1983 (1) TMI 42 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to set off of loss from unfulfilled contracts against profits from regular business.
2. Interpretation of "speculative transaction" and "speculation business" under the Income Tax Act.
3. Applicability of Circular No. 23 (XXXIX) D of 1960.

Summary:

1. Entitlement to Set Off of Loss:
The primary issue was whether the assessee, a registered firm engaged in the manufacture and sale of groundnut oil, was entitled to set off a loss of Rs. 85,643 arising from payment of price differences in respect of unfulfilled contracts of sale against the profits from its regular business. The Income Tax Officer (ITO) disallowed the set-off, categorizing the 13 unfulfilled contracts as speculative transactions. The Appellate Assistant Commissioner (AAC) agreed with the ITO, but the Tribunal took a contrary view, stating that unless the Department proves that the transactions constituted speculation business, the set-off must be allowed.

2. Interpretation of "Speculative Transaction" and "Speculation Business":
The court examined the definitions and provisions under the Income Tax Act, particularly s. 43(5), Expln. 2 to s. 28, and s. 73(1). It was determined that the intention of the parties is irrelevant in defining speculative transactions. The court held that speculative transactions must be deemed a distinct and separate business if they are of such a nature as to constitute a business. The court rejected the assessee's argument that speculative transactions must be connected by a common thread to be considered a separate business. The court supported its interpretation with decisions from the Calcutta High Court, Madras High Court, and its own previous judgments, emphasizing that speculative transactions forming part of the general business must be treated as a separate business under the Act.

3. Applicability of Circular No. 23 (XXXIX) D of 1960:
The assessee's counsel referred to Circular No. 23 (XXXIX) D of 1960, which suggests that if a forward transaction is entered into for safeguarding against loss through future price fluctuations, it should not be treated as speculative. However, the court noted that the Tribunal did not express an opinion on the applicability of this circular. The court directed the Tribunal to consider the applicability of the circular before passing final orders, ensuring that the decision is made after hearing both parties and in accordance with law.

Conclusion:
The court answered the question in the negative, favoring the Revenue and against the assessee. The Tribunal was instructed to consider the applicability of Circular No. 23 (XXXIX) D of 1960 before finalizing the orders. No costs were awarded.