delivery of goods.

39. According to the finding recorded by the Tribunal, there was no existing contract for actual delivery of goods which the assessee had entered into, and to safeguard the loss of which, through future price fluctuations, the assessee entered into the forward contracts in question. The finding of the AAC, which has not been set aside by the Tribunal, is that the assessee is not a stockist. It is also not disputed that the earlier contract entered into by the assessee was a forward contract of purchase. It was urged that as the assessee ultimately intended to enter into contracts for the sale of goods, in respect of which he had entered into contracts of purchase, prov. (a) to Section 43(5) of the Act would be attracted although there was no existing contract for the sale of merchandise when the hedging transactions were entered into. This contention, as I have already observed, is contrary to the plain meaning of prov. (a) to Section 43(5) of the Act. The use of the plural in the expression ' his contracts for actual delivery of merchandise sold by him ' in the said proviso is not for the purpose of indicating the dealings of the assessee generally, but to make it clear that there neea not be actual correlation, contract to contract, for bringing a hedge transaction within the meaning of prov. (a). I may usefully refer to the following observations in Raghunath Das Prahlad Das v. CIT : [1976]104ITR95(All) .

'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, 1961 : vide the cases of Juvvi Subbaramaiah and Co. v. Commissioner of Income-tax : [1964]51ITR742(AP) and Omkarmal Agarwal v. Commissioner of Income-tax . Decision of the Gujarat High Co : [1968]67ITR329(AP) urt in the case of Chimanlal Chhotalal v. Commissioner of Income-tax : [1968]69ITR129(Guj) also supports the same view. Learned counsel for the assessee urged that in Chimanlal Chhotalal's 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.'

40. I respectfully agree with the aforesaid observations. The learned counsel for the assessee strenuously contended that the view of the Gujarat High Court in the decision reported in Chimanlal Chhotalal v. CIT : [1968]69ITR129(Guj) , that Clause (a) was intended to cover only purchase contracts and not sale contracts was erroneous. It is, however, not necessary to decide that question in the instant case because, in view of the findings of the Tribunal the sale contract entered into by the assessee was not intended to guard against future loss in respect of any existing contract for actual delivery of merchandise sold by the assessee.

41. Learned counsel for the assessee also referred to the following administrative instructions of the Board, referred to at page 1109 of Iyengar's Income Tax (6th Edn., Vol. 2):

' 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 Expln. 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. Those points and their decisions thereon are given below : Point (i).

Under Clause (a) of the proviso to Expln. 2 to Section 24(1) of the Income-tax Act, the Income-tax Officers exclude from the category of speculative transactions only a ' hedging purchase ' ' transaction entered into with reference to 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 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 Expln. 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 material 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 transaction.'

42. Apart from the fact that the decisions of the Board are not binding on this court and are only meant for the guidance of the departmental authorities, I am unable to appreciate as to how the decision of the Board 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 material on merchandise in hand ' can be pressed into service in the instant case when the tacts found in the present case disclose that the assessee is not a stockist and that at the time, when it entered into hedging transactions, it was not proved that the assessee had 'merchandise in hand' and that it had entered into any contract for actual delivery of merchandise sold by it. The words ' actual delivery ', occurring in Section 43(5) of the Act, mean real as opposed to notional delivery, as held by the Supreme court in Davenport & Co. P. Ltd. v. CIT : [1975]100ITR715(SC) . The Tribunal erred in law in construing the proviso in question because the Tribunal held that it was permissible to read prov. (a) after recasting it as follows :

' Provided that for the purpose of this clause a contract (for purchase or sale) in respect of merchandise entered into by a person in the course of his merchanting business to guard against future price fluctuations in respect of...merchandise dealt in by him...shall not be deemed to be a speculative transaction.'

43. I am afraid that if the language of the proviso is plain and does not admit any ambiguity, it is not permissible for the Tribunal or for this court to recast it. In this connection, I may usefully refer to the following passage in Principles of Statutory Interpretation by G. P. Singh :

' When the words of a statute are clear, plain or unambiguous, i.e., they are reasonably susceptible to only one meaning, the courts are bound to give erfect to that meaning irrespective of consequences. The rule as stated by Tindal C.J. in Sussex Peerage's case [1844] 11 Cl. & F. 85is inthe following form : ' If the words of the statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense. The words themselves alone do, in such case, best declare the intention of the lawgiver.' The rule is also stated in another form : ' When a language is plain and unambiguous and admits only of one meaning, no question of construction of a statute arises, for the Act speaks for itself. The results of the construction are then not a matter for the court, even though they may be strange or surprising, unreasonable or unjust or oppressive.' ' Again and again' says Viscount Simon L.C., ' this Board has insisted that in construing enacted words we are not concerned with the policy involved or with the results, injurious or otherwise, which may follow from giving effect to the language used.' And says Gajendragadkar J., ' If the words used are capable of one construction only then it would not be open to the courts to adopt any other hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act.' '

44. The Tribunal, in my opinion, fell into error in not giving effect to the plain language of prov. (a) to Section 43(5) of the Act. The following observations in CIT v. Somasundaram Chettiar and Co. : [1975]101ITR832(Mad) approved in Gomraj Fatehchand v. CIT : [1976]102ITR131(Mad) are pertinent :

' But we are inclined to think that we will be doing considerable violence to the language used in Clause (a) if it is understood to cover all cases of purchases and sales entered into by an assessee with a view to guard against his future loss in general in that line of business.'

