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TMI Blog1967 (8) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracts in groundnut seeds, groundnut-oil and groundnut oil cakes. It is a member of the Saurashtra Oil and Oil Seeds Association Limited, an association recognised by the Central Government, inter alia, for groundnut-oil, groundnut seeds and groundnut-oil cakes under section 6 of the Forward Contracts (Regulation) Act, 1952. During Samvat year 2013, which was the relevant accounting year for the assessment year 1958-59, the assessee entered, inter alia, into two classes of forward contracts in groundnut oil, groundnut seeds and groundnut-oil cakes. One class consisted of the forward contracts which were admittedly not in violation of any prohibition imposed under the Forward Contracts (Regulation) Act, 1952, while the other class consisted of forward contracts which according to the revenue, were in violation of the prohibition imposed under section 15, sub-sections (1) and (4) of that Act. The assessee incurred a profit of Rs. 2,19,046 in the first class of forward contracts and a loss of Rs. 3,40,443 in the second class of forward contracts. The assessee also earned profit in its other business which did not consist of forward contracts. In the course of the assessment of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose forward contracts was liable to be taken into account in computing the total income of the assessee. The Tribunal held that the forward contracts were non-transferable specific delivery contracts and were, therefore, outside the mischief of section 15, sub-sections (1) and (4), and that, in any event, even if section 18 did not save the forward contracts, they were not hit either by section 15, sub-section (1), or section 15, subsection (4). The Tribunal thus came to the conclusion that the forward contracts were valid and legal contracts and the loss arising from them was liable to be taken into account as loss from business. But the Tribunal also went further and observed that, even if the forward contracts were illegal, the loss of Rs. 3,40,443 arising from them would still be liable to be taken into account as business loss in computing the total income of the assessee. This view taken by the Tribunal necessitated the consideration of the question--which the Appellate Assistant Commissioner had not examined on the view taken by him--whether the loss of Rs. 3,40,443 was liable to be set off against the whole of the other profit of the assessee or only against that part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of section 24 of the Indian Income-tax Act, 1922, merely on the ground that the assessee had not performed the contracts by giving delivery and had paid damages in settlement of the obligations contracted for ? (4) Whether, on the facts and in the circumstances of the case, the assessee is entitled to set off the balance of the loss of Rs. 1,21,397 against the assessee's other income ? " were referred by the Tribunal for the determination of this court. The point which arises for consideration in the first question is whether the forward contracts resulting in the loss of Rs. 3,40,443 (hereinafter referred to as the impugned contracts) were illegal by reason of contravention of section 15, sub-sections (1) and (4), of the Forward Contracts (Regulation) Act, 1952. It will be convenient to set out the relevant statutory provisions bearing on this question. Section 2(i) of the Act defines " ready delivery contract " as meaning " a contract which provides for the delivery of goods and the payment of a price therefor, either immediately or within such period not exceeding eleven days after the date of the contract ". " Forward Contract " is defined in section 2(c) as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 9 and 9A are not material and we need not pause to consider them. Section 10 empowers the Central Government to direct any recognised association to make any rules or to amend any rules made by the recognised association. Section 11, which is the only other section material to be considered, provides by sub-section (1) that any recognised association may, subject to the previous approval of the Central Government, make bye-laws for the regulation and control of forward contracts, and sub-section (2) of this section sets out, in particular various matters in relation to which provision may be made by such-bye-laws. Clause (g) of sub-section (2) refers to the provision for " regulating the entering into, making, performance, rescission and termination of contracts, including contracts between members .... or between a member of the recognised association and a person who is not a member ......" and clause (p) refers to the provision for " the regulation of dealings by members of their own account ". In exercise of the statutory authority conferred under section 11 bye-laws were made by the association for regulation and control of forward contracts between members of the assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of any goods. " To analyse the scheme of the Act, it divides contracts of sale of goods into two categories " ready delivery contracts " and " forward contracts ". Forward contracts are classified into those which are " specific delivery contracts " and those which are not. Then again " specific delivery contracts " are divided into " transferable specific delivery contracts " and " non-transferable specific delivery contracts ". Section 18(1) exempts from the operation of the Act " non-transferable specific delivery contracts ". The net result of these provisions is that all forward contracts except those which are non-transferable specific delivery contracts would be within the operation and mischief of section 15, sub-sections (1) and (4). The main contention of the assessee, therefore, was that the impugned contracts resulting in the loss of Rs. 3,40,443 were non-transferable specific delivery contracts and they did not have to pass the test of section 15, sub-sections (1) and (4). On this contention the question which falls for determination is whether the