1986 (7) TMI 38 - HC - Income Tax

Summary

Issues:
1. Whether the loss incurred by the assessee in local purchase transactions qualifies as non-speculative loss.
2. Whether the offers made by the assessee to foreign customers, not accepted by them, can be considered as contracts for the proviso to section 43(5) of the Income-tax Act, 1961.

Comprehensive Analysis:

Issue 1:
The assessee, a leading exporter of jute products, suffered a loss in local purchase transactions due to non-acceptance of offers by foreign customers. The Income-tax Officer treated these transactions as speculative, disallowing the claimed deduction. However, the Appellate Assistant Commissioner recognized the local transactions as hedging transactions, allowing the appeal. The Tribunal upheld this decision, stating that the firm offers to foreign customers constituted a commitment for actual delivery of goods. The Tribunal rejected the Revenue's appeal, emphasizing that the local purchases were not speculative but intended to guard against future price fluctuations. The Court agreed, holding that the local purchases were hedging contracts, and the loss was rightly allowed as non-speculative.

Issue 2:
The Revenue argued that since the foreign transactions were not accepted, no contracts for actual delivery existed, making the local purchases speculative. In contrast, the assessee contended that the overall transaction process should be considered, emphasizing that the firm offers bound them to export goods upon acceptance. The Court agreed with the assessee, noting that even if not all foreign contracts materialized, the local purchases were made to guard against future price fluctuations. The Court interpreted the proviso to section 43(5) to encompass multiple contracts for actual delivery, not just individual ones. Therefore, the assessee was entitled to the benefit of the proviso, and the local purchases were not speculative contracts.

In conclusion, the Court ruled in favor of the assessee on both issues, affirming that the loss was non-speculative and that the offers made to foreign customers, even if not accepted, could be considered as contracts for the proviso to section 43(5) of the Income-tax Act, 1961.