COMMISSIONER OF INCOME TAX Vs. KOTHARI S C

JUDGEMENT

(1.) THIS reference arises out of two applications for reference made before the Tribunal, one by the assessee and the other by the CIT. There are in all four questions referred to us for our opinion and out of them, the first two questions are referred on the application of the CIT and the last two questions are referred on the application of the assessee. In order to appreciate how the questions arise for determination, it is necessary to notice the facts giving rise to the reference in some detail.

(2.) THE assessee is a registered firm and it carries on business as commission agent and general merchant and it also trades in forward contracts in groundnut seeds, groundnut-oil and groundnut oil cakes. It is a member of the Saurashtra Oil and Oil Seeds Association Limited, an association recognised by the Central Government, inter alia, for groundnut-oil, groundnut seeds and groundnut-oil cakes under s. 6 of the Forward Contracts (Regulation) Act, 1952. During Samvat year 2013, which was the relevant accounting year for the asst. yr. 1958-59, the assessee entered, inter alia, into two classes of forward contracts in groundnut oil, groundnut seeds and groundnut- oil cakes. One class consisted of the forward contracts which were admittedly not in violation of any prohibition imposed under the Forward Contracts (Regulation) Act, 1952, while the other class consisted of forward contracts which according to the Revenue, were in violation of the prohibition imposed under s. 15, sub-ss. (1) and (4) of that Act. THE assessee incurred a profit of Rs. 2,19,046 in the first class of forward contracts and a loss of Rs. 3,40,443 in the second class of forward contracts. THE assessee also earned profit in its other business which did not consist of forward contracts. In the course of the assessment of the assessee for the asst. yr. 1958-59, the question arose whether the loss of Rs. 3,40,443 was liable to be set off against the profit of Rs. 2,19,046 and the other profit earned by the assessee in order to arrive at the assessable income of the assessee. THE ITO took the view that the forward contracts resulting in the loss of Rs. 3,40,443 were illegal since they were hit by s. 15, sub-ss. (1) and (4) and not being non- transferable specific delivery contracts, they were not saved from the mischief of those sub- sections by s. 18. THE ITO held that the forward contracts being illegal, the loss arising from the forward contracts was not liable to be taken into account in computing the assessable income of the assessee and he, therefore, ignored the loss of Rs. 3,40,443 in arriving at the assessable income of the assessee. THE ITO also held that in any event even if the loss of Rs. 3,40,443 arising from the forward contracts was liable to be taken into account, it was a loss in speculative transactions and the assessee was, therefore, not entitled to set if off against its other income except to the extent to which such income represented profit in any other business consisting of speculative transactions. THE assessee carried the matter in appeal before the AAC but the AAC took the same view and holding that the forward contracts were illegal by reason of s. 15, sub-ss. (1) and (4), he refused to take into account the loss of Rs. 3,40,443 in computing the assessable income of the assessee. This view rendered it unnecessary for the AAC to go into the question whether the assessee was entitled to set off the loss of Rs. 3,40,443 against the whole of its other profit or only against that part of the profit which was referable to other business in speculative transactions. THE assessee thereupon preferred a further appeal to the Tribunal and this time the appeal met with partial success. THE Tribunal disposed of the appeal by means of two orders. THE first order, which was styled as "Remand order", disposed of the question as to whether the forward contracts entered into by the assessee were illegal by reason of contravention of s. 15, sub- ss. (1) and (4), and the loss of Rs. 3,40,443 arising from those forward contracts was liable to be taken into account in computing the total income of the assessee. THE Tribunal held that the forward contracts were non-transferable specific delivery contracts and were, therefore, outside the mischief of s. 15, sub- ss. (1) and (4), and that, in any event, even if s. 18 did not save the forward contracts, they were not hit either by s. 15, sub-s. (1), or s. 15, sub- s. (4). THE Tribunal thus came to the conclusion that the forward contracts were valid and legal contracts and the loss arising from them was liable to be taken into account as loss from business. But the Tribunal also went further and observed that, even if the forward contracts were illegal, the loss of Rs. 3,40,443 arising from them would still be liable to be taken into account as business loss in computing the total income of the assessee. This view taken by the Tribunal necessitated the consideration of the question--which the AAC had not examined on the view taken by him--whether the loss of Rs. 3,40,443 was liable to be set off against the whole of the other profit of the assessee or only against that part of the profit which was referable to the business of speculative transactions and a decision of this question obviously depended upon whether the loss of Rs. 3,40,443 was a loss sustained in speculative transactions. On this point the AAC had not come to any finding in the view taken by him as regards the main question and the Tribunal, therefore, called for a remand report from the AAC on the point. THE AAC submitted his remand report stating that, in his opinion, the forward contracts were speculative transactions within the meaning of the second Expln. to s. 24(1) of the Act and the loss of Rs. 3,40,443 arising from the forward contracts was, therefore, loss sustained in speculative transaction attracting the applicability of the first proviso to s. 24(1) and by reason of that proviso the loss of Rs. 3,40,443 could be set off only against the profit of Rs. 2,19,046, which was earned in the other forward contracts which were admittedly speculative transactions. THE Tribunal, by its second order, agreed with the view taken by the AAC and permitted set off the loss of Rs. 3,40,443 only to the extent of the profit of Rs. 2,19,046, by reason of the first proviso to s. 24(1) and disallowed the claim of set off of the balance of Rs. 1,21,397 against the other profit of the assessee. THE assessee and the CIT were both dissatisfied with the decision of the Tribunal and they, therefore, preferred applications for reference of the questions of law arising out of the two orders of the Tribunal and on the application of the CIT the following two questions, namely :

(3.) PROCEEDING further with the examination of the scheme of the Act, Chapter IV contains provisions conferring authority on the Central Government to prohibit certain classes of forward contracts. Sec. 15, sub-ss. (1) and (4) enact :