impugned contracts were non-transferable specific delivery contracts. Now there was no dispute between the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticular term, there is nothing in law which prevents them from setting up that term. The terms of a contract can be express or implied from what has been expressed. It is in the ultimate analysis a question of construction of the contract. And again it is well-established that in construing a contract it would be legitimate to take into account surrounding circumstances. Therefore on the question whether there was an agreement between the parties that the contract was to be non-transferable, the absence of a specific clause forbidding transfer is not conclusive. What has to be seen is whether it could be, held on a reasonable interpretation of the contract, aided by such considerations as can legitimately be taken into account that the agreement of the parties was that it was not to be transferred. When once a conclusion is reached that such was tile understanding of the parties, there is nothing in law which prevents effect from being given to it. " This is the test which must be applied for the purpose of determining whether the impugned contracts were non-transferable specific delivery contracts. Now the impugned contracts were in identical terms save and except for the name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies was that the rights and liabilities under the contract (sic) should themselves carry out the contract. Now it is well settled that, as a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand, rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between the parties. Since it is only a benefit under the contract which can be assigned, the discussion really centres round two questions : Was the constituent entitled to assign his right to get the goods on payment of the price ? And was the assessee entitled to assign his right to receive the price on delivery of the goods ? The matter must be regarded as clear beyond doubt. The right of the assessee to receive the price was burdened with an obligation to deliver the goods and it is well-settled that a benefit under a contract which is burdened with a liability is incapable of assignment under the law. Moreover, it is clear from the clause in regard to loading tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as required under the contract to be made out in the name of the constituent as consignee but there is nothing in the contract or the surrounding circumstances to indicate that the agreement between the parties was that the railway receipt should not be transferred by the consignee after taking delivery against payment of the price. The constituent could after taking delivery of the railway receipt from the bank transfer it to a purchaser by endorsement without committing any breach of the agreement between the parties and the rights under the railway receipt were, therefore, not non-transferable as required by the definition of " non-transferable specific delivery contract ". Realising this difficulty in its way the assessee contended that the non-transferability of the railway receipt which was contemplated by the definition was non-transferability during the period prior to the discharge of the contract by performance and the definition did not require that the railway receipt should be non-transferable even after it was taken delivery of by the constituent against payment of the price and the contract was wholly carried out and performed. But this contention suffers from a doub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if we turn to the contract it is not possible to find any indication in the present case either in the terms of the contract or in any of the surrounding circumstances which would show that the agreement between the parties was that the railway receipt should not be transferred by the constituent. This could have been easily secured by the assessee by stating in the contract that the railway receipt shall not be transferred by the constituent or by making some such provision to that effect but we do not find any such provision and it must, therefore, be held that the railway receipt relating to the contract was transferable by the constituent. If that be so, the conclusion must inevitably follow that the impugned contracts were not non-transferable specific delivery contracts within the meaning of section 2(f) and were not exempt from the operation of the provisions of Chapters III and IV under section 18(1). The assessee, however, tried to repel this conclusion by putting forward a very ingenious contention. The contention was that the bye-laws made by the Saurashtra Oil and Oil Seeds Association Ltd. (hereinafter referred to as the association) were statutory bye-laws made und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one association recognised for the purpose of the Act and a dealer may be a member of several such associations. If such a dealer enters into a forward contract in respect of the particular kind of goods, the bye-laws of which association would govern such contract ? If the argument of the assessee were right, the bye-laws of all the associations having the force of law would govern such forward contract and an absurd situation would arise and neither party would know what are the rights and liabilities arising under such forward contract. The bye-laws of a recognised association have no territorial operation and it is, therefore, difficult to conceive of them as having the force of law governing all forward contracts entered into between members of the association or through or with any such member. The assessee expressed an apprehension that, if we accepted the view that the bye-laws of the association do not have the force of law and that it should be open to any member of the association not to make the forward contract entered into by him subject to the bye-laws of the association, the object and purpose of the enactment of the Act would be frustrated, for, in that event, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he association or through or