COMMISSIONER OF INCOME TAX Vs. SHIVLAL DHIRAJLAL

JUDGEMENT

(1.) THE assessee is a registered partnership firm having its head office at Jamnagar and three branches one at Jamnagar and two at Rajkot. One of the branches at Rajkot is run in the name and style of "Harsukhlal & Brothers". The controversy involved in this reference is confined to the business carried on by the Rajkot branch, running in the name of Harsukhlal & Brothers and, therefore, we need not set out the details of the business carried on by the assessee firm at Jamnagar and the other branch at Rajkot. The branch in the name of Harsukhlal & Brothers deals in foodgrains, sugar, oil, etc., on wholesale basis. It also carries on business as a commission agent. It appears that the main source of income of this branch is Adat, i.e., commission on purchase and sale of goods of other parties. In Samvat year 2017, which is relevant to the asst. yr. 1962 63, the commission account of Harsukhlal and Brothers showed net receipts of Rs. 3,06,086. The assessee firm claimed deduction of Rs. 27,035, on the ground that the amount due from the firm of Tataram Ramjilal had become a bad debt. It is this claim for deduction of Rs. 27,035 which is the subject matter of this reference. The facts relevant to this claim for deduction are as follows :

(2.) THE firm of Tataram Ramjilal had entered into a forward contract for purchase of 8,000 tins of groundnut oil through the assessee firm. The market price of groundnut oil was falling and, therefore, the assessee firm "tried to cover transactions in order to reduce its losses" It drew hundis in favour of the firm of Tataram Ramjilal, but the hundis were dishonoured. The assessee firm thereupon settled the transaction by selling 8,000 tins of ground nut oil to avoid further loss. There is no dispute that there was no actual delivery of 8,000 tins of groundnut oil. The assessee firm, as a result of the said transaction, had to suffer a loss of Rs. 27.055, which it claimed from the firm of Tataram Ramjilal. The firm of Tataram Ramjilal, however, did not pay the said amount as claimed by the assessee firm and, therefore, the assessee firm filed a suit to recover the said amount from the firm of Tataram Ramjilal. The civil Court, however, dismissed the suit of the assessee firm, holding that (1) the transaction was settled without the instructions of the constituent, i.e., the firm of Tataram Ramjilal, and (2) the transaction was illegal as it was hit by the provisions of the Saurashtra Ground nut and Groundnut Products (Forward Contracts prohibition) Order, 1949 ("the Order of 1949" for short). The assessee firm claimed deduction of Rs. 27,035 as a bad debt. The ITO, while framing the income tax assessment for the year 1962 63, rejected the assessee firm's claim for deduction of Rs. 27,035 as a bad debt on the ground that the settlement of transaction by the assessee firm was without authority of the firm of Tataram Ramjilal and that the loss had occurred as a result of the transactions which were in the nature of wagering and illegal speculative transactions prohibited by the Order of 1949. In the appeal preferred by the assessee, the AAC held to the effect that, though the assessee firm has apparently claimed deduction of Rs. 27,035 as a bad debt, the claim arose out of speculative transactions. Therefore, according to the AAC, the claim should be taken as a claim for loss arising from speculation business. Such speculation loss, according to the AAC, had to be set off against speculation profit and in the absence of such profit, it was required to be carried forward to future years, as per the provisions of the IT Act, 1961 ("the Act" for short). Being aggrieved by the order of the AAC, the Revenue preferred an appeal before the Tribunal. The assessee firm, which also felt aggrieved by the order of the AAC, filed cross objections in the appeal preferred by the Revenue.

(3.) AFTER the matter was remanded, the AAC reheard the appeal of the assessee. The AAC held that the assessee firm had not entered into speculative transactions on its own behalf, but it had entered into these transactions while acting on behalf of its constituents. That being the position, according to the AAC, it could not be said that the loss which the assessee firm had claimed arose from a speculative transaction. The AAC, further held that, since the assessee firm had failed to recover the amount claimed as loss from its constituent, it did not become a bad debt. According to the AAC, the loss did not arise from trading activity. He further held that the loss, deduction of which was claimed by the assessee firm, arose from transactions which were held by the Court to be illegal. He further held that the decision of the Supreme Court in the case of S. C. Kothari (supra) was applicable to the facts of the instant case and, since the debt or loss arose from illegal transactions, the assessee firm was not entitled to claim deduction thereof from other income. In this view of the matter, the AAC dismissed the appeal of the assessee firm.