SINHA J. - This is a reference under section 66(1) of the Indian Income-tax Act. The assessee in this case is a limited Co. - Messrs. Hoosen Kasam Dada (India) Ltd., Calcutta - and the assessment year is 1953-54 corresponding to the accounting year ended on 30th June, 1952. The assessee company is incorporated under the Indian Companies Act, 1913, and has been carrying on business since 1947. Its registered office is in Calcutta, but it had business connections all over India. Its principal business was that of export of gunnies. In the income-tax assessment of the particular year mentioned above, various questions arose, but in this reference we are concerned with only one question and it arises as follow :
In the relevant year, the assessee suffered a loss of Rs. 6,39,897 in transactions with regard to the sale and purchase of gunnies. The Income-tax Office disallowed this amount on the ground that this amount was lost on speculation in gunnies and speculation was not the assessees line of business, so that the loss could not be set off against any profits.
As I have stated above, the assessee carried on an extensive business in gunnies. In a statement filed on behalf of the assessee company which is set out at pages 25 and 26 of the paper-book, it has been stated that in the early part of the year 1952, in the usual course of business, the assessee company had entered into forward contracts in gunnies for the purpose of export through brokers of the Indian Jute Mills Association. Such contracts were in Form 'A' of the said association. In view of certain difficulties caused by a certain notification of the Controller of Exports in regard to export of jute goods to Pakistan, and the gradual decline in the international market price of jute goods, the assessee company entered into a number of settlement contracts. The result of such settlement contracts was that at the beginning the company made profit in some cases but later on consistently suffered loss and the total of such losses amounted to Rs. 6,39,897. The Income-tax Officer allowed such losses as were referable to contracts where delivery was given, but has refused to allow losses where they were the subject-matter of settlement contracts and no delivery was given.
Against this order of assessment, the assessee preferred an appeal to the Appellate Assistant Commissioner and upon this point the decision of the Income-tax Officer was upheld. It has also been upheld by the Appellate Tribunal. The question that has been referred to us is as follow :
'Upon the facts and in the circumstances of this case, whether the transactions were in the nature of speculative ones within the meaning of the first proviso to section 24(1) of the Indian Income-tax Act and whether the amount of the loss of Rs. 6,39,897 would be set off against the profits and against of the business?'
Before I deal with the question, I might point out that all the relevant facts have been stated above, and the question will have to be considered in the background of such facts. It is not disputed that the assessee was, in the relevant year, doing a large amount of business in the sale and purchase of gunnies, in the course of which a number of contracts were entered into. In respect of some contracts, delivery was given, but with regard to other contracts, they were settled by entering into settlement contracts and no delivery was given. Briefly speaking, the point of view of the authorities below has been that the matter is governed by the proviso to section 24(1) of the Indian Income-tax Act read with Explanation 2. It is pointed out that a speculative transaction has been defined by Explanation 2 to mean a transaction in which no periodical or ultimate delivery is given. Applying this definition, it has been held that under the settlement contracts, which relate to this amount of Rs. 6,39,897 no delivery was given, and hence, they were speculative transactions. Consequently, under the proviso, they could only be set off against other speculative transactions and not against non-speculative transactions. The assessee, on the other hand, wants to set them off against other transactions in which delivery was given. This has not been allowed, and constitutes the dispute in this case.
In order to understand this dispute it is necessary to refer to certain sections of the Act. The first section to be referred to is section 6. That section lays down the 'heads' of income chargeable to income-tax, e.g., salaries, income from property and 'profits and agains of business, profession or vocation'. In this case, we are concerned with the head, 'profits and gains of business'. The next section to be considered is section 10. Sub-section (1) to section 10 lays down that the tax relating to business shall be payable by an assessee under the head 'profits and gains of business, profession or vocation', in respect of the profits or gains of any business, profession or vocation carried on by him. This is the general provision. Sub-section (2) lays down the method of making certain allowances in computing such profits or gains. It has now been held that these are not exhaustive by them selves in the computation of business income.
The next section is section 24, which deals with the right to set off losses in computing the aggregate income of an assessee. The relevant part thereof runs as follow :
'24. Set-off loss in computing aggregate income. - (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that yea :
Provided that in computing the profits or gains chargeable under the head profits or gains of business, profession or vocation, any loss sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions...
Explanation 1. - where the speculative transactions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business.
