THAKURLAL SHIVPRAKASH PODDAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the applicant-assessee, the Income-tax Appellate Tribunal, Indore Bench, Indore, has submitted a statement of case under Section 256(1) of the I.T. Act, 1961, for the opinion of this court on the following question of law :

(2.) IN order to understand the scope of the question it is necessary to refer briefly to the material facts either admitted or found by the Tribunal that gave rise to the question. For the assessment year 1962-63, the corresponding accounting year ending with November 8, 1961, M/s. Thakurlal Shivprakash Poddar of Mehnagar, hereinafter called the assessee, a registered firm, deriving income from exploiting certain mines in the district of Jhabua of Madhya Pradesh, filed a return on July 31, 1962, declaring an income of Rs. 1,45,423. The assessee had agreed on February 28, 1961, to deliver in the month of April/May, 1961, 2,000 tons of manganese ore at the rate of Rs. 50 per ton to M/s. Pitty Brothers, Bombay. The quality of manganese agreed to be delivered was required manganese, 13% iron, 13% silica and alumina, 0.12% phosphorus. The assessee could not and did not deliver 2,000 tons of manganese ore of the specifications indicated in the contract. On August 25, 1961, a settlement was arrived at by the assessee and M/s. Pitty Brothers with regard to the aforesaid contract as a result of which the assessee agreed to pay a sum of Rs. 30,000 by way of compensation at the rate of Rs. 15 per ton. The amount of Rs. 30,000 was claimed to have been paid by the assessee on October 24, 1961. IN the circumstances, the assessee claimed in his return the aforesaid sum of Rs. 30,000 paid by it to M/s. Pitty Brothers, for deduction on the ground that it is a normal trading loss incurred by it in respect of the contract in question. The ITO in the assessment order dated November 29, 1963, disallowed his claim on two grounds. According to him, the transaction was a bogus one and even if it be held to be a genuine transaction, it was in the nature of a speculative transaction and as such the loss claimed on this account inadmissible. The assessee's appeal to the AAC was not successful. On further appeal to the Tribunal, it was found on a consideration of the facts and circumstances that the transaction was genuine and not bogus and the amount of Rs. 30,000 was in fact paid by the assessee to M/s. Pitty Brothers. However, the Tribunal rejected the claim of the assessee on the ground that the transaction is one of speculative nature as there was a settlement of the contract without giving delivery of the goods contracted for as required by the provisions of Expln. 2 to Sub-section (1) of Section 24 of the INdian I.T. Act, 1922, and, therefore, the loss of Rs. 30,000 sustained by the assessee would be a loss of speculative transaction which the assessee would be entitled to carry forward and set off against a profit of speculative transaction in subsequent years in accordance with the provisions of the Act. Hence, this reference.

(3.) THE answer to the question depends upon the scope and meaning of the definition of "speculative transaction" defined under Expln, 2 to Sub-section (1) of Section 24 of the Indian I.T. Act, 1922, corresponding to Section 43(5) of the 1961 Act and its application to the facts of the present case. Before considering the scope and ambit of the definition of "speculative transaction", it is profitable to refer briefly to the heads of income and method provided under the Act for deducting the speculative loss from the income in a given year. Heads of income chargeable to income-tax are enumerated in Section 6 of the 1922 Act. An assessee, who sustains a loss under any one of the heads of income in any accounting year, shall be entitled under Section 24(1) of the Act to have such loss set off against his income, profits or gains under any other head in that year. But, however, the first prov. to Section 24(1) permits the set-off of a loss in speculative business only against the assessee's profits and gains, if any, in a similar business. Where the speculative transactions are of such a nature and character so as to constitute a business, the business shall be under Expln. 1 deemed to be distinct and separate from any other business. Any ordinary trading loss incurred by an assessee during a particular accounting year is ipermissible to be deducted from the profits and gains of the assessee in other heads. But the loss incurred in speculative transaction is not deductible from the income as an ordinary trading loss. Such speculative loss can be deducted only from the income derived by the assessee during that year from his other speculative transactions or speculative business. If there is no profit or gain in any speculative transaction or business during that year the speculative loss would be carried forward to the next year where the assessee would be entitled to set off such loss or income derived during that year under any speculative transaction of business. We shall now turn to the definition of "speculative transaction".