1973 (3) TMI 31 - HC - Income Tax

Assessee did not give or take actual delivery of yarn but the contracts were cancelled. The assessee paid a sum in respect of all these contracts and claimed these amounts at business losses incurred by him - Whether speculative transactions during the course of assessee s business can be treated as speculation business and loss in such transactions can be allowed against other business income - we are unable to accept the contention of the learned counsel for the assessee that the losses incurred in respect of these transactions did not constitute losses in speculation business - In view of our finding that the losses were incurred in a speculation business, the prohibition contained in section 73 operates. The question whether the losses incurred in a speculative transaction which is not in the nature of a business could be set off against the income from the other business of the assessee, therefore, does not arise.

Issues Involved:
1. Classification of losses from contracts as speculative business losses.
2. Legality of disallowance of Rs. 7,750 as per the Income-tax Act.

Issue-wise Detailed Analysis:

1. Classification of losses from contracts as speculative business losses:

The assessee engaged in the purchase and sale of yarn entered into contracts for sale and purchase, which were later canceled without actual delivery of yarn. The Income-tax Officer categorized the losses from these contracts as speculative business losses, disallowing their set-off against regular business income. The Appellate Assistant Commissioner reversed this, considering the contracts as part of normal business. However, the Tribunal upheld the Income-tax Officer's view, treating the transactions as speculative based on the lack of actual delivery.

Section 43(5) of the Income-tax Act, 1961 defines "speculative transactions" as those settled otherwise than by actual delivery. The assessee argued that the price differences were settled due to market fluctuations and not with speculative intent. The court, however, emphasized that the intention at the time of contract is immaterial if actual delivery is absent. The court referenced Commissioner of Income-tax v. Pioneer Trading Company Private Ltd., where it was held that settlements after breach are not speculative, but disagreed with its narrow interpretation of "settled" and emphasized that the absence of actual delivery, regardless of breach, classifies a transaction as speculative.

The court cited Hoosen Kasam Dada (India) Ltd. v. Commissioner of Income-tax and Abdul Gani Haji Habib v. Commissioner of Income-tax, supporting the view that transactions settled by payment differences without delivery are speculative. The court also agreed with D. M. Wadhwana v. Commissioner of Income-tax, which held that "actual delivery" means real, not notional, delivery.

The court concluded that the contracts dated July 13 and 16, 1962, settled by payment differences of Rs. 4,600, were speculative transactions.

2. Legality of disallowance of Rs. 7,750 as per the Income-tax Act:

The assessee contended that losses from speculative transactions not forming part of a speculation business should be set off against regular business income. The Tribunal, referencing Juvvi Subbaramaiah and Co. v. Commissioner of Income-tax, dismissed this argument, considering the transactions part of the assessee's general business. The court noted that under Explanation 2 to section 28 of the Act, speculative transactions within a business are deemed distinct and separate from other business activities. Thus, losses from such transactions are treated as losses from speculation business.

The court referenced Hoosen Kasam Dada (India) Ltd. v. Commissioner of Income-tax, which held that speculative transactions within a business are distinct and separate. Similarly, Abdul Gani Haji Habib v. Commissioner of Income-tax supported the view that speculative transactions forming part of business activities are considered speculation business.

The court concluded that the losses incurred in the four transactions constituted losses in speculation business, invoking the prohibition in section 73 against setting off these losses against regular business income. Consequently, the disallowance of Rs. 7,750 was upheld.

Conclusion:

The court answered both questions in the affirmative, ruling against the assessee. The respondent was entitled to costs, with counsel's fee set at Rs. 250.

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