COMMISSIONER OF INCOME TAX Vs. AGRAWAL BROTHERS

JUDGEMENT

(1.) THIS is a reference made by the Tribunal, Indore Bench, at the instance of the Department. The facts giving rise tot his reference are that the assessee returned income of Rs. 12,811 after charging to the accounts loss, claimed to be hedging loss, amounting to Rs. 93,554. The ITO observed that the loss arose from forward contracts entered into by the assessee which were settled otherwise than by actual delivery of transfer of goods. The losses were claimed by way of difference in the accounts dealt with by the assessee. Before the ITO, it was, however, claimed that to the extent of Rs. 38,230, the difference in price debited to the difference account pertained to the ready business and the balance of Rs. 56,248 was covered by proviso (a) to s. 43(5) of the IT Act, 1961, which corresponds to proviso (a) to Expln. 2 to s. 24(1) of the Indian IT Act, 1922. The ITO held that whole of the loss of Rs. 98,091 arose from speculative transactions and could not be set off against other business income or other heads of income and that the same was liable to be carried forward to be set off against income from speculative transactions in future years.

(2.) ON appeal before the AAC, it was pointed out that to the extent of Rs. 38,230 the type of losses were such that they arose from purchase of goods from one party and sale to another party, the losses arising therefrom only being debited to the trading account. It was further shown that the said loss arose in respect of some 42 transactions. The AAC further found that in all these cases there was a contract for purchase of goods and the goods were actually delivered. He, accordingly, held that to the extent of Rs. 38,230 the loss was a regular trading loss. In regard to the transactions resulting in a loss of Rs. 56,248, the AAC found that the goods had not been delivered. Since the assessee was neither a manufacturer nor a stockist the AAC did not accept the submission that the forward contracts for purchase or sale were hedging transactions to guard against loss through future price fluctuations. He was of the opinion that the purchase contract could not be considered to be the assessee's stock and held that the loss of Rs. 56,248 could not be allowed as a hedging loss. ON appeal, the Tribunal accepted the submission of the assessee that the above transaction was typical and that the same characteristics obtained in several other transactions which were the subject-matter of appeal. The Tribunal, analysing one of such transactions, ultimately found that the sum of Rs. 56,248 was a loss covered by proviso (a) to s. 43(5) of the Act of 1961, and could not be regarded as loss in a speculative transaction. After the decision of the Tribunal, the Department approached the Tribunal for making a reference and the Tribunal has submitted statement of the case and referred the following questions for opinion of this Court :

(3.) THE learned counsel for the assessee, on the other hand, contended that the first part of proviso (a) to s. 43(5), apparently talks of contracts for purchase and, therefore, hedging contracts could only be contracts for sale. He also contended that the view taken in the two decisions cited by learned counsel for the Department does not appear to be correct. He further contended that the provisions contained in s. 43(5), proviso (a) of the IT Act, 1961, are identical to proviso (a) to Expln. 2 to s. 24(1) of the Indian IT Act, 1922 and the Board of Revenue on the question of hedging contracts observed that hedging contracts could be both purchase as well as sale. THE learned counsel referred to this view of the Board from Iyengar's Commentary on the IT Act (6th Edn., Vol. II, pp. 1109-10), and contended that if the highest executive in the Department has interpreted the language of the proviso in a particular manner it should be accepted, except when accepting the interpretation would mean doing violence to the language itself. In support of his contention the learned counsel placed reliance on the rule of construction enunciated by Crawford in his work on Statutory Construction para 219 p. 393. It was not disputed before us that the transactions, one of which in detail has been quoted above, as referred to by the Tribunal in its judgment, are transactions the total loss of which, which is the subject-matter of this reference, comes to Rs. 56,248. It is also not in dispute that the only question in the reference is as to whether a contract of sale subsequent to the contract of purchase was a contract which would fall within proviso (a) to s. 43(5) of the Act and in fact this is what one of the questions referred to us is.