GOMRAJ FATEHCHAND Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee in the first case is a registered firm carrying on business in camphor, cassia, etc. It carried on its business not only on ready basis but also on forward basis. In respect of its forward contracts, it incurred a loss of Rs. 39,540 for the year 1959-60 and Rs. 7,942 for the year 1960-61. It contended before the Income-tax Officer that the losses were incurred in hedging transactions which fell outside the pale of Explanation 2 to Sub-section (1) of Section 24 of the Indian Income-tax Act, 1922, that all the forward dealings were hedging in nature as they had been entered into with a view to guard against any loss that might arise due to future price fluctuations. THE Income-tax Officer rejected these contentions. He took the view that all the forward transactions were ultimately settled not by actual delivery of the goods but by payment of difference, that the losses have not been incurred in relation to hedging transactions, that the forward sales which were covered by physical stock with the assessee on all settlement dates could alone be hedged by forward purchases and that any forward sale in excess of the quantity of the goods on hand, could not in the nature of things, be considered as a hedging transaction. THE Income-tax Officer actually found that the difference paid and received by the assessee in forward contracts is Rs. 2,02,298 and Rs. 1,64,706 and the difference paid and received proportionate to the forward sales not covered by ready stock on a pro rata basis was found to be Rs. 24,165. Similarly, there were transactions in camphor at Calcutta and Bombay which were settled by paying the difference of Rs. 15,375 to various parties. THEse two sums which aggregate to Rs. 39,540 were disallowed as loss in speculative transactions in the year 1959-60. Likewise, a sum of Rs. 7,942 was disallowed as a loss in speculative transactions in the year 1960-61. THE matter was taken in appeals to the Appellate Assistant Commissioner but without success. THEre were further appeals to the Income-tax Appellate Tribunal. THE Tribunal also upheld the disallowance of the said claim for losses. At the instance of the assessee, the following question has been referred to this court in T.C. No. 90 of 1968 :

(2.) IN the second case also the assessee is a dealer in camphor and he entered into forward transactions in camphor and for the assessment years 1959-60 and 1960-61, the loss claimed was Rs. 668 and Rs. 5,278, respectively. The assessing authority, the Appellate Assistant Commissioner and the Appellate Tribunal having rejected the assessee's contention that all the forward transactions which were concluded by payment or receipt of the difference and in respect of which the losses had occurred are hedging transactions, and hence outside the pale of speculative business; the assessee sought a reference to this court and the following question has been referred in T.C. No. 91 of 1968 :

(3.) THE Supreme Court reiterated the view it has expressed earlier in Dunichand Rataria v. Bhuwalka Brothers Ltd., , Bayyana Bhimayya v. Government of Andhra Pradesh, and State of Andhra Pradesh v. Kolla Sree Ramamurthy, that a forward delivery of goods may amount to two deliveries in point of fact and, in the eye of law, if in the course of a transaction of sale the buyer takes delivery of the documents of title to the goods and transfers them to another by endorsement or delivery and such transferee takes delivery of the goods from the original seller. THE purport of the decision of the Supreme Court in the said case appears to be that where a seller enters into a sale and issues a delivery order and the delivery order is transferred successively and the ultimate transferee takes delivery of the goods from the original seller, then the first sale as well as the subsequent sales cannot be said to be speculative transactions as contemplated by Section 24, for the sale has resulted in the ultimate delivery of the goods. This position appears to be obvious for the reason that the Explanation 2 to Section 24(1) does not contemplate the actual delivery being taken by the buyer in the first sale. THE Explanation only contemplates a sale in respect of which the goods have not ultimately been delivered either to the buyer or to his transferees.