45. I respectfully agree with the aforesaid observations.

46. In my opinion, therefore, the questions referred to this court must be answered in the negative and in favour of the department. In the circumstances of this case, parties shall bear their own costs of this reference.

G.P. Singh, C.J.

47. This reference under Section 256(1) of the I. T. Act, 1961, comes up before me on a difference of opinion between Hon. Oza J. and Hon. Sohani J.

48. The assessee is a partnership firm carrying on business in grains, oil, commission and speculative transactions. The relevant assessment year is 1961-62, the previous year for which ended on 31st March, 1961. The income returned by the assessee was Rs. 12,811 after charging to the accounts loss, claimed to be hedging loss, amounting to Rs. 98,904. The ITO held that the entire loss of Rs. 98,691 arose from speculative transactions and could not be set of! against other business income or other heads of income and that the same was liable to be carried forward to be set off against income from speculative transactions in future years.

49. On appeal, the AAC held that the loss to the extent of Rs. 38,230 was in respect of transactions in which there was delivery of goods and that the loss to that extent could not be treated as speculation loss. The AAC, therefore, allowed Rs. 38,230 as business loss. As regards loss to the extent of Rs. 56,248 the AAC held that the transactions from which this loss arose were speculative transactions where the goods were not delivered. He further found that the assessee was neither a manufacturer not a stockist and that the loss of Rs. 56,248 could not be allowed as hedging loss under prov. (a) to Section 43(5) of the Act.

50. In further appeal by the assessee, the Tribunal held that the loss of Rs. 56,248 could be allowed as hedging loss covered by prov. (a) to Section 43(5). On an application made by the Commissioner, the Tribunal referred to the High Court the following two questions :

' (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a contract of sale subsequent to the contract of purchase was within the terms of the proviso to Section 43(5) of the Income-tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 56,248 was a loss covered by proviso (a) to Section 43(5) and was to be regarded as a normal business loss. '

51. The AAC in holding against the assessee observed as follows :

' Shri Goyal argued that the appellant had entered into forward contracts either for purchase or for sale and to ensure or guard against loss through future price fluctuations the appellant had to enter into contracts. He stated that instead of having ready stocks at hand on the dates of contracts he had contracts for purchase or sale on the date of contracts. Hedging loss can be allowed only if it is proved that the dealer is either a manufacturer or a stockist and he had entered into a forward contract to safeguard against the risk of raw materials or merchandise in stock falling in value. The purchase contracts cannot be considered as appellant's stock and therefore I reject Shri Goyal's contention that the loss of Rs. 56,248 should be allowed as headging loss. '

52. The assessee filed before the Tribunal a copy of the various transactions making up the loss of Rs. 56,248. The Tribunal in its order extracted the details of one of the transactions as specimen which are as follows :

' Rs. 2,187.50 hedge loss paid to Brijlal Pannalal, Dhulia.

One Tank G.N. Oil sold on 2-9-60 @ 64.62 settled on 27-10-60 @ 69. This contract of hedge was against the following contract of purchase from Dewas Flour and Oil Mills, Dewas.

Date of contract-- 24-8-60 @ 59.50

Delivery taken on 15-11-60,

Note:--This tank was sold to Bhorjumal and Sons, Chhawani, Indore, on 15-11-60 (a), 68.12 per md. There has been a profit of Rs. 4,085 in this contract. '

53. It will be seen that the assessee entered into forward contracts of sale for the purpose of guarding against loss in respect of forward contracts of purchase and claimed that the loss arising from such forward contracts of sale was covered by prov. (a) to Section 43(5) of the Act. This proviso reads as follows :

' 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 ;....

shall not be deemed to be a speculative transaction. '

54. The Tribunal held in favour of the assessee on the reasoning that a contract in respect of merchandise within the meaning of the proviso may be a contract for the purchase or sale of merchandise and that 'contracts for actual delivery' within the meaning of the proviso will include a contract for purchase of merchandise by an assessee who carries on merchanting business. The Tribunal read the proviso to mean as under :

' Provided that for the purpose of this clause a contract (for purchase or sale) in respect of merchandise entered into by a person in the course of his merchanting business to guard against future price fluctuations in respect of...merchandise dealt in by him...shall not be deemed to be a speculative transaction. '

55. Hon. Oza J. agreed with the interpretation put upon the proviso by the Tribunal. According to him, the words ' merchandise sold by Mm ' qualify the word ' goods ' in the proviso. He further held that the words ' merchandise sold by him' in the context meant 'merchandise dealt in by him '. By so reading the proviso, Hon. Oza J. came to the conclusion that the proviso covers a hedging contract of sale entered into for the purpose of guarding against the loss in respect of an actual delivery contract of purchase. Hon. Oza J., therefore, answered both the questions in the affirmative in favour of the assessee.

