1976 (5) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the Circular F. No. 124-60 TPM dated September 12, 1960, issued by the CBR was inoperative and ineffective so far as the State of Gujarat is concerned and that the assessee is not entitled to claim any relief under the said circular?
2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to set off loss of Rs. 27,157 against its other business income?

Detailed Analysis:

1. Circular F. No. 124-60 TPM and its Applicability in Gujarat:

The Tribunal held that the Circular F. No. 124-60 TPM dated September 12, 1960, issued by the CBR was inoperative and ineffective in Gujarat due to the decision in Chimanlal Chhotalal v. CIT [1968] 69 ITR 129 (Guj). The Tribunal found that despite the assessee having sufficient stock to meet its obligations under the contracts, the circular could not be applied in Gujarat. The court reconsidered the interpretation of the proviso (a) to s. 43(5) of the I.T. Act, 1961, and found no justification for restricting the width of the words "a contract in respect of raw materials or merchandise" to mean only "a contract of purchase." The court concluded that the interpretation in Chimanlal Chhotalal's case was too restrictive and did not align with the legislative intent or commercial understanding of hedging transactions.

2. Entitlement to Set Off Loss Against Other Business Income:

The court examined whether the assessee was entitled to set off the loss of Rs. 27,157 against its other business income. The assessee argued that the loss was a hedging loss, which should be allowed to be set off against other business income as per the CBR circular. The revenue contended that the forward contracts for sale entered into by the assessee were speculative transactions under s. 43(5) of the I.T. Act, 1961, and thus, the loss could not be set off against other business income. The court analyzed the nature of hedging transactions, distinguishing them from speculative transactions. Hedging contracts are genuine transactions entered into to insure against adverse price fluctuations and involve both forward contracts of sale and purchase. The court found that the restrictive interpretation of hedging contracts in Chimanlal Chhotalal's case was incorrect. However, the court concluded that hedging contracts must be in respect of raw materials for manufacturers and need not succeed the contracts for sale and actual delivery of goods manufactured, provided they are within a reasonable time frame, generally not exceeding the assessment year.

Conclusion:

The court answered the second question in the negative, holding that the assessee is not entitled to set off the loss of Rs. 27,157 against its other business income because the hedging transactions must be in respect of raw materials for manufacturers. Consequently, the court did not address the first question and left it to the Tribunal to apply the circular and provide benefits consistent with the court's order. No order as to costs was made in this reference.