with any such member. Now, the constituents with whom the impugned contracts were entered into by the assessee were admittedly non-members but the assessee was a member of the association and the impugned contracts being contracts entered into by the constituents with a member of the association were, therefore, outside the prohibition enacted in section 15, sub-section (1). The revenue could not dispute that the assessee was a member of the association but the argument of the revenue was that the impugned contracts were not entered into by the assessee in his capacity as a member of the association and they were, therefore, not free from the taint of illegality provided under section 15, sub-section (1). This contention is not well-founded and it suffers from, several infirmities. In the first place, it must be remembered that section 15, subsection (1), is a penal section in that contravention of its prescription is made punishable under section 20, sub-section (1), clause (c), and it must, therefore, be strictly construed. This sub-section, on a plain natural construction of its words, does not prescribe that the forward contract, in order to escape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1), requires something more than mere factum of membership of a recognised association in order to save a forward contract from the taint of illegality. The impugned contracts in the present case were entered into by the constituents with the assessee who was a member of the association and they were, therefore, not in violation of the prohibition imposed under section 15, sub-section (1). That takes us to section 15, sub-section (4), and the question is whether the assessee entered into the impugned contracts with its constituents in contravention of this sub-section. Now, for the purpose of this reference, it was common ground between the parties that the assessee had entered into the impugned contract on its own account with the constituents who were not members of the association and that it had done so without securing the consent or authority of the constituents and without disclosing in the contract notes that it had bought or sold the goods, as the case may be, on its own account. The assessee, had, therefore, clearly entered into the impugned contracts in contravention of section 15, sub-section (4). Now section 20, sub-section (2), provides that any person who enters i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration that the trade is tainted with illegality. The taint of illegality or wrong-doing associated with income, profits and gains is immaterial for the purpose of taxation. Even if a trade is illegal, it is still a trade within the meaning of the Income-tax Act, and its income profits and gains are chargeable with income-tax. See Wheatcroft's Law of Income Tax, paragraph 1-411, page 1196, Simon's Income-tax, second edition, Volume 2, paragraph 480. This principle was laid down by Rowlatt J. in the well known case of Mann v. Nash. The profit which was sought to be taxed in that case was profit arising from illegal use of gaming machines and it was held that this profit was chargeable with income-tax. Rowlatt J. pointed out that the broad position taken to repel the claim of the revenue was : " ... that the Income Tax Acts when they tax the profits of any trade, adventure, manufacture or concern in the nature of trade--because those are the widest words--impliedly exclude profits of illegal trades, or to put it in another way, that an illegal trade is not a trade within the meaning of the Income-tax Acts. " and posed the question in these terms : " That is the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inland Revenue . That case arose out of a bootlegging partnership entered into between three persons for the purpose of gettin whisky into the United States by committing a breach of the laws of both Great Britain and of United States and the question was whether the profits made by them were assessable to tax. The Court of Session held that the profits arising from the sales of whisky were assessable to income tax. Lord Sands observed : " The third question is whether the profits of the adventure are exempt from income tax because their acquisition was tainted with offence against the criminal law. The tax is imposed upon profits of trade. Crime, such as house-breaking, is not trade, and therefore the proceeds are not caught by the tax. It does not follow, however, that there cannot be a business answering to the description of trade, albeit it is tainted with illegality. Trafficking in drugs, for example, is of the nature of trade, albeit such trafficking may in the circumstances be illegal. I respectfully adopt the dictum of Lord Haldane, in delivering the judgment of the Privy Council in the case of Smith, that once the character of business has been ascertained as being of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that if profits arising from an illegal business are assessable to tax, equally losses arising from such business should be liable to be taken into account in computing the business income of the assessee and in principle there was no distinction between profits and losses of such business. The revenue, on the other hand, urged that losses from illegal business should not be allowed to be taken into account, for to do so would be to encourage breaches of law on the part of the assessee and to permit the assessee to profit by his own wrong. The revenue invoked the principle that no person can benefit by an unlawful act ; no person can be permitted in support of his claim to put forward an act which is an unlawful act and pleaded that this principle should be projected into the income-tax law and losses arising from unlawful acts of the assessee should not be permitted to be taken into account. We do not think the contention of the revenue is well-founded on principle and we find ourselves unable to accept it. We are of the view that illegal business is business within the meaning of the Income-tax Act and if profits from illegal business are assessable to tax, there is no reason ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e losses incurred in any particular transaction of the business must, therefore, necessarily be taken into account in order to arrive at the true profits of the business and such profits may be either positive in the sense that they are actual profits or they may be negative in the sense that they are losses. When, therefore, it is said that the profits of a business are assessable to tax, it does not mean that the profit must represent a positive figure of excess of income over outgoings. There may instead be a loss in that the outgoings may exceed the income and in such a case that would also be liable to be taken into account in the assessment of the assessee. There is in principle no distinction between profits and losses of a business and if the profits of an illegal business are assessable to tax, equally the losses arising from illegal business must be held to be liable to be taken into account in computing the income of the assessee. This appears to be clear on principle but apart from principle there are two decisions of the Allahabad High Court which support the view we are taking. The first decision to which we may refer in this connection is a decision of a Division B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this case claimed to deduct under section 10(2)(xv) a penalty of Rs. 82,000 paid by him in order to release from confiscation goods imported by him in contravention of the provisions of a notification issued under the Import and Export Control Act and the question was whether this deduction was allowable as expenditure wholly and exclusively laid out for the purpose of the business of the assessee within the meaning of section 10(2)(xv). The claim for deduction was negatived and Chagla C.J. delivering the judgment of the court pointed out that this expenditure had become necessary because the assessee had carried out the business in a manner prohibited by law and such an expenditure could not be held to fall within the ambit of section 10(2)(xv). The learned Chief Justice observed that it was a principle underlying all laws and income-tax law was no exception that no person can benefit by an unlawful act and no person can be permitted in support of his claim to put forward an act which is an unlawful act. Strong reliance was placed on behalf of the revenue on this observation of the learned Chief justice but we do not see how this observation can help the arguments of the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax. The assessee in this case claimed to deduct in the computation of his business income a sum of Rs. 6,800 paid by him to S. B. and Co., for entering into a device for exporting wool without having the requisite licence. The claim for deduction was rejected and the argument which prevailed with the Punjab High Court was that the amount of Rs. 6,800 was paid to achieve what was prohibited by law, namely, the export of wool without the requisite export licence and it was, therefore, not deductible. The Punjab High Court held that if an amount is spent by the assessee to carry out his business unlawfully, he is not entitled to deduction of the amount as an admissible item of expenditure. The amount expended by the assessee in this case was for the purpose of carrying on his business and the expenditure did fall upon him in his capacity as a trader. But, even so, the Punjab High Court took the view that, since for the purpose of claiming this deduction the assessee was relying upon an unlawful act, he was not entitled to claim the deduction. This decision is clearly distinguishable and the principle laid down in it has no application to the present case. What we pointed out while d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax and Commissioner of Income-tax v. Kantilal Nathuchand, says that if there is a loss in speculative transactions, it can be set off only against the profit from other business consisting of speculative transactions and it cannot be set off against other business income of the assessee. It, therefore, becomes necessary to consider whether the impugned contracts entered into by the assessee were speculative transactions within the meaning of the first proviso to section 24(1). Now, what is a speculative transaction is set out in the second Explanation to section 24(1) and that Explanation says that 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 of the commodity or scrip. The impugned contracts were clearly speculative transactions within the meaning of the second Explanation, since they were contracts for sale of groundnut oil, groundnut seeds and groundnut oil cakes and they were ultimately settled by cross-contracts of purchase, that is, otherwise than by actual delivery of the goods. The assessee, however, contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set off only against the profit of Rs. 2,19,046, which was admittedly profit from speculative transactions, and the balance of Rs. 1, 21,397 after such set-off was not liable to be set off against the other income of the assessee in view of the first proviso to section 24(1). We may make it clear that in taking this view we have proceeded upon the basis that the impugned contracts which resulted in the loss of Rs. 3,40,443, constituted a separate business distinct from the business of forward contracts resulting in the profit of Rs. 2,19,046. The result would however be the same even if the impugned contracts which resulted in the loss of Rs. 3,40,443 did not constitute a separate business but were part of the same business of forward contracts which resulted in the profit of Rs. 2,19,046, for in that event the loss of Rs. 3,40,443 would be liable to be taken into account in determining the profit from such business under section 10. Our answer to the questions referred to us, therefore, are : Question No. 1 : It is not necessary to decide whether the contracts in respect of which the loss of Rs. 3,40,443 was claimed were illegal contracts but they were entered into in contravent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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