(1.) THE assessee carries on business of manufacturing oil. The assessment year under reference is 1965 -66, the previous year being S.Y. 2020 which ended on November 4, 1964. In S.Y. 2020, the assessee entered into certain forward transactions of sale of oil tins. These transactions were utlimately settled otherwise than by actual delivery of the goods and the settlement resulted in a loss of Rs. 27,157. The assessee debited the said amount to the profit and loss account in its trading books and claimed it as a business loss. The ITO, following the decision of this court in Chimanlal Chhotalal v. CIT : [1968]69ITR129(Guj) , held that only forward contracts for purchase of raw material entered into by an assessee in the course of his manufacturing business to guard against loss through price fluctuations in respect of his forward contracts of sale for actual delivery of the goods manufactured by him are saved and expected by prov. (a) from the class of speculative transactions as defined in s. 43(5) of the I.T. Act, 1961, and, therefore, the loss incurred as a result of such contracts of sale was not entitled to be set off against the other business income. The assessee being aggrieved with this order of the ITO, carried the matter in appeal before the AAC, Jamnagar, who also, following the aforesaid, therefore, carried the matter in further appeal before the Tribunal at Ahmedabad. It was contended on behalf of the assessee before the Tribunal that the contracts of sale entered into by the assessee were, for all intents and purposes, what are known commercially as 'hedging contracts' entered into with a view to guarding against the loss through future price fluctuations of the groundnut oil in respect of which it had entered into certain forward transaction, and since the assessee had sufficient stock on hand to meet its obligations of supplying oil tins under the said contracts, the loss of Rs. 27,157 suffered by it, was, for all intents and purpose, a hedging loss which the assessee was entitled to set off against its other business income as clarified and permitted by the CBR under its circular bearing reference F. No. 124 -60 TPM of September 12, 1960 and, therefore, the revenue authorities were in error in disallowing the set -off as claimed by the assessee. The Tribunal found that at the time when the assessee entered into the aforesaid contracts, it had sufficient stock of raw material and to meet with its obligations under the contracts and, therefore, its case was covered by the aforesaid circular of the CBR. In spite of this finding, the Tribunal felt itself unable to permit the set -off of the loss in question against the business income of the assessee since the said circular in view of the decision of this court in Chimanlal Chhotalal's case : [1968]69ITR129(Guj) . The Tribunal, following the said decision, held that the aforesaid contract entered into by the assessee were speculative transactions within the meaning so s. 43(5) of the the I.T. Act, 1961, and, therefore, rejected the claim of the assessee and confirmed the order of the AAC. At the instances of the assessee, therefore, the following two questions have been referred to this court for its opinion under s. 256(1) of the I.T. Act, 1961.
(2.) WHEN this reference was called out for final hearing before a Division Bench of this court (consisting of Divan C.J. and P. D. Desai J.) the Division Bench felt that the decision of this court in Chimanlal Chhotalal's case : [1968]69ITR129(Guj) required reconsideration and, therefore, referred the same to a larger Bench. This is how this reference has come before this Full Bench.
(3.) ON a true construction and effect of prov. (a) to s. 43(5) of the I.T. Act, 1961, every contract irrespective of whether it was for sale or purchase of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandise business, would not be deemed to be a manufacturing transaction, if its purpose is to guard against the loss through goods manufactured by him or merchandise sold by him. There is no justification in the prov. (a) to s. 43(5) of the I.T. Act, 1961, to restrict the width and import of the words 'a contract in respect of raw materials or merchandise' as to mean 'a contract of purchase only' as read by the Division Bench of this court in Chimanlal Chottalal's case : [1968]69ITR129(Guj) . In so far as the Division Bench gave a restrictive meaning to the said words to mean 'a contract of purchase of raw materials or more than what is warranted therein. The interpretation placed by the Division Bench in Chimanlal Chhotalal's case : [1968]69ITR129(Guj) goes against the very legislative intent evinced in prov. (a) to s. 43(5) that where bona fide forward sales are entered into with a view to guarding against the risk of fluctuations of prices of raw materials or merchandise in stock, the losses arising as a result of such forward sales cannot be treated as speculative losses. In any case, the interpretation placed by the Division Bench goes against the concession made by the circular of the CBR of September 12, 1960, by which it permitted to exclude hedging sales from the class of speculative transactions, if the total of such transactions does not exceed the total stocks of raw materials or merchandise in hand. In the submission of the Advocate -General appearing for the assessee the Tribunal was clearly in error in excluding the operation of this circular so far as Gujarat is concerned in view of the decision of this court in Chimanlal Chhotalal's case : [1968]69ITR129(Guj) because the said decision did not enjoin the revenue to deprive the assessee of the benefit which is available and extended to the other assessee in the other parts of this country.