COMMISSIONER OF INCOME TAX Vs. PUTTAIAH SESHAIAH AND CO

JUDGEMENT

(1.) The question referred to us under s. 256(1) of the I.T. Act is :

(2.) The facts relevant to the case are the assessee is a registered firm carrying on business in manufacture and sale of groundnut oil. During the accounting year relevant to the assessment year 1971-72, it entered into as many as 148 contracts for sale of oil involving a total quantity of 2,318 tonnes. Out of these contracts the assessee performed 135 contracts by delivery of oil of 2,112 tonnes but in respect of 13 contracts involving 206 tonnes, he could not performed the contracts by supplying the oil for want of wagons; he settled them by paying the price difference. For the relevant assessment year, he claimed set off for the amount of loss arising from payment of price difference against the profits of his business which was disallowed by the ITO holding that since the 13 contracts were settled otherwise than by delivery of goods, they are speculative transactions and, hence, the losses arising therefrom cannot be set off against profits from regular business. On appeal, the AAC agreed with the ITO. On further appeal, however, the Tribunal took a contrary view. On a consideration of the relevant provisions of the Act, the Tribunal observed that unless the Department proves that

(3.) The definition of speculation business makes it clear that the intention of the parties is made immaterial and irrelevant. If a contract is settled otherwise than by the actual delivery or transfer of the commodity or scrips, it will be a speculative transaction notwithstanding the fact that at the time the transaction was entered into, the parties intended to effect delivery of commodity or scrips, as the case may be. On the same analogy, even if the parties, at the time of entering into the contract, merely intended to indulge in speculation, i.e., where they never intended to deliver the commodity or scrips, but if on account of some one or other reason, they actually deliver or transfer the commodity or scrips in pursuance of the contract, it will not be a speculative transaction. It is obvious that Parliament, by this definition, sought to exclude any equiry or investigation into the intention of the parties. Now, s. 28 is one of the sections dealing with heads of income which are chargeable to tax under the Act. Section 28 deals with profits and gains of business or profession. According to this section, the profits and gains of any business or profession carried on by an assessee have to be assessed under this and the following sections. While so providing Parliament put in Expln.2 to s. 28, which corresponds to Expln. (1) to s. 24(1) of the 1992 Act. The idea behind this Explanation is to treat the speculative transcations as a distinct and separate business from other business, if the speculative transcations are of such a nature as to constitute a business; it is referred to as "speculation business." Then s. 73 (1) says that any loss arising from a speculation business can be set off only against the profits and gains, if any, of another speculation business but not against the profits and gains from any other business. It is the interpretation of Expln. 2 to s. 28 which mainly falls for considerations before us. The contention of Sri. M. S. N. Murthy the learned standing counsel for the Department, is that so long as the spectulative transcations are business transcations they must be treated as and must be deemed to constitute a distinct and separate business called "spectulation business", while the contention of Sri Srirama Rao, the learned counsel for the assessee, is that for this Explanation to apply the several spectulative transactions must be such as to constitute one business, and that, then alone they can be treated as a separate business. In other words, the contention of Mr. Rao is that a common thread must run through several speculative transcations before they can be treated as a distinct or separate business called "speculation business". His contention is that if the transcations which are held as spectulative transcations by virtue of the definition contained in s. 43(5), are part and parcel of the general business done by an assessee and are not specilative per se, the Explanation has no application. The counsel submits that while for determining whether a transaction is a speculative transaction or not, the definition under s. 43(5) is relevant, for the purpose of determining whether they constitute spectlative business or not, one has look to and consider the intention of the parties at the time of entering into those transcations. Both the counsel relied upon certain supporting their rival points.