1980 (7) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Relationship between the assessee and WLF (principal and agent vs. seller and purchaser).
2. Evidence supporting the Tribunal's findings.
3. System of accountancy followed by the assessee (cash vs. mercantile).
4. Directions given by the Tribunal to the Income-tax Officer.
5. Nature of the loss of Rs. 39,824 (speculative vs. hedging transaction).

Issue-wise Detailed Analysis:

1. Relationship between the assessee and WLF:
The Tribunal concluded that the assessee's exports to WLF were not outright sales but were on a consignment basis. Despite the apparent change in the method of exporting goods since December 1955, the Tribunal noted that the relationship between the assessee and WLF was that of principal and agent. The Tribunal observed that the correspondence between the parties indicated that the assessee's interest in the goods remained until disposal by WLF. This was supported by the fact that the assessee was under-drawing its invoices to build up a balance in the USA, which was used to cover potential losses and other obligations. The Tribunal held that the transactions were not outright sales, as the property in the goods did not pass to WLF.

2. Evidence Supporting the Tribunal's Findings:
The Tribunal's findings were based on various pieces of correspondence between the assessee and WLF. For example, letters dated April 4, 1955, and July 29, 1955, indicated that the Reserve Bank was not in favor of deductions from the total value of goods to cover expenses in the USA. The Tribunal also considered letters from Mr. Pilkington and other correspondence that showed the assessee's intention to build up a credit balance in the USA. The Tribunal concluded that the change in the method of export was made to avoid exchange difficulties and that the transactions continued to be on a consignment basis.

3. System of Accountancy Followed by the Assessee:
The assessee claimed to follow the cash system of accountancy for its exports, crediting sales only when amounts were realized. However, the Tribunal found that the assessee was not following the cash system but the mercantile system. The Tribunal noted that the under-drawing of invoices was done to build up a balance in the USA to meet obligations, indicating that the assessee was not following the cash system. The Tribunal held that the amount kept in the USA by under-drawing or under-invoicing represented the assessee's sale price.

4. Directions Given by the Tribunal to the Income-tax Officer:
The Tribunal directed the Income-tax Officer to compute the portion of the sale price retained by the assessee in the USA, which would be included as the assessee's income. The Tribunal provided guidance to the Income-tax Officer to determine the extent of under-drawing or under-invoicing with reference to actual facts and to estimate it if proper and full particulars were not made available. The Tribunal's directions were to ensure that the kept-back portion of sales was included in the computation of the assessee's income.

5. Nature of the Loss of Rs. 39,824:
The Tribunal disallowed the loss of Rs. 39,824, holding that it was a speculative loss under section 43(5) of the Income-tax Act, 1961. The assessee claimed that the transactions were hedging transactions, but the Tribunal found no evidence to support this claim. The Tribunal noted that only transactions entered into in the course of merchanting business to guard against future price fluctuations in respect of contracts for actual delivery of merchandise could be considered hedging transactions. The assessee failed to provide corroborative evidence, and the Tribunal concluded that the loss was speculative.

Conclusion:
The High Court found that the Tribunal's findings were neither unreasonable nor perverse. The Tribunal's conclusions were based on the cumulative effect of the facts and circumstances of the case. The High Court answered questions Nos. 1, 3, 4, and 5 in the negative and question No. 2 in the affirmative, all in favor of the Revenue. Each party was directed to bear its own costs.