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TMI Blog1966 (3) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... and clause (a) of the proviso to Explanation 2 ?" The facts and circumstances which have occasioned this reference are as follows : The assessee is a Hindu undivided family and derives income from property and business. The assessee's business consists in purchasing cotton kapas (raw cotton), ginning it and them selling the lint and cotton seeds. Between 21st October, 1956, and 4th April, 1957 (the relevant accounting year was the period from 3rd November, 1956, to 23rd October, 1957), the assessee entered into fourteen forward contracts with certain Bombay parties to sell 2,200 bales of cotton lint at certain specified rates for delivery between March and May, 1957. Two out of these fourteen contracts were entered into before the commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale of lint. It, however, appeared to the Commissioner of Income-tax that the assessment order passed by the Income-tax Officer was erroneous and prejudicial to the interests of the revenue to the extent of an unjustifiable deduction of Rs. 47,250 (loss Rs. 48,468 minus profit Rs. 1,218), as in the Commissioner's view that amount represented a loss arising from speculative transactions within the meaning of Explanation 2 to section 24(1) of the Income-tax Act. After due notice to the assessee, the Commissioner, in exercise of his revisional power under section 33B of the Act, revised the assessment, holding that the loss in question was a loss arising from speculative transactions in the nature of a business not permissible as a dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business. Explanation 2. --- A speculative transaction means a transaction in which a contract for purchase and 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 scrips : Provided that for the purposes 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 merc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so to Explanation 2 to section 24(1) of the Act. It was argued that the transactions in question were hedging contracts to guard against possible loss from another set of transactions and, therefore, cannot be deemed to be speculative transactions. On the established facts of this case and having regard to the nature of the business done by the assessee, this contention has not a leg to stand on. The nature of the business conducted by the assessee was buying kapas (raw cotton), ginning it and selling lint and cotton seed. In respect of the impugned transactions there are only one set of contracts and not two sets as required by clause (a) of the proviso to Explanation 2. That proviso contemplates two contracts : (i) a contract for actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gin it, convert it into lint in a factory with the aid of machinery and then sell it. That this is a manufacturing process has been held by a Division Bench of this court consisting of Satyanarayana Raju and Venkatesam JJ. in Kotak & Co. v. State of Andhra Pradesh, and we are in respectful agreement with that view. Our attention has been drawn to a decision of a Division Bench of the Punjab High Court in Patel Cotton Co. Private Ltd. v. State of Punjab, in which the learned judges took the view that no manufacturing process is involved in ginning cotton because the process of ginning does not create anything new or distinctive. In taking this view, the learned judges expressly disagreed with the view of the High Court of Andhra Pradesh in K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot to a single head. The next step in the argument was that in cases of that nature, section 10 is the appropriate section and section 10 makes no distinction between speculative and non-speculative transactions. In the first place, we are of the view that this question is not one which has been referred to us under section 66 of the Act and we find it difficult to agree with the learned advocate for the assessee that this question arises out of the order of the Tribunal. Before all the authorities below, the case proceeded on the footing that the section applicable to the facts of the case was section 24. There was not a whisper anywhere in the course of those proceedings that the appropriate section was section 10 and not section 24. Eve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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