OMKARMAL AGARWAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The following question has been referred to us by the Income-tax Appellate Tribunal, Hyderabad Bench, at the instance of the assessee, under section 66 (1) of the Income tax Act, 1922 :

(2.) The fact and circumstances which have occasioned this reference are as follows : The assessee is a Hindu undivided family and derives income from property and business. The assessees business consists in purchasing cotton kapas (raw cotton), ginning it and them selling the lint and cotton seeds. Between 21st October, 1956, and 4th April, 1957 (the relevant accounting year was the period from 3rd November, 1956, to 23rd October, 1957), the assessee entered into fourteen forward contracts with certain Bombay parties to sell 2,200 bales of cotton lint at certain specified rates for delivery between March and May, 1957. Two out of these fourteen contracts were entered into before the commencement of the previous accounting year, on 21st October, 1956, and 22nd October, 1956, for the sale of 150 bales. There were, however, no contracts for the purchase of either lint or cotton kapas. Thirteen of the contracts were settled by the assessee, without giving actual delivery, between 30th December, 1956, and 28th February, 1957. The fourteenth contract for 300 bales was similarly settled on 5th April, 1957. These settlement were effected by showing same parties on the dates of settlement, paying the difference between the selling rate and the purchase rate. It will thus be observed that even before time for delivery as stipulated had arrived, the assessee had chosen to the settle the contracts and had not waited to give actual delivery. By these settlements the two contracts entered into before the commencement of the accounting year resulted in a profit of Rs. 1,218 and the other twelve contracts entered into after the commencement of the accounting year resulted in a loss of Rs. 48,468. Thus, during the accounting year the assessee incurred a net loss of Rs. 47,250 in those forward transactions. For the assessment year the assessee was assessed by the Income-tax Officer at Rs. 59,644 made up of Rs. 1,304 from property and Rs. 58,304 from business. In determining the income from business, the Income-tax Officer allowed against other business income, loss arising out of the forward contracts for the sale of lint.

(3.) It, however, appeared to the Commissioner of Income-tax that the assessment order passed by the Income-tax Officer was erroneous and prejudicial to the interests of the revenue to the extent of an unjustifiable deduction of Rs. 47,250 (loss Rs. 48,468 minus profit Rs. 1,218), as in the Commissioners view that amount represented a loss arising from speculative transaction within the meaning of Explanation 2 to section 24 (1) of the income-tax Act. After due notice to the assessee, the Commissioner, in exercise of his revisional power under section 33B of the Act, revised the assessment, holding that the loss in question was a loss arising from speculative transactions in the nature of a business not permissible as a deduction or a set-off under the first proviso to section 24 of the Act against income from any business, and enhanced the assessment by an amount of Rs. 47,250, but directed that the said loss from such speculative transactions be carried forward under section 24 (2) of the Act for a set-off against profits from speculative transactions in subsequent years.