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Chimanlal Chhotalal Vs. Commissioner of Income-tax, Gujarat - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 32 of 1965
Judge
Reported in[1968]69ITR129(Guj)
ActsIncome Tax Act, 1922 - Sections 24(1)
AppellantChimanlal Chhotalal
RespondentCommissioner of Income-tax, Gujarat
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate J.M. Thakore, Adv.
Excerpt:
.....first proviso to section 24 (1) - in view of true interpretation of proviso forward contract for sale entered into by assessee as hedge contract for purpose of guarding against losses through future price fluctuations not covered by provision (a) - assessee not entitled to set off. - - 56,170 on the ground that the assessee had failed to establish that it had entered into forward contracts of purchase with agriculturists and that the forward contracts of sale were entered into by it as hedge contracts to guard against loss through future price fluctuations in respect of the forward contracts of purchase. the assessee preferred an appeal to the appellate assistant commissioner but the appeal was unsuccessful and the assessee thereupon carried the matter in further appeal to the..........even if such forward contracts of purchase were entered into by the assessee, 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 were not covered by proviso (a) and the forward contracts of sale were, therefore, speculative transactions and the loss arising from them was not liable to be set off against the other business income of the assessee. the assessee then applied for a reference and on the application of the assessee, the following question namely : 'whether on the facts and in the circumstances of the case, the assessee was entitled to set off the loss of rs. 56,170 against its other business income ?' was referred by the tribunal for the determination.....
Judgment:

Bhagwati, Actg. C.J.

1. This reference raises a short question of construction of proviso (a) to the second Explanation to section 24(1) of the Income-tax Act, 1922. The assessee is a registered firm and it carries on business as a dealer in cotton and cotton seeds. During Samvat year 2015, being the relevant previous year for the assessment year 1960-61, the assessee entered into certain forward contracts of sale of kapas (unginned cotton in pods) and cotton bales. Out of these contracts, barring a contract with Messrs. J. Chunilal & Company which resulted in a loss of Rs. 9,446, all the other contracts were ultimately settled otherwise than by the actual delivery of the goods and they resulted in a loss of Rs. 66,256. These contracts were admittedly covered by the second Explanation to section 24(1) and if they did not fall within proviso (a), they would be speculative transactions within the meaning of the first proviso to section 24(1) and by reason of that proviso the loss of Rs. 66,256 sustained in these contracts would not be liable to be set off against the other profit of the assessee from non-speculative transactions. The assessee, therefore, claimed before the Income-tax Officer making its assessment for the assessment year 1960-61, that these contracts were hedging contracts entered into by the assessee for the purpose of guarding it against loss through future price fluctuations in respect of forward contracts of purchase entered into with the agriculturists and by reason of proviso (a) they were deemed not to be speculative transactions and the first proviso to section 24(1) did not, therefore, operate to preclude the set-off or Rs. 66,256 against the other profit of the assessee. The Income-tax Officer allowed the loss of Rs. 10,086 as non-speculative loss to the extent that the forward contracts of sale were relatable to the ready stocks of cotton held by the assessee at the date of those contracts but disallowed the balance of the loss of Rs. 56,170 on the ground that the assessee had failed to establish that it had entered into forward contracts of purchase with agriculturists and that the forward contracts of sale were entered into by it as hedge contracts to guard against loss through future price fluctuations in respect of the forward contracts of purchase. The assessee preferred an appeal to the Appellate Assistant Commissioner but the appeal was unsuccessful and the assessee thereupon carried the matter in further appeal to the Tribunal. The Tribunal did not go into the question whether the assessee had entered into forward contracts of purchase with agriculturists but took the view that even if such forward contracts of purchase were entered into by the assessee, 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 were not covered by proviso (a) and the forward contracts of sale were, therefore, speculative transactions and the loss arising from them was not liable to be set off against the other business income of the assessee. The assessee then applied for a reference and on the application of the assessee, the following question namely : 'Whether on the facts and in the circumstances of the case, the assessee was entitled to set off the loss of Rs. 56,170 against its other business income ?' was referred by the Tribunal for the determination of this court.

2. The determination of this question obviously depends on the true interpretation of proviso (a) to the second Explanation to section 24(1). The proviso takes out from the definition of speculative transaction contained in the second Explanation, hedging contracts which satisfy the following description :

'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.'

3. The question is, whether on a true interpretation of the proviso, forward contracts of sale of merchandise entered into by a person in the course of his merchanting business as hedging contracts to guard against loss through future price fluctuations in respect of his forward contracts of purchase of merchandise are covered by the proviso. 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. 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. The hedging contracts contemplated by the proviso are therefore clearly contracts of purchase and not contracts of sale. The assessee contended that the words 'merchandise sold by him' were intended to convey that '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 they are not intended to limit such contracts only to forward contracts for sale of merchandise. 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, clear that 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 contracts 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. The loss of Rs. 56,170 was, therefore, clearly a loss arising from speculative transactions and it was not liable to be set off against the other business income of the assessee.

4. We, therefore, answer the question referred to us in the negative. The assessee will pay the costs of the reference to the Commissioner.

5. Question answered in the negative.


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