COMMISSIONER OF INCOME TAX Vs. RAMACHANDRA SHIVNARAIN

JUDGEMENT

(1.) BY this reference under section 256(1) of the Income -tax Act, 1961, made at the instance of the Commissioner of Income -tax, the Income -tax Appellate Tribunal, Bombay Bench, Bombay has referred the following question of law to this court for opinion : 'Whether, on the facts and in the circumstances of the case, the losses of Rs. 34,870 and Rs. 8,148 sustained by the assessee in the 'hessian hedge account' and the 'gunny hedge account', respectively, represent business losses and not speculation losses ?'

(2.) THE assessee is a firm carrying on business in the purchase and sale of cloth, jute, bardan, etc. The assessment year is 1971 -72. During the relevant previous year, the hessian account showed a profit of Rs. 1,32,044 in a business of 970 bales against which a loss in the hessian hedge account of Rs. 34,870 was claimed as loss from ready business. Similarly, a sum of Rs. 8,148 was claimed as loss incurred in the bardan hedge account. The Income -tax Officer disallowed both these losses on the ground that they were in the nature of speculation losses as the contract had been settled otherwise than by delivery.

(3.) SECTION 43(5) of the Act defines speculative transaction. It reads as under : 'Section 43(5). 'Speculative transaction' means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips : Provided that for the purpose of this clause - (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or ... shall not be deemed to be a speculative transaction;'