CHIMANLAL CHHOTALAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference raises a short question of construction of proviso (a) to the second Expln. to S. 24(1) of the IT Act, 1922. The assessee is a registered firm and it carries on business as a dealer in cotton and cotton seeds. During Samvat year 2015, being the relevant previous year for the asst. yr. 1960 61, the assessee entered into certain forward contracts of sale of kapas (unginned cotton in pods) and cotton bales. Out of these contracts, barring a contract with M/s J. Chunilal & Company which resulted in a loss of Rs. 9,446, all the other contracts were ultimately settled otherwise than by the actual delivery of the goods and they resulted in a loss of Rs. 66,256. These contracts were admittedly covered by the second Explanation to S. 24(1) and if they did not fall within proviso (a), they would be speculative transactions within the meaning of the first proviso to s. 24(1) and by reason of that proviso the loss of Rs. 66,256 sustained in these contracts would not be liable to be set off against the other profit of the assessee from non speculative transactions. The assessee, therefore, claimed before the ITO making its assessment for the asst. year 1960 61, that these contracts were hedging contracts entered into by the assessee for the purpose of guarding it against loss through future price fluctuations in respect of forward contracts of purchase entered into with the agriculturists and by reason of proviso (a) they were deemed not to be speculative transactions and the first proviso to S. 24(1) did not, therefore, operate to preclude the set off or Rs. 66,256 against the other profit of the assessee. The ITO allowed the loss of Rs. 10,086 as non speculative loss to the extent that the forward contracts of sale were relatable to the ready stocks of cotton held by the assessee at the date of those contracts but disallowed the balance of the loss of Rs. 56,170 on the ground that the assessee had failed to establish that it had entered into forward contracts of purchase with agriculturists and that the forward contracts of sale were entered into by it as hedge contracts to guard against loss through future price fluctuations in respect of the forward contracts of purchase. The assessee preferred an appeal to the AAC but the appeal was unsuccessful and the assessee thereupon carried the matter in further appeal to the Tribunal. The Tribunal did not go into the question whether the assessee had entered into forward contracts of purchase with agriculturists but took the view that even if such forward contracts of purchase were entered into by the assessee, forward contracts of sale entered into by the assessee for the purpose of guarding against loss through future price fluctuations in respect of the forward contracts of purchase were not covered by proviso (a) and the forward contracts of sale were, therefore, speculative transactions and the loss arising from them was not liable to be set off against the other business income of the assessee. The assessee then applied for a reference and on the application of the assessee, the following question namely : "Whether on the facts and in the circumstances of the case, the assessee was entitled to set off the loss of Rs. 56,170 against its other business income ?" was referred by the Tribunal for the determination of this Court.

(2.) THE determination of this question obviously depends on the true interpretation of proviso (a) to the second Expln. to S. 24(1). The proviso takes out from the definition of speculative transaction contained in the second Expln., hedging contracts which satisfy the following description :