Explanation 2. - A speculative transaction means a transaction in which a contract for purchase and sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual deliverly or transfer of the commodity or scrip :
Provided that for the purposes of this section, -
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(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 a speculative transaction.'
The way that the Appellate Tribunal has decided this case is as follow : It has been stated that under Explanation 2, any settlement contract in which delivery has not been given is a speculative transaction. In the present case, the settlement contracts in question satisfy that test, and, therefore, are speculative transactions. In deciding this question, initial intention to deliver or not is immaterial. The result, according to the Tribunal, is that these speculative transactions cannot be set off against other transactions which are non-speculative, and in which delivery was given. Consequently, this loss cannot be allowed, because there is no non-speculative transaction against which this particular loss could be set off.
It appears to me that the reasoning has been simply put and is correct. The view finds support from decisions of this High Court, as also the Bombay High Court, the Punjab High Court, the Madras High Court and the Madhya Pradesh High Court. Everywhere, it has been held that the interpretation made by the Tribunal is the correct interpretation. In their book on Income-tax, Messrs. Kanga and Palkhivala have however made certain observations in which doubt has been thrown upon the point. In my opinion, the point of view taken by the learned authors is not correct and cannot be accepted.
I do not propose to go into each and every authority and consider all the arguments and reasonings given therein. I shall consider certain points argued before us by Mr. Mitra in this case. He argued that section 24(1) allows a set-off between several headings of income as laid down under section 6. It is then said that the proviso provides for the setting off profits and gains under the heading of speculative transactions only against profits and gains in other speculative transactions and vocations. First of all, the argument advanced is as to the legal interpretation appropriate to a 'proviso'. Mr. Mitter strongly relies upon the opinion of the learned authors mentioned above, to the effect that a profit or gain out of speculative transactions could be set off against some other head under section 10 and there is nothing in section 24 or the proviso thereto, which militates against the setting off of profits and gains in speculative transactions against profits and gains in a non-speculative transaction, under the heading 'profits and gains of business, profession or vocation'. It is argued that the proviso to section 24(1) cannot cut down the provisions of section 6 or section 10. I am unable to see the logic in this argument. As has been laid down by the Bombay High Court in Keshavlal Premchand v. Commissioner of Income-tax the legislature, in enacting the proviso to sub-section (1) of section 24, was enacting a substantive provision of law dealing with the mode of set-off in the computation of the profits and gains chargeable under the head 'profits and gains of business, profession or vocation', where we are concerned with speculative transactions. This view has been supported by the Madhya Pradesh High Court in Commissioner of Income-tax v. Ram Gopal Kaniyalal as also by the Punjab High Court in Commissioner of Income-tax v. Ram Sarup.
The position seems to me quite clear. Section 6 lays down the heads of income. Section 10 deals with income from business and the method of computing it. None of these sections, by themselves, deal with the right of set-off of a loss against a profit in computing the aggregate income. The question of set-off is specifically dealt with by section 24. Sub-section (1) deals with set-off between different heads as mentioned in section 6. The proviso however deals with one particular head, Viz., 'profits and gains of business, profession or vocation'. It lays down that within that head, you cannot set off loss sustained in a speculative transaction against profits or gains in a non-speculative transaction. What you have to do is to set off a loss in speculative transactions only against a profit in other speculative transactions. In a sense, of course, it affects the scope of sub-section (1). But that, in my opinion, is well within the province of a proviso. While sub-section (1) gives the right to set off a loss under one head against a profit and gain under another head, the proviso prevents such a set-off in respect of loss under the heading appropriate to a speculative transaction. In the case of a loss sustained in a speculative transaction, the right of set-off is severely limited to the profits and gains in other speculative transactions. If Explanation 2 was not there, we would have to cconsider what the expression 'speculative transaction' meant under the general law. These transactions would be similar to the head of 'Gambling and wagering' transactions under the law of contract. It is not always easy to decide as to whether a transaction is of a gambling and wagering nature under the ordinary law of contract. One of the factors to be taken into consideration is the initial intention of the parties to deliver or not to deliver the goods contracted for. I have already mentioned that the Appellate Tribunal said that, in the facts and circumstances of this case, the initial intention was not relevant. What was relevant was delivery. Now, if the matter rested on the ordinary law of contract, this exposition of the law would plainly be defective. But the Tribunal has rested its decision upon Explanation 2. It seems to me quite clear that the Tribunal has done so rightly and that the definition contained in Explanation 2 has severely restricted the meaning of the expression 'speculative transaction' and in a sense simplified it for the purposes of the computation of income-tax. It has been provided that, subject to three exceptions, a speculative transaction means a transaction in which there is a contract for purchase and sale of commodities, where there is a periodical or ultimate settlement otherwise than by the actual delivery or transfer of the commodity. Simply put, it means that where there is no delivery under a settlement contract, it is a speculative transaction. On the other hand, however speculative the transaction might be, if there is delivery, it cannot be considered as a speculative transaction for the purposes of section 24.