56. Hon Sohani J. did not decide whether the proviso covered only hedging contracts of purchase and not of sale. He, however, held that the actual delivery contract, to protect with the hedging contract which is entered into, must be a contract for actual delivery of merchandise sold by the assesses. Hon. Sohani J. did not agree that the proviso could be read in the manner done by the Tribunal. In the opinion of Hon. Sohani J. the words ' merchandise sold by him' could not be construed to mean' merchandise dealt in by him.' Hon. Sohani J. answered both the questions in the negative in favour of the revenue.

57. Having heard the learned counsel for the Commissioner and the learned counsel for the assessee, I am of opinion that the questions referred to the High Court by the Tribunal should be answered as decided by Hon. Sohani J.

58. The difference of opinion between the learned judges has arisen on the meaning of the words ' in respect of his contracts for actual delivery of goods manufactured by him and merchandise sold by him ' as they occur in the last portion of the proviso. These words describe the actual delivery contracts which can be protected by hedging contracts. If these words are expanded, they will read : ' in respect of his contracts for actual delivery of goods manufactured by him or in respect of his contracts for actual delivery of merchandise sold by him '. The words ' merchandise sold by him ' do not qualify the word ' goods '. While dealing with an assessee doing merchanting business, we are only concerned in the last portion of the proviso with the words ' actual delivery of merchandise sold by him ' and not with the word ' goods ' which is to be read along with the words ' manufactured by him ' while dealing with the case of an assessee doing manufacturing business. We are here concerned not with a manufacturer but with an assessee who carries on merchauting business. Contracts for actual delivery of merchandise sold by the assessee must necessarily be contracts for sale of the merchandise and not contracts for purchase of the merchandise. In my opinion, the words ' merchandise sold by him ' have to be given their natural or ordinary meaning and the word ' sold ' cannot be substituted by the words ' dealt in ' as has been done by the Tribunal.

59. Although it is now fashionable to talk of a purposive construction, the primary rule of construction still is that the language used in a statute has to be understood in its grammatical and ordinary sense without addition or subtraction or substitution: Stock v. Frank Jones (Tipton) Ltd. [1978] 1 All ER 948 (HL). This is specially true of a taxing statute where equitable construction is inadmissible and one has to adhere simply to the words of the statute. Ransom (Inspector of Taxes) v. Higgs [1974] 3 All ER 949 (HL). The rule of construction applicable to a taxing statute as well expressed in the classic words of Rowlatt J. in Cape Brandy Syndicate v. IRC [1921] 1 KB 64 as follows:

'......in a taxing act one has to look merely at what is clearly said.

There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.'

60. The above passage from the judgment of Rowlatt J. has been quoted times out of number and approved by the House of Lords, Privy Council and the Supreme Court in a number of cases. I content myself by mentioning only the recent cases which are Commrs. of Customs and Excise v. Top Ten Promotions Ltd. [1969] 3 All ER 39 (HL), Owen Thomas Mangin v. IRC [1971] 2 WLR 39 and Smt. Tarulata Shyam v. CIT : [1977]108ITR345(SC) .

61. The actual delivery contract concerning a manufacturer in the context of the proviso is obviously an actual delivery contract of sale. Similarly, the actual delivery contract in respect of an assessee doing merchanting business has to be an actual delivery contract of ' merchandise sold by him', that is, an actual delivery contract of sale of the merchandise. These are the contracts in respect of which if a hedging contract is entered into, it is not to be deemed to be a speculative transaction because of the proviso, although there is no actual delivery of the goods. This view is supported by decisions of at least three High Courts. [See Chimanlal Chhotalal v. CIT : [1968]69ITR129(Guj) , CIT v. Somasundaram Chettiar & Co. : [1975]101ITR832(Mad) and Raghunath Das Prahlad Das v. CIT : [1976]104ITR95(All) ]. In Chimanlal Chhotalal's case, the Gujarat High Court was dealing with prov. (a) to Expln. 2 to Section 24(1) of the 1922 Act which is identical to prov. (a) to Section 43(5) of the 1961 Act. Bhagwati C.J. (as he then was) in negativing the argument that the words ' merchandise sold by him ' were intended to convey that the contracts for actual delivery against which hedging contracts are made must be in respect of merchandise usually sold by such person in the course of his merchanting business, or, in other words, ordinarily dealt in by him and that they are not intended to limit such contracts only to forward contracts of sale of merchandise observed as follows (p. 134):

