H.N. Seth, J. - (1.) AT the instance of the assessee, Messrs. Raghunath Das Prahlad Das of Mathura, the Income-tax Appellate Tribunal, Delhi Bench B, has referred the following question in respect of the assessment year 1963-64 for the opinion of this court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding in law that the loss of Rs. 46,275 arose to the assusseo from speculative transactions within the meaning of Section 43(5) of the Income-tax Act, 1961, and; consequently, could not be set off against other income of the assessee ? "
(2.) THE assessee is a registered firm working as commission agent in a number of commodities such as coconut, munghpali, sarson, etc. It also purchased and sold those commodities on its own account. In respect of those commodities the assessee also entered into transactions which admittedly were speculative transactions. During the months of September and October of 1961, which fell within the previous year relevant to the assessment year 1963-64, the assessee had purchased certain quantity of ready sarson. It also entered into forward contracts for sale of 7,169 units of sarson (delivery to be effected during the months of November, 1961, and May, 1962). During the months of October to May, 1962, the assessee further entered into forward contracts for the purchase of 7,160 units of sarson, to be delivered during the months of November, 1961, and May, 1962. THE assessee admits that all these forward contracts of sale and purchase in respect of 7,160 units of sarson were ultimately settled without taking or effecting actual delivery of the goods purchased or sold. On these transactions the assessee earned profits amounting to Rs. 2,69,047 and suffered losses amounting to Rs. 3,15,322. Net result was a loss of Rs. 46,275. Before the. Income-tax Appellate Tribunal the assessee claimed that inasmuch as on the dates on which it entered into forward contracts for the sale of 7,160 units of sarson in the month of October, 1961, it had ample stock of ready sarson with it. These forward contracts of sale were entered into as hedge contracts to guard against the loss through future price fluctuation in respect of contracts for actual delivery of his ready goods. Accordingly, such transactions could not be considered to be speculative transactions as laid down in Section 43(5), proviso, Clause (a) of the Income-tax Act, 1961. The assessee entered into the forward contracts of purchase of 7,160 units of sarson during the months of October, 1961, and May, 1962, merely for settling the forward contracts of sale made by it during the month of October, 1961. In the circumstances it was entitled to adjust the losses suffered by it in respect of these forward contracts as against the profits earned by it in connection with its non-speculative business. The case of the assessee was not accepted by the Income-tax Appellate Tribunal which held that at the time when during the month of October, 1961, the assessee entered into forward contracts of sale of sarson, it did not enter into any contract for actual delivery of sarson which was already in stock with it. Since there was no contract for sale of ready sarson it was not known what loss the assessee was going to guard against. It observed that, in the circumstances, the assessee could not claim that it sold sarson in the forward market just to project or guard itself against the losses that may arise in respect of purchases made by it earlier, as indeed there were no prior forward purchases. As there was no contract for actual delivery of goods dealt with by the assessee the question of applicability of Section 43(5), proviso, Clause (a), did not arise. The Tribunal also relied upon a decision of the Gujarat High Court in the case of Chimanlal Chhotalal, wherein it had been held that the contracts contemplated by Section 43(5), proviso, Clause (a) were forward contracts of sale of merchandise and it was in respect of such forward contracts of sale alone that the hedging contracts contemplated by the section could be entered into by the dealers. The hedge contracts contemplated by the proviso were clearly contracts of purchases and not contracts of sale. In this view of the matter the Tribunal concluded that the forward contracts for the sale and purchase of 7,160 units of sarson, entered into by the assessee, which were ultimately settled without delivery of goods, were speculative transactions. Resultant loss because of those transactions continued to be speculation loss which could not be adjusted as against the profits of non-speculation business of the assessee. Such losses had to be carried forward . to the following year for being adjusted as against the profits of speculation business in that year.
(3.) SECTION 43(5) of the Income-tax Act, 1961, runs thus : "' 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 merchaniing 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 exchange in the course of any transaction in the nature of jobbing or 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." Under the main clause, whenever a transaction in which a contract for the purchase or sale of any commodity is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity, it is considered as a speculative transaction for the purpose of the Income-tax Act. But it such transactions have taken place in the circumstances mentioned in Clauses (a) to (c) of the proviso to Section 43(5) they will not be deemed to be speculative transactions. Clause (a) of Section 43(5) applies only if the following circumstances exist: (1) If there is a contract for actual delivery of goods manufactured by the assessee or a merchandise sold by it; (2) the assessee must by a subsequent transaction intend to guard against losses through future price fluctuation in respect of such contract; and (3) the transaction in question must be a contract entered into in respect of raw materials or the merchandise in the course of the assessee's manufacturing business and it should have been settled otherwise than by actual delivery of goods. ;