S. Rajaratnam, Accountant Member -
(1.) THIS is an appeal filed by Rukmini Bai, wife of Amruthlal of Nizamabad, against the order of the AAC for the assessment year 1977-78.
(2.) The assessee is an individual and had purchased 172.5 qtls. of turmeric at Rs. 164 per qtl. on 21-4-1976. She had sent the same for sale through a commission agent, Chaganlal Mavji & Co., at Sangli, on 23-4-1976. The goods were ultimately sold at Rs. 374 per qtl. on 13-7-1976. She had, meanwhile, entered into the following forward contracts of sale :
It was the assessee's case that the loss on settlement of these forward contracts on 13-7-1976 by payment of a difference to the extent of Rs. 13,293 was, though a speculative transaction within the meaning of Section 43(5) of the Income-tax Act, 1961 ('the Act') excepted under Clause (a)of the proviso to Clause (5) of Section 43 as a transaction 'to guard against loss through future price fluctuation in respect of his contracts for actual delivery of goods or merchandise sold by him'. The ITO disallowed the claim on the ground that the forward contracts had no relationship with the stock of turmeric in hand and that these two sets of transactions were independent of each other and, therefore, not covered by the exception. It is in this view, he had treated the payment of difference to the extent of Rs. 13,293 as separate from the assessee's income in view of Section 73 of the Act, which segregates such loss in speculation and permits only future set-off against such speculation profits. The AAC confirmed this treatment on the ground that the transaction of actual purchase of turmeric and forward contracts were not interrelated. In fact, he had found that though there was talk of forward contract, there was no such contract. He further found that even if it was hedging in the popular sense, it did not satisfy the requirement of the exception in the proviso to Section 43(5). The assessee has come up in second appeal and has claimed that the forward contracts being of a hedging nature they are saved by the proviso.
We have carefully considered the records as well as the assessee's arguments in writing both before the ITO and the AAC. The amount of Rs. 13,293 is settled otherwise than by actual delivery or transfer of commodity. It is, therefore, a speculative transaction under Clause (5) of Section 43. The only question is whether, it is covered by the proviso to the said clause which reads as under :
(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 purposes 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
(c) a contract entered into by a member of a forward market or a stock or exchange in the course of any transaction in the nature of jobbing arbitrage to guard against loss which may arise in the ordinary course of his business as such member ;
shall not be deemed, to be a speculative transaction ;
The assessee had repeated her claim that it was a hedging transaction. As pointed out by the first appellate authority, even if it is a hedging transaction in the popular sense, it does not get automatically excepted under the proviso. Though, the AAC had observed that he did not find any forward contract, the assessee has given full details and these have been recorded in the assessment order. The ITO has not disputed the genuineness of the transaction. He had only stated that there was no interrelationship between the forward contracts and the stock of goods. It is not clear from his order as to what kind of interrelationship he expected to find. The fact remains that the assessee had the stock and had consigned it for sale. She had 172.5 qtls. of turmeric while the forward contracts related to a quantity of 150 qtls. The contract was entered into at a time when the stocks had already come to her constructive possession through her commission agent, Chaganlal Mavji & Co. There was no firm contract of sale of the ready goods at the time she entered into the forward contract. The assessee was no doubt in error in relying upon Clause (a) of the proviso, the benefit of which is available only where there is already a pre-existing contract either for actual delivery or sale. However, the assessee would come under Clause (b) which covers a case of forward 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'. The forward contracts, it is seen from the records, were also entered into, through the same commission agent, Chaganlal Mavji & Co. The ready goods were actually sold on 13-7-1976 when the forward contracts were also settled by payment of the difference, though, the date of delivery for settlement stipulated in the forward contract was for 31-10-1976. The availability of ready stock during the pendency of the contract, both at the settlement and at the time of sale, the fact that the goods were entrusted with the same commission agent through whom the forward contracts were also entered into, the relationship between the quantity of stock available and the quantity for which the forward contracts were entered into, etc., clearly support the assessee's claim for exception under Clause (b). The only other point made out by the first appellate authority is that there was no need for entering into a forward contract to avoid a loss, because there was no such possibility of loss as the market was rising. This overlooks the fact that the assessee could not have foreseen the bullish market as on or about 13-7-1976, when she entered into the forward contracts in the last week of April 1976. We, therefore, find that there is no merit in the orders of the authorities below. While Clause (a) of the proviso would except forward contracts and cover other existing contracts for delivery of goods, Clause (b) would cover forward contracts in respect of ready 'holding of stocks'. Hence, the assessee is entitled to succeed in view of Clause (b) to the proviso to Clause (5) of Section 43.
(3.) IN the result, the appeal is allowed. Relief due is Rs. 13,293.;