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TMI Blog1975 (11) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... Shortage bran exported as per Bill of landing Bran paid for by the purchaser as per invoice Shortage in transit . % % % Tons Tons Tons 1964-65 16.7 81.6 1.7 2,127 2,046 81 1965-66 15.8 82.4 1.8 3,003 2,905 98 1966-67 15.4 84.2 0.4 3,258 3,187 71 1971-72 13.7 84.5 1.8 - - 84 The assessee sold oil within the country while it exported deoiled bran to foreign countries, mainly to U.K. and Malaya. The ITO observed that the shortages were excessive and that there was no satisfactory explanation for the same. He did not accept the assessee s statement that the actual quantity of bran exported was as shown in the Bill of lading and that the shortage found by the consignee on receipt of goods was due to leakage in transit. Further, for the asst. yr. 1966-67, the ITO noticed a difference of 1,440 bags in purchase of bran whose value was Rs. 10,800. In the circumstances, he did not accept the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that though the revised figures of purchases given by the assessee to the ITO were to be accepted, there was shortage of 71 tons in export of deoiled bran and that after restricting the allowable shortage to 1 per cent the value of the excess was of the order of Rs. 5,000. For 1971-72, he accepted the ITO s view as regards the shortage of deoiled bran in transit and confirmed the addition of Rs. 9,200. 4. Before us, Sri M.J. Swamy, the learned counsel for the assessee, has submitted that insofar as the yield of oil is concerned, the results disclosed by the assessee during the years under consideration were quire fair and reasonable, that in the earlier years and the subsequent years, the books were accepted, that the yield of oil is bound to vary from year to year depending upon the quality of bran and seasonal conditions and that therefore, the departmental officers were not at all justified in estimating the yield or restricting the shortage occurring in the manufacturing process. As regards the shortage in transit of deoiled bran exported to foreign countries, the learned counsel has pointed out that the shortage is normal having regard to the quantity exported, that short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in yield depending upon the quality of bran. We, therefore, hold that there is no justification for estimating the yield of oil or disallowing the shortage in manufacturing process for any of the years under consideration. 6. Coming to the shortage in exported deoiled bran, we are of the opinion that the assessee has no control over it and the entire claim has to be allowed. The assessee has prepared statement showing the number of bags exported, net weight as per the bill of lading and the weight as per consignee s invoice in respect of each consignment of export. This statement shows the overall shortage in export. It has been filed before the lower authorities. There is no reason to doubt the correctness of the weight shown in the bill of lading. It was not an estimated weight. Freight has been paid on the basis of the weight shown in the bill of lading. The shortage claimed by the assessee, therefore, occurred entirely in transit and it is not at all possible to hold that the assessee had deliberately overstated the quantities in the bill of lading and sold the extra quantity internally, outside the books of account. That was the inference drawn by the Departmental offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the asst. yr. 1965-66. We delete the addition of Rs. 14,438. 8. For the asst. yr. 1966-67, the addition made by the ITO was on account of discrepancy in purchases of bran. The ITO was mainly influenced by the fact that the stock register shown before him contained many erasures and interpolations. It was explained that it was due to the fact that some mistakes had crept in initially while taking totals and that they were rectified later on. The AAC was not quite satisfied with the findings of the ITO. It is evident from his observation that "even accepting that the revised figures given by the appellant are correct, the provisions of s. 145 are applicable inasmuch as the appellant did not maintain manufacturing accounts". In other words, the AAC was not prepared to give a categorical finding that there were discrepancies in the purchases recorded by the assessee. As a matter of fact, it was pointed out by the assessee s counsel that the so-called discrepancy of 1,440 bags was on account of the fact that the ITO did not take into account the opening stock of 1,551 bags less 100 bags which was recorded twice. We do not therefore, think that any addition is called for the asst. yr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther contended that even if the transactions were held to be speculative and coming within the mischief of s. 43(5) of the Act, these transaction, cannot constitute speculative business as required in Expln. (2) to s. 28 of the Act and, therefore, the provisions of s. 73(1) which prohibit the set off of loss of a speculative business against profits and gains of other business, cannot come into play. The learned counsel for the assessee has also drawn our attention to a circular dt. 12th Sept., 1960 of the Central Board of Revenue, New Delhi, (Circular No. 23 of 1960) which was issued under s. 24 of the Indian IT Act, 1922, which corresponds to s. 73 of 1961 Act, and submitted that even according to Board s instructions, the provisions of s. 43(5) and s. 73 are not meant to cover losses in transactions of this type. 12. For the Department, reliance is placed on the orders