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Issues Involved:
1. Whether the transactions resulting in losses for the assessment years 1960-61 and 1961-62 were speculative transactions. 2. Whether these transactions were saved from being treated as speculative by clause (a) of the third proviso to section 24(1) of the Indian Income-tax Act, 1922. Detailed Analysis: 1. Speculative Transactions: The primary issue was whether the transactions resulting in losses of Rs. 2,04,746 for the assessment year 1960-61 and Rs. 17,000 for the assessment year 1961-62 were speculative in nature. The Income-tax Officer and the Appellate Assistant Commissioner both concluded that these losses were from speculative transactions as defined in Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922. The Tribunal, however, upheld the assessee's contention that the transactions were part of its merchanting business to guard against future price fluctuations and thus should not be considered speculative under sub-clause (a) of the third proviso to section 24(1). 2. Applicability of Clause (a) of the Third Proviso to Section 24(1): The court examined whether the transactions, admittedly speculative under Explanation 2, fell within the scope of clause (a) of the third proviso to section 24(1). The relevant provision states that a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods shall not be deemed speculative. Nature of Transactions: The court analyzed the nature of the transactions for both assessment years. For 1960-61, the losses included Rs. 6,492 from cloth business and Rs. 1,98,254 from yarn business. The Rs. 6,492 loss arose from transactions with two parties, while Rs. 1,98,254 included Rs. 45,754 from price differences (vilaivasi) and Rs. 1,52,500 from transactions without actual delivery of yarn. For 1961-62, the Rs. 17,000 loss was from price differences. Assessment of Clause (a) Applicability: The court noted that the assessee conceded the speculative nature of the transactions and had to establish that they were protected by clause (a) of the third proviso. The assessee failed to provide details for the Rs. 45,754 and Rs. 17,000 losses, making it impossible to determine if these transactions were covered by clause (a). Consequently, these sums were treated as speculative losses. For the remaining amounts, the court considered specific transactions in cloth and yarn business. In both cases, the assessee entered into initial purchase contracts, followed by sale contracts, and later repurchase contracts, ultimately settling the contracts by paying the price difference without actual delivery. Interpretation of Clause (a): The court interpreted clause (a) to cover only purchase contracts entered into to guard against loss through future price fluctuations in respect of actual delivery contracts. It rejected the Tribunal's broader interpretation that included both purchase and sale transactions. The court emphasized that the contracts must be specifically intended to guard against loss in respect of actual delivery contracts of the same goods. Conclusion: The court concluded that the assessee did not establish that the transactions were covered by clause (a) of the third proviso to section 24(1). The transactions were not intended to guard against future loss but to secure higher profits due to rising prices. Therefore, the reference was answered in the negative, against the assessee, and the revenue was awarded costs. Judgment: The reference was answered in the negative, against the assessee. The revenue was awarded costs of Rs. 250.
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