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TMI Blog1992 (1) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian Income-tax Act, 1922, was "whether, on the facts and in the circumstances of the case, the transactions resulting in the loss of Rs. 2,04,746 in the previous year relevant to the assessment year 1960-61 and in the loss of Rs. 17,000 in the assessment year 1961-62 were saved from being treated as speculative transactions by clause (a) of the third proviso to section 24(1) of the Indian Income-tax Act, 1922 ?" The assessee is a registered firm carrying on business in cloth and yarn. Its head office is at Madurai with branches at Vijayanagaram and Calcutta. Its trade in cloth consisted mainly in gada manufactured by certain mills including Meenakshi Mills Ltd., Virudhunagar Textiles Ltd., and Loyal Textile Mills Ltd. The assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the transactions in question are speculative transactions but contended that they are saved by clause (a) of the third proviso to section 24. This is what the High Court has recorded (at p. 835): "In this case it has been conceded at all stages by the assessee that the transactions in respect of which the losses in question have occurred are speculative transactions as defined in Explanation 2 and, therefore, it is not necessary for us to consider the scope of Explanation 2 to section 24. The only question for consideration is whether the transactions which are admittedly speculative coming within Explanation 2 to section 24(1), will fall within the scope of clause (a) of the third proviso to that section. " The High Court disagreed w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of this section, (a)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 manufactured by him or merchandise sold by him ; or (b) a contract in respect of stocks and shares entered into by dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ; or (c) a contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the transactions in question and held them saved by the said clause. The High Court, however, did not agree with the said interpretation. It took the view that (at p. 837 of 101 ITR) "for a transaction to come under clause (a), it should be one entered into by an assessee to guard against loss through future price fluctuations in respect of his sale contracts". It, however, agreed with the Tribunal that there need not be actual co-relation, contract to contract, between the purchase and sale contracts contemplated by the clause and that it is sufficient if a transaction either by way of purchase or sale is entered into with a view to guard against any future loss in that particular line of business. It held (at p. 837 of 101 ITR) "for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into a contract to repurchase the same goods from the same party. Subsequently, he took delivery of the goods from the mills and sold them to other parties. So far as contracts of purchase and sale with the first mentioned party are concerned, he settled them by paying the difference. In the circumstances, the High Court held that it is not possible to say either that the sale contract entered into by the assessee with the purchaser, or the purchase contract entered into between them, would come under clause (a). The only question now before us is whether the High Court was right in its interpretation of clause (a) of the third proviso to section 24 (which corresponds to clause (a) of the proviso to the definition of speculative tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gree with the learned judges of the High Court that there need not be correlation between contract and contract but there ought to be a correlation between the contracts spoken of in the first part of clause (a) and the contracts spoken of in the latter part. Unless such correlation exists between the two sets of contracts, the clause is not attracted. The Tribunal was not right in holding that the words "contracts for actual delivery of goods" occurring in the latter part of the definition do also take in contracts of purchase. Such an understanding is inconsistent with the scheme and spirit of the clause. If we examine the contracts entered into by the assessee on the above touch-stone, it would be evident that they do not fall within n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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