1968 (4) TMI 14 - HC - Income Tax

Speculative transactions - loss - nature of business - held that transaction which were settled by payment of difference must be treated as speculative transactions

Summary

Issues Involved:
1. Whether the losses of Rs. 9,26,402 and Rs. 35,000 were sustained in speculative transactions which are in the nature of a business.
2. Whether the Income-tax Appellate Tribunal was competent to go into the question of the vires of the first proviso to section 24(1) of the Indian Income-tax Act, 1922.

Issue-Wise Detailed Analysis:

1. Whether the losses of Rs. 9,26,402 and Rs. 35,000 were sustained in speculative transactions which are in the nature of a business.

The court examined the facts of the case, noting that the assessee, Haji Habib Haji Pirmohammed, carried on extensive business in gunnies and oil seeds. During the relevant assessment year, the assessee entered into forward contracts, some of which were settled by payment of differences rather than actual delivery. The Income-tax Officer disallowed certain losses, deeming them speculative transactions without actual delivery.

The Appellate Assistant Commissioner upheld this decision, referencing Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, which defines speculative transactions. The Tribunal also supported this view, stating that the intention to deliver or not deliver commodities was irrelevant under the language of Explanation 2.

The court reiterated that the definition of speculative transactions under Explanation 2 does not consider the intention of the parties but focuses on whether actual delivery took place. The Tribunal had found that the forward transactions were carried out regularly and systematically for profit, thus constituting business transactions.

The court referenced previous judgments, including Hoosen Kasam Dada (India) Ltd. v. Commissioner of Income-tax, which clarified that speculative transactions, even as part of a broader business, are deemed distinct and separate under Explanation 1 to section 24(1). This view was supported by other cases, such as D. M. Wadhwana v. Commissioner of Income-tax and Sahu Jain Ltd. v. Commissioner of Income-tax.

The court concluded that the speculative transactions did form a separate business, as defined by the Supreme Court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, which described business as a "real, substantial and systematic or organised course of activity or conduct with a set purpose."

Thus, the court answered the first question in the affirmative, confirming that the losses were sustained in speculative transactions in the nature of a business.

2. Whether the Income-tax Appellate Tribunal was competent to go into the question of the vires of the first proviso to section 24(1) of the Indian Income-tax Act, 1922.

The second question was not pressed before the court, and as such, the court did not provide an answer.

Conclusion:

The court held that the losses incurred by the assessee in speculative transactions were indeed in the nature of a business, as defined under section 24(1) of the Indian Income-tax Act, 1922. The speculative transactions were deemed distinct and separate from the general business of the assessee. The second question regarding the competence of the Income-tax Appellate Tribunal to question the vires of the proviso was not addressed. The court ruled in favor of the revenue, and the assessee was ordered to pay the costs of the reference.