1978 (11) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that a contract of sale subsequent to the contract of purchase was within the terms of the proviso to section 43(5) of the Income-tax Act, 1961.
2. Whether the Tribunal was correct in law in holding that the sum of Rs. 56,248 was a loss covered by proviso (a) to section 43(5) and was to be regarded as a normal business loss.

Detailed Analysis:

1. Contract of Sale Subsequent to Contract of Purchase under Proviso to Section 43(5):

The Tribunal held that a contract of sale subsequent to a contract of purchase fell within the terms of proviso (a) to section 43(5) of the Income-tax Act, 1961. The Tribunal reasoned that the proviso should be interpreted in a manner that includes contracts for both purchase and sale within the scope of hedging transactions. The Tribunal recast the proviso as follows: "a contract (for purchase or sale) in respect of merchandise entered into by a person in the course of his merchanting business to guard against future price fluctuations in respect of... merchandise dealt in by him... shall not be deemed to be a speculative transaction."

However, the High Court, upon reviewing the Tribunal's decision, found that the words "merchandise sold by him" should be given their natural and ordinary meaning, and the word "sold" cannot be substituted by "dealt in." The High Court emphasized that the actual delivery contracts against which hedging contracts can be entered must be contracts of sale for actual delivery of merchandise, not contracts of purchase. This interpretation aligns with decisions from other High Courts, including Gujarat, Madras, and Allahabad, which have held that the hedging contracts covered by the proviso are meant to guard against contracts for the actual delivery of merchandise sold by the assessee.

2. Loss of Rs. 56,248 as Normal Business Loss:

The Tribunal accepted the assessee's contention that the loss of Rs. 56,248 was a hedging loss covered by proviso (a) to section 43(5) and thus should be regarded as a normal business loss. The Tribunal based its decision on the interpretation that hedging contracts could include both purchase and sale transactions.

However, the High Court disagreed with this interpretation. The High Court held that the proviso to section 43(5) is clear and unambiguous, and it specifically refers to contracts for actual delivery of merchandise sold by the assessee. The High Court found that the assessee was neither a manufacturer nor a stockist, and there was no existing contract for the actual delivery of merchandise sold by the assessee at the time the hedging transactions were entered into. Therefore, the loss of Rs. 56,248 could not be considered a normal business loss under the proviso.

Separate Judgments:

Judge Oza J.:
Oza J. agreed with the Tribunal's interpretation that the proviso could include contracts of both purchase and sale. He believed that the words "merchandise sold by him" qualify the term "goods" and that the interpretation by the Board of Revenue, which included both purchase and sale hedging contracts, was reasonable.

Judge Sohani J.:
Sohani J. disagreed with Oza J. and the Tribunal's interpretation. He emphasized that the plain language of the proviso should be followed, which clearly refers to contracts for the actual delivery of merchandise sold by the assessee. He found that the Tribunal erred in recasting the proviso and that the loss of Rs. 56,248 could not be regarded as a normal business loss.

Chief Justice G. P. Singh:
Chief Justice G. P. Singh agreed with Sohani J., stating that the words "merchandise sold by him" should be given their natural meaning and that the proviso does not cover hedging contracts against contracts of purchase of merchandise. He emphasized that the primary rule of construction of a taxing statute is to adhere to the words used without addition, subtraction, or substitution.

Final Decision:
The High Court, in accordance with the majority opinion, answered both questions in the negative, in favor of the revenue and against the assessee. The Tribunal's interpretation was not upheld, and the loss of Rs. 56,248 was not considered a normal business loss under proviso (a) to section 43(5).