COMMISSIONER OF INCOME TAX Vs. GOUREPORE CO LTD

JUDGEMENT

(1.) In this reference, we are concerned with three assessment years, viz., the assessment years 1965-66, 1966-67 and 1967-68. In respect of these three years, only one question has been referred to this court under Section 256(1) of the I.T. Act, 1961 ;

(2.) The Tribunal for all these years, on this aspect, followed the principle decided by it for the assessment year 1961-62 and it will, therefore, be necessary to examine the facts found by the Tribunal and also the reasonings of the Tribunal. There, the Tribunal was concerned with the loss of Rs. 8,54,063. We may incidentally point out that the reference for the same year is in the list. We have heard the reference and shall dispose of it today after this judgment.

(3.) The Tribunal has noted that the assessee is a company and it has also noted the relevant assessment year. Its business consisted of the manufacture and sale of jute goods. This fact is important. By this finding the Tribunal makes it quite clear that the assessee was carrying on two types of businesses, viz., as dealer in merchandise of jute goods as well as a manufacturer of jute goods. The amounts in question, according to the ITO, were represented to be the loss from speculative transaction within the meaning of Expln. 2 to Section 28, Section 43(5) and Section 73 of the I.T. Act, 1961. But, for the assessment year 1961-62, some of the losses were claimed within the meaning of Expln. 2 to Section 24(1) of the Indian I.T. Act, 1922. As we shall presently note, the position is identical in both the Acts. The ITO was of the view that the transaction had been ultimately settled by means other than actual delivery of stocks. Before him, it was contended that the purchase and sale of gunny included forward sales and sometimes forward sales bought back and the contracts were settled by means other than actual delivery of the goods. It was further submitted that the assessee-company was obliged to either cancel the previous order or to buy the same at a reduced rate as it received overseas orders for supply of special quality of goods where the margin of profit was higher. In these circumstances, it was claimed to be hedging contracts. The ITO rejected this contention as not falling within the meaning of the proviso to Section 43(5) of the I.T. Act, 1961, and for the assessment year 1961-62, the ITO came to the conclusion that the transactions did not come within Clause (a) to Expln. 2 to Section 24(1) of the Indian I.T. Act, 1922. According to him, the loss was the result of the assessee-company buying back the earlier forward sales to accommodate fresh contracts with a view to earning higher profit and the pattern of such transactions was not characteristic of hedging. It was further contended on behalf of the assessee that the transactions were few and isolated. This was also rejected by the ITO on the ground that, the scheme of the Act had not drawn any distinction between an isolated speculative transaction and several such transactions for the purpose of setting off the loss. It was then submitted on behalf of the assessee that the forward sales and acceptance of overseas contract necessitating purchase back of forward sales formed a composite transaction. The ITO rejected this contention on the ground that separate contracts were executed for each of the transactions and, therefore, these were independent of each other and, moreover, in terms of Section 24(1), speculative transactions were distinguishable from others. The AAC upheld the order of the ITO. There was a further appeal before the Tribunal. The Tribunal found that the assessee had the intention to supply the goods as per sale contract but considering that if it could manufacture special quality of goods to execute overseas orders it could earn better profit, the assessee switched over to the manufacture of special quality goods and settled forward contracts with the Indian buyers. It was held by the Tribunal after considering the definition of speculative transaction in Expln. 2 to Section 24(1) of the Indian I.T. Act, 1922, or prov. (a) to Section 43(5) of the I.T. Act, 1961, that the settlement of these transactions was necessary and incidental to the very carrying on of the assessee's business in the overseas supplies resulting in more profits even after setting off the toss consequent upon the settling of the contract of sale with the Indian buyers. The Tribunal thus held that the net result was admittedly a hedging profit and not a speculative loss. In that view of the matter, the Tribunal allowed these losses. The question is the propriety of this view expressed by the Tribunal.