I do not see, therefore, what else the Tribunal could have done other than applying this simple definition, and coming to the conclusion on the facts and circumstances of this case, that the loss in question related to transactions which were speculative transactions. Admittedly, under the relative settlement contracts, no delivery was given or intended to be given. So, by force of the Explanation itself, the transactions must be held to be speculative transactions. I respectfully agree that the proviso is a substantive provision of law. Such a provision is not invalid if it affects the provisions of section 6 or 10. As I have already pointed out, those provisions of law do not specifically deal with the question of set-off of a loss. It is section 24 itself which deals specifically with that question, and while we must read sub-section (1) as providing the general provision for a set-off, there is nothing to prevent the Legislature from introducing a proviso which lays down a substantive provision in respect of a particular class of transaction or a particular class of transactions within a specified head of income. This is precisely the case here.
I now come to another point of view put forward by Mr. Mitra. Accounting to him, we must not lose sight of the fact in the proviso to section 24 not only the words 'speculative transactions' are mentioned, but they are followed by the words 'which are in the nature of a business'. He argues that if you have a business including a number of transactions of the same nature, then if you are going to single out certain specified transactions as speculative transactions they must form a distinct or separate group. He argues that, in the present case, the facts are otherwise. In other words, in a series of transactions in gunnies, some transactions were non-speculative and others were speculative. Under such circumstances, the proviso does not apply. I must admit that I am unable to understand the logic of this argument. Perhaps, it is putting forward the views of Messrs. Kanga and Palkhivala in another form. I must point out that if that was so, the introduction of Explanation 1 would have been utterly superfluous. Explanation 1 says that where speculative transactions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business. In considering the proviso, we are considering the profits and gains of a business. Other headings do not enter into the picture. But the proviso does not contemplate that the speculative transactions should form a separate unit. On the other hand, it has been stated in Explanation 1 that they would be 'deemed' to be a distinct and separate unit. I cannot see any difficulty in separating the two kinds of businesses, Viz., speculative and non-speculative, and considering them as separate groups. I might here point out that there is an unreported Division Bench judgment of this High Court, Sree Hanuman Investment Co. Ltd. v. Commissioner of Income-tax (unreported judgment dated February 13, 1962, in Reference No. 59 of 1957). Mitter J. held there that the decided cases were one way and the interpretation of the proviso to section 24(1) should be as stated above. I respectfully agree.
In my opinion, it is not permissible to interpret the provision in any other way. It is quite clear to me that the words 'speculative transactions' have been defined in Explanation 2 for this very purpose, viz., to obviate nice questions of law that may arise with regard to the delivery or non-delivery of goods under contract. The law has been simplified in this respect and the expression 'speculative transaction' has been defined for the purposes of the Income-tax Act. The Tribunal has, therefore, come to the right conclusion in thinking that this definition must be applied and the question of initial intention was irrelevant. Also I agree that the proviso to sub-section (1) to section 24 is a substantive provision of law.
The result is that upon the admitted facts in the present case, the loss has arisen from transactions which must be held to be 'speculative transactions', within the meaning of the expression as used in the proviso to sub-section (1) of section 24 read with Explanation 2. Consequently, the losses cannot be set off against profits and gains on headings which are non-speculative transactions, i.e., in respect of transactions in which delivery had been given.
The result is that the question that has been asked should be answered as follow :
(1) Upon the facts and circumstances of this case, the transactions were in the nature of speculative ones within the meaning of the first proviso to section 24(1) of the Indian Income-tax Act and that the loss of Rs. 6,39,897 cannot be set off against the profits and gains of the business. The Commissioner of Income-tax is entitled to his costs. Certified for two counsel.
DATTA J. - I agree.
Question answered accordingly.