MITTER, J. - (1.) THE questions referred to this Court under s. 66(2) of the Act are as follows : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the transactions between the assessee and M/s Kedar Nath Hariram were speculative transactions within the meaning of the expression used in s. 24(1) of the Indian IT Act? (2) Whether, on the facts and in the circumstances of the case the Tribunal erred in rejecting the set-off of the loss claimed by the assessee of Rs. 40,572 under s. 24(1) of the Indian IT Act?"
(2.) THE facts taken from the statement of case are as follows : THE assessment year concerned is 1953-54, the corresponding accounting year being 2008 Gujarati Diwali year ending on 18th Oct., 1952. THE assessee is a member of the Gunny Trades Association and is a registered dealer in jute and hessian. In the accounting year mentioned above, the assessee entered into three transactions for purchase and sale of hessian bags, heavy cess, etc., with Kedar Nath Hariram. Under the first contract, the assessee agreed to sell to the said firm 500 bales of heavy cess at the rate of Rs. 180 per hundred bags, on 1st Sept., 1951. Out of these, 250 bales were deliverable on 30th April, 1952. On 13th Oct., 1951, the assessee entered into a second contract with the same party agreeing to purchase 500 bales of the same quality of heavy cess at Rs. 216-8-0 per hundred bags. THE deliveries under the second contract were to be made as under the first contract. THE assessee incurred a total loss of Rs. 81,072 on the two contracts. THE assessee entered into an agreement to purchase 300 bales of hessian from the said firm on 20th Aug., 1951, deliverable on 15th Nov., 1951. On 22nd Sept., 1951, the assessee entered into another agreement to sell 300 bales of the same commodity to the same party deliverable on the same date (15th Nov., 1951). As a result of the two last mentioned contracts, the assessee made a profit of Rs. 40,500. Thus, as a result of this series of transactions, the assessee suffered a net loss of Rs. 49,570. THE contracts were in the standard form of contract prescribed by the Indian Jute Mills Association, the relevant clauses of which will be noted hereafter. It is admitted that there was no physical delivery of the commodity agreed to be purchased and sold. THE parties to the contract exchanged pucca delivery orders which authorised the purchaser to take delivery of the stipulated number of bales from the mills concerned, but the goods were not actually sent by any party to the other. THE mode of payment adopted under the contract was as follows: On 15th April, 1952, Kedar Nath Hariram drew up a bill for Rs. 2,40,441-9-0 against the assessee in pursuance of the second contract dt. 10th Oct., 1951, being the value of the 250 bales of heavy cess purchased by the assessee. On the same date the assessee drew up a bill against Kedar Nath Hariram for Rs. 1,99,905-3-3 in pursuance of the first contract dt. 1st Sept., 1951, being the cost of the 250 bales agreed to be sold by the assessee. THE books of the assessee showed a debit entry of Rs. 2,40,441-9-0 and a credit entry of Rs. 1,99,905-3-3 in respect of the transactions just now mentioned under dt. 15th April, 1952. THE bank pass book of the assessee corroborated the statement and showed a credit entry in favour of the assessee of Rs. 1,99,905-3-3 and a debit entry of Rs. 2,40,441-9-0. Similarly, bills were drawn by the two parties against each other and similar entries in the cash book and the bank pass book are to be found in respect of the deliveries to be effected on 30th April, 1952. Again with regard to the contracts for the purchase and sale of 300 bales of heavy cess, bills were drawn up and delivery orders attached to the bills in the same manner and similar debit and credit entries for the entire amount in respect of the pucca delivery orders were to be found in the books of account of the assessee including the bank pass book. The ITO held that the transactions entered into between the assessee and Kedar Nath Hariram were speculative in nature as none of the contracts were followed up by actual delivery of the goods. He, therefore, did not allow the set-off of the net loss against the business income of the assessee in view of the proviso to s. 24(1) of the IT Act. The AAC confirmed the disallowance. Elaborate arguments were put up before the Tribunal. In order to appreciate the same it is necessary to refer to the salient features of the terms and conditions of the contracts which were all in the same form. One of these contracts is an annexure to the statement of the case bearing dt. 13th Oct., 1951. The firm of Kedar Nath Hariram appeared to have acted as the brokers in the transaction. The document shows that the said firm had bought by the order of International Trading Company (name and style in which the assessee worked) and on the assessee's account two lakhs bags of European mills' standard make, quality, etc., as per margin at the rate of Rs. 216-8-0 per hundred bags free alongside export vessel in the port of Calcutta. In the margin the quality of the bags, their weight, etc., are shown. The important terms and conditions of the contract were : "(1) Buyers to give seven clear working days' notice to place goods alongside. (2) Goods to be packed, folded, well pressed, marked and shipped by sellers in covered cargo boats in iron bound bales of 400 pcs. each. (3) Payment to be made in cash in exchange for delivery orders on sellers, or for railway receipts, or for dock's receipts or for mate's receipts (which dock's or mate's receipts are to be handed over by a dock or ship's officers to the seller's representatives). . . . . (5) Delivery of the said goods to be given and taken as follows : 15th April, 1952 One lakh bags. . . (9) In the event of the buyers failing to give to the sellers instructions for shipment or deliver of any portion of the goods in time to ship or deliver such portion within due date, a written intimation from the sellers sent by post or otherwise, to the buyer's place of business, that the goods are already in godown at mill named overleaf, shall be considered a proper and sufficient tender, whether they have been specially set aside or not." Under s. 24(1) an assessee, who sustains a loss of profits or gains in any year under any of the heads mentioned in s. 6, is to be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. Under the first proviso to s. 24(1) any loss sustained in speculative transactions which were in the nature of a business were however not to be allowed to be set off against the income of the assessee from any source other than business consisting of speculative transactions. Under Explanation 2 of s. 24(1) of the IT Act "a speculative transaction means a transaction in which a contract for purchase and 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."