' But this contention fails to give due effect to the words ' merchandise sold by him ' and equates them with the words ' merchandise dealt in by him '. The words ' merchandise sold by him ' in the context and collocation of the words ' contracts for actual delivery of goods manufactured by him ' leave no doubt that the ' contracts for actual delivery' referred to in the last part of the proviso are forward contracts of sale and they do not include forward contracts of purchase. If forward contracts of purchase were intended to be included, it is difficult to see why the legislature should have used the words ' contracts for actual delivery of merchandise sold by him '. These words would be quite inappropriate when used in reference to forward contracts of purchase.'

62. These observations have my respectful concurrence.

63. Whether the hedging contracts within the proviso can be contracts of purchase only and not contracts of sale is a question on which I do not express any opinion as has been done by Hon. Sohani J., but I am clear that the actual delivery contracts against which hedging contracts can beentered into for the purposes of the proviso must be contracts of sale for actual delivery of merchandise and not contracts of purchase.

64. Learned counsel for the assessee relied upon the decision of the Board on certain representations and suggestions received from associations and chambers of commerce which is quoted in Iyengar's Income-tax, 6th Edn., Vol. 2, p. 1110. The decision of the Board as quoted therein runs as follows:

' Boards 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 Expln. 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.'

65. The Board's decision, extracted above, does not support the contention of the learned counsel for the assessee. It will be seen that according to the Board's decision, the hedging contracts have to be for guarding against the risk of ' merchandise in stock falling in value ' Further, the Board's decision that the hedging contracts can be taken to be genuine only ' to the extent the total of such transactions does not exceed the total stocks of merchandise in hand ' also emphasises the same thing. It is clear from the Board's decision that a hedging contract in the case of an assessee doing merchanting business must be against a transaction relating to merchandise in stock of the assessee which means that the proviso does not embrace hedging contracts against contracts of purchase of merchandise. However, even if the opinion expressed by the Board were in favour of the assessee, it cannot have a controlling effect in the interpretation to be adopted by this court. I have already stated that at least three High Courts have taken the same view which has been adopted by Hon. Sohani J., and which, in my opinion, is the correct view. On a question of interpretation of a fiscal legislation, like the Income-tax Act, which has an all India application, there should be unanimity, as far as possible, amongst the different High Courts. It is also a significant fact that although the decision of the Gujarat High Court was rendered in 1968, Parliament has not so far come forward to amend the proviso. This inaction gives rise to an inference that the view taken by the Gujarat High Court is in accord with the intention of Parliament.

66. It was submitted by the learned counsel for the assessee that an assessee who carries on merchanting business enters into contracts of purchase and sale of merchandise in the normal course of business and there is no reason why Parliament may not have intended to confer the benefit of hedging contracts in respect of actual delivery contracts of purchase of merchandise. It is not open to me to speculate upon the intention of Parliament which can be gathered only from the words used in the proviso. The words used in the proviso are clear and unambiguous and it is not possible to construe them in the manner contended for by the learned counsel for the assessee. An argument based on anomaly cannot widen the meaning to be attached to clear language in a statute unless possibly when the anomaly leads to such an absurdity, that it is manifest that Parliament could not have intended it which is not the case here (See Stock v. Frank Jones (Tipton) Ltd. [1978] 1 All ER 948 (HL).

67. For the reasons given above, I agree with the opinion expressed by Hon. Sohani J. I would answer the questions referred to the High Court in the negative in favour of the revenue and against the assessee. There shall be no order as to costs. The case shall now be listed before the Division Bench for final decision in accordance with the majority opinion..

ORDER

G.L. Oza & G.G. Sohani, JJ.

G.L. Oza, J.

68. This is a reference made by the Income-tax Appellate Tribunal, Indore Bench, at the instance of the department. The quest'on referred to us were :

' 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a contract of sale subsequent to the contract of purchase was within the terms of the proviso to Section 43(5) of the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 56,248 was a loss covered by proviso (a) to Section 43(5) and was to be regarded as a normal business loss '

69. After hearing of this reference the Division Bench did not agree in the judgment dated December 2, 1977. As there was disagreement between the two judges constituting the Division Bench, the matter was referred to a third judge and, consequently, it was placed before Hon'ble the Chief Justice Shri G. P. Singh, who heard the matter and gave his opinion.

70. In view of the opinion of Hon'ble the Chief Justice Shri G. P. Singh the reference is answered as follows :

Question No. 1 is answered in the negative and the answer to question No. 2 follows from answer to question No. 1.

71. In the circumstances of the case, the partis are directed to bear their own costs.


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