of the lower authorities. It is contended by the Departmental Representative that the intention of the assessee was irrelevant in considering whether the assessee had indulged in a speculative transaction. It is submitted that the definition of speculative transaction in s. 43(5) made absence of delivery of go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, the Sellers shall not put forward non-availability or non-performance of the contract. The Sellers must intimate the Buyers, within 72 hours of the last due date of the contract, the details of the despatch of oil made by them failing which the Buyer shall be entitled to: (a) grant an extension in the despatch or tendering of R.R. date, as the case may be, if asked for by the Sellers in writing or; (b) cancel the contract at par; or (c) repurchase from the open market for the entire quantity or the balance quantity yet to be delivered against the contract, as the case may be, on the third day after the due date and recover from the sellers the difference between the prices at which they cover the oil and the contract price; or (d) settle the contract on the basis of the market price as ruling on the fifteenth day after the due date." From the correspondence filed before us, it is seen that the assessee was made to pay the differences in question on account of breach of contract and not by way of settlement of contract otherwise than by delivery of goods. The question now is whether such payment would still be covered by s. 43(5) of the IT Act. The revenue relied sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a settlement of damages for breach of contract, cannot amount to a settlement of the contract within the definition of speculative transaction under s. 43(5) of the Act. 14. Even if we assume for the sake of argument that the settlement made by the assessee was a settlement of the contract within the definition of speculative transaction in s. 43(5), it would not take the revenue's case further, for the disallowance can be made only if the loss claimed by the assessee amounts to a loss in a speculative business carried on by the assessee, as required by the provisions of Expln. 2 to s. 28 of the Act, s. 43(5) reads as under : " speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts:" Explanation 2 to s. 28 reads as under : "Whether speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as speculation business ) shall be deemed to be distinct and separate from any other business". Sec. 73(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into by the assessee in that case was an adventure in the nature of trade or trading activity or was in the nature of investment. Their Lordships extracted a quotation from that report and there motive was mentioned as one of the badges of trade. We quote below the relevant portion of that extract : "We have drawn up and set out below a summary of what we regard as the major relevant considerations that bear upon the identification of these badges of trade . (1) (2) (3) (4) (5) (6) Motive. There are cases in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is never irrelevant in any of those cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances in the absence of direct evidence of the seller s intentions and even, if necessary, in the face of his own evidence." 15. What emerges from the above decisions is that for the purpose of finding whether a transaction constitutes trade or an adventure in the nature, of trade, in other words a business activity, one cannot ignore the object and the motive behind the transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 4 5 6 1964-65 287.204 268.504 4,64,433.18 Nil - 1965-66 620.861 601.862 9,86,223.25 Nil - 1966-67 652.500 643.000 12,82,995.78 233 97,006 1967-68 774.815 792.604 20,00,041.01 19 4,560 1968-69 727.752 727.752 13,76,492.00 Nil - 1969-70 593.510 593.510 11,75,732.65 Nil - 1970-71 1041.822 1041.822 28,79,471.47 Nil - 1971-72 1084.354 1094.183 33,21,208.68 76 74,860 1972-73 1161.122 1161.122 39,31,275.33 Nil - 1973-74 1318.399 1318.399 46,48,023.93 Nil - 1974-75 1973.99 1973.998 86,89,778.80 Nil - 1975-76 1429.112 1429.112 90,16,984.98 Nil - It can be seen from the above that only in these three years under consideration, the assessee made payments towards price difference (it was a v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve transaction." Of course, the case before us is not one where the assessee had substantially complied with the contract and made the payment of price difference only in respect of undelivered part. But, one has to go into the spirit of the Board s decision and apply it to the transactions as a whole which ended in payment of price differences, vis-a-vis the transactions in which ready deliveries were effected. Viewing from that angle, we feel that the assessee can be allowed the benefit of set off of the losses arising from the transactions in question against the profit from normal business. 19. Thus, for the above reasons, we hold that the losses suffered by the assessee on account of payment for non-fulfilment of ready delivery contracts during the three years under consideration should be allowed as losses from regular business and set off against profit therefrom. We direct accordingly. 20. In the cross objection filed by the Department, which relates to asst. yr. 1965-66, the only contention is that the assessee should have charged interest on the cost of additions made on behalf of the owner as it was paying interest on borrowals used for the construction and that si ..... X X X X Extracts X X X X X X X X Extracts X X X X
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