(3.) THE impact of the above provision on the affairs of the assessee was that if the transactions with Kedar Nath Hariram were speculative transactions within the meaning of s. 24(1) of the IT Act, the net loss of Rs. 40,571 could not be allowed to be set off against the income of the assessee from other business. It was strenuously contended before the Tribunal and before this Court that the said transactions could not be speculative transactions. Special reference was made to the words "periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips". It was said that there was actual delivery or transfer of the goods inasmuch as there was no settlement contract or dealing in differences only : the parties actually sent pucca delivery orders of the mills along with their bills. These pucca delivery orders, according to the learned advocate for the assessee, represented the goods and as such the transactions never had any speculative element in them. The whole question before us is whether, by the exchange of delivery orders, the transactions avoided the mischief of the Explanation. It was argued that the exchange of delivery orders was one of permissible modes of delivery. This was sought to be supported by the decision of the Supreme Court in the case of Dunichand Rataria vs. Bhuwalka Brothers Ltd. (1955) 1 SCR 1071. As that case proceeds largely on the construction and effect of the issue of pucca delivery orders by jute mills as expounded earlier in the case of Anglo-India Jute Mills Co. vs. Omademull (1911) ILR 38 Cal 127, it would be appropriate to take a note of the views expressed in that case. The facts in the Anglo-India Jute Mill Co.'s case (supra) were as follows. The company sold 3,00,000 yards of hessian cloth on 1st March, 1908. In the sold note sent to them by the brokers the sale was expressed to be to the brokers' principals. Under the conditions of the contract, payments were to be made in cash in exchange for delivery orders or on certain other specified terms which are not relevant and delivery of the goods was to be given and taken on the terms "ready payment against pucca delivery order". Three delivery orders bearing dt. 2nd March, 1909, were issued by the company to the brokers who pledged them with the firm of Chandermull Serahmull to secure repayment with interest of the sum of Rs. 18,000 advanced by them to the brokers. The plaintiff, Luchminarain Kanoria, was also interested in the advance. Subsequently, an agreement was made between the plaintiffs and the brokers under which for valuable consideration the plaintiffs gave up the two delivery orders and obtained from the brokers an assignment of their equity of redemption in the other delivery order and the 1,00,000 yards of hessian cloth represented thereby. It was on this third delivery order that the plaintiffs' claim in the suit was based. The defendant company resisted the plaintiffs' claim on the ground that they were unpaid sellers of the goods and that they had a lien on them so long as these remained in their possession and the price or any part of it remained unpaid. The real question was whether the defendant- company was estopped from denying that cash had been paid for the goods to which the delivery order related and whether they could not claim to be entitled to a lien as against the plaintiffs. The defendant-company contended that the plaintiffs could not succeed as the property in the goods had not passed since there was no appropriation of them to the delivery order. They also contended that the delivery order was not a document of title. Jenkins C.J. held that there was statutory recognition of a delivery order as a document of title in s. 108 of the Contract Act and s. 137 of the Transfer of Property Act and under the latter section the transferee acquired a title to the goods to which it related. The learned Chief Justice came to the conclusion that the defendant- company had adduced no evidence to prove that the goods had not been ascertained, though this was a fact specially within their knowledge and said that the defendant-company could not be heard to advance this plea, and for substantially the same reasons as precluded them from showing that cash had not been paid. He observed that "having regard to the terms of the delivery order, the known course of dealing in this market, Mr. Young's representations (who in reply to the enquiry as to whether the delivery orders were in order said that they were all right) and their own conduct, the defendant-company must be taken to have appropriated goods of the required quantity and description to this delivery order, and they cannot now be heard to deny that they held these goods for the plaintiffs. And it must be borne in mind that we have not to consider whether property passed as between the original sellers and buyers but whether, in the events that have happened, the sellers can assert this against the plaintiffs who have acted on the faith of the seller's representation that no lien existed and that they held goods to answer the delivery order. In my opinion, the defendant-company's contention on this head must also fail, for, in the circumstances, the defendant-company have represented that the delivery order would pass and confer a good title, and they put it in the power of M/s Janki Dass and Co. to indorse the delivery order with this representation to the plaintiffs, who, dealing in good faith and for value, were induced to alter their position on the faith of the representation so made.";