1967 (8) TMI 20 - HC - Income Tax

Speculative Transactions - Whether the assessee was entitled to set off the loss against its other business income - Held no

Summary

Issues:
Interpretation of proviso (a) to the second Explanation to section 24(1) of the Income-tax Act, 1922 regarding forward contracts of sale as hedging contracts.

Analysis:
The judgment addressed the interpretation of proviso (a) to the second Explanation to section 24(1) of the Income-tax Act, 1922, concerning forward contracts of sale as hedging contracts. The assessee, a registered firm dealing in cotton and cotton seeds, entered into forward contracts of sale resulting in a loss of Rs. 66,256, which could be deemed speculative if not covered by proviso (a). The Income-tax Officer allowed only a portion of the loss as non-speculative, leading to an appeal by the assessee. The Tribunal held that forward contracts of sale for hedging purposes were not covered by proviso (a) and, therefore, the loss was speculative and not eligible for set-off against other business income.

The central issue revolved around the interpretation of proviso (a) to determine if forward contracts of sale entered into as hedging contracts qualified for exclusion from speculative transactions. The proviso excludes hedging contracts related to raw materials or merchandise in manufacturing or merchanting businesses to guard against future price fluctuations in contracts for actual delivery of goods. The court analyzed whether forward contracts of sale for hedging against future price fluctuations in forward purchase contracts fell within the proviso's scope.

The court clarified that the proviso covers only forward contracts of purchase for raw materials or merchandise in manufacturing or merchanting businesses to hedge against future price fluctuations in forward sale contracts. It emphasized that the proviso pertained to contracts of purchase, not sale, as the purpose was to guard against losses in future purchase contracts. The court rejected the assessee's argument that "merchandise sold by him" encompassed forward purchase contracts, stating that the proviso specifically referred to forward sale contracts. Consequently, the loss of Rs. 56,170 from the forward sale contracts was deemed speculative and not eligible for set-off against other business income.

In conclusion, the court answered the reference question in the negative, ruling that the assessee was not entitled to set off the speculative loss against other business income. The judgment highlighted the distinction between forward contracts of purchase and sale in the context of proviso (a) and emphasized that only purchase contracts qualified as hedging contracts under the provision. The assessee was directed to pay the costs of the reference to the Commissioner.