COMMISSIONER OF INCOME TAX GUJARAT Vs. KOTHARI

JUDGEMENT

(1.) This is an appeal from a judgement of the Gujarat High Court. Originally an appeal (C. A. 1993/68) had been brought by certificate but that certificates was found to be defective as no reason were stated therein for granting it. A petition for special leave, was, therefore, filed and the same has been granted. Both the appeals shall stand disposed of by this judgement. The assessee is a registered firm and carries on the business of commission agency and general merchants. It also does forward business. It is a member of the Saurashtra Oil and Oilseeds Association Ltd., Rajkot. During the assessment year 1958-59 the corresponding accounting period being the samvat year 2013 the assessee claimed to have incurred a loss of Rs. 3,40,443/- in certain transactions entered into with different people for the supply of groundnut oil. The transactions, according to the assessee, were non-transferable ready delivery contracts entered into with non-members of the Association. It was expected that these contracts would be performed but owing to certain reasons some of the contracts could not be performed and differences had to be paid. According to the assessee it had acted as a Pucca Artia. The assessee claimed that the aforesaid loss was allowable under S. 10 (1) of the Income-tax Act, 1922 as a deduction against its other business income. The Income-tax Officer came to the conclusion that the transactions in question were hit by the provisions of the Forward Contracts (Regulation) Act, 1952 hereinafter called the 'Act' and the Rules and Regulations of the Saurashtra Oil and Oilseeds Association Ltd. In particular the transactions were hit by the provisions of sub-ss. (1) and (4) of S. 15 of the Act and were not saved by S. 18. The losses were held to have been incurred in illegal transactions. He rejected the contention of the assessee that even on the assumption that the losses were incurred in illegal transactions they could be allowed in the computation of the income. The Income-tax Officer further held that the losses incurred in illegal business could bot be deducted from the speculative profits under S. 24 of the Indian Income-tax Act, 1922, hereinafter called the "Act of 1922". The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. In the appeal before the Tribunal it was held that the transactions in question were not the illegal contracts but were contracts which had been validly entered into under the Act and the bye-laws etc. The Tribunal thereafter proceeded to examine the question whether the losses incurred could be allowed on the assumption that the transactions were illegal. It was of the view that the assessee would be entitled to a set off under S. 24 even if the losses were incurred in illegal transactions. The Tribunal remanded the matter for a report from the Appellate Assistant Commissioner as to the applicability of the proviso to S. 24 (1) (read with the Explanation) of the Act of 1922. After the remand report was received the Tribunal gave the following two findings: (1) the contracts under consideration were all non-transferable specific delivery contracts where the intention ab initio was either to give or take delivery (2) the contracts were entered into either for the purchase or sale and later on the same quantity was either sold or purchased back by the assessee on behalf of the same constituents at the market rates prevailing at the material time i.e. they were squared up by corresponding sales or purchases as the case might be. After referring to certain decisions of High Courts the Tribunal held that the loss of Rs. 3,40,443/- had been incurred in speculative transactions. The Tribunal next proceeded to consider whether notwithstanding that the losses had been incurred in speculative transactions the assessee could set off those against the other income under S. 10 (1) of the Act of 1922. Purporting to follow the view of the majority of the High Courts, the Tribunal held that such a loss could not be set off against the other income. But according to the Tribunal the assessee was certainly entitled to set off the loss against the profits in speculative transactions and to that extent the contention of the assessee was accepted. Both the assessee and the Commissioner of Income Tax moved the Tribunal for submitting a case and referring certain questions of law to the High Court. Thus in all the following four questions were referred by the Tribunal :

(2.) So far as the first question is concered we are unable to comprehend why the High Court did not decide it. A lot of debate took place before us on the question whether the contravention of S. 15 (4) of the act would render the contracts illegal. According to that provision no member of a recognised Association shall, in respect of any goods specified in the notification under sub-s. (1), enter into any contract on his own account with any person other than a member of the recognised Association unless he has secured the consent or authority of such person and disclosed in the note memorandum or agreement of sale or purchase that he has bought or sold the goods as the case may be on his own account. It is not necessary to refer to the proviso. It is common ground and has been admitted before us that there was a clear contravention of the provisions of S. 15 (4) so far as the transactions in questions were concerned. According to S. 20 (e) any person who enters into any contract in contravention of the provisions of section 15 (4) among other sections shall on conviction be punishable for the first offence with imprisonment which may extend to one year or with fine of not less than Rs.1,000/- or with both. It is wholly incomprehensible how such a contract would not fall directly within the ambit of the first part of S. 23 of the Indian Contract Act which deals with consideration or object of an agreement which is forbidden by law. Such consideration or object would be unlawful according to the provisions of that section and the agreement would consequently be void. The High Court did not decide the point whether the contracts which contravened the provisions of S. 15 (4) of the Act were illegal it did not consider it material to decide whether the impugned contracts were illegal. In its opinion what was material was that the impugned contracts had been entered into unlawfully and the question was whether the loss sustained in the unlawful business could be taken into account in computing the business income of the assessee. We consider that the first question which was referred to the High Court stands concluded by the law laid down by this court in Sunderlal and Son v. Bharat Handicrafts (P) Ltd. (1968) 1 SCR 608 = (AIR 1968 SC 406). It was laid down that the prohibition imposed by S. 15 (4) of the act was not imposed in the interest of revenue. The provision was conceived in the largest interest of the public to protect them against the malpractices indulged in by members of recognised associations in respect of transactions on which their duties as agents came into conflict with their personal interest. Parliament had made a writing, evidencing or confirming the consent or authority of a non-member, as a condition of the contract if the member has entered into a contract on his own account. So long as there was no writing as was contemplated by section 15 (4) or its proviso there was no enforceable contract.

(3.) It is well settled that contracts which are prohibited by statute the prohibition being either express or implied would be illegal and unenforceable if they are entered into in contravention of the statute. Under the provisions of the Act there is not only an express prohibition (S. 15 (4)) but punishment is also provided for contravention of that prohibition, (S. 20). Such contracts could not possibly be regarded as having been validly entered into under the Act. The answer to the first question, therefore, should have been in the affirmative and against the assessee.