9911796707
TMI Blog1978 (2) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of Jhabua of Madhya Pradesh, filed a return on July 31, 1962, declaring an income of Rs. 1,45,423. The assessee had agreed on February 28, 1961, to deliver in the month of April/May, 1961, 2,000 tons of manganese ore at the rate of Rs. 50 per ton to M/s. Pitty Brothers, Bombay. The quality of manganese agreed to be delivered was required manganese, 13% iron, 13 % silica and alumina, 0. 12% phosphorus. The assessee could not and did not deliver 2, 000 tons of manganese ore of the specifications indicated in the contract. On August 25, 1961, a settlement was arrived at by the assessee and M/s. Pitty Brothers with regard to the aforesaid contract as a result of which the assessee agreed to pay a sum of Rs. 30,000 by way of compensation at the rate of Rs. 15 per ton. The amount of Rs. 30,000 was claimed to have been paid by the assessee on October 24, 1961. In the circumstances, the assessee claimed in his return the aforesaid sum of Rs. 30,000 paid by it to M/s. Pitty Brothers, for deduction on the ground that it is a normal trading loss incurred by it in respect of the contract in question. The ITO in the assessment order dated November 29, 1963, disallowed his claim on two ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a speculative transaction as an ordinary trading loss. The answer to the question depends upon the scope and meaning of the definition of "speculative transaction" defined under Expln. 2 to sub-s. (1) of s. 24 of the Indian I.T. Act, 1922, corresponding to s. 43(5) of the 1961 Act and its application to the facts of the present case. Before considering the scope and ambit of the definition of "speculative transaction", it is profitable to refer briefly to the heads of income and method provided under the Act for deducting the speculative loss from the income in a given year. Heads of income chargeable to income-tax are enumerated in s. 6 of the 1922 Act. An assessee, who sustains a loss under any one of the heads of income in any accounting year, shall be entitled under s. 24(1) of the Act to have such loss set off against his income, profits or gains under any other head in that year. But, however, the first prov. to s. 24(1) permits the set-off of a loss in speculative business only against the assessee's profits and gains, if any, in a similar business. Where the speculative transactions are of such a nature and character so as to constitute a business, the business shall be u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase or sale of any commodity including stocks and shares, by the assessee during the accounting period in question. (b) The contract of sale or purchase must have been settled either periodically or ultimately. (c) Such settlement of the contract must not be by the actual delivery or transfer of the commodity or scrips. In the present case, there was admittedly a transaction in which the assessee has entered into a contract for the supply of 2,000 tons of manganese ore of a specified quality to M/s. Pitty Brothers on February 28, 1961. The supply of manganese ore was agreed to be made in April/May, 1961. The condition No. 3 pertaining to the absence of actual delivery of the manganese ore by the seller has also been established, and admittedly, there was no delivery of the ore to M/s. Pitty Brothers, the purchaser under the contract. However, Shri Chitale, learned counsel for the assessee, contends that the particular manganese ore of 2,000 tons agreed by his client to be supplied to M/s. Pitty Brothers was subsequently sold at the rate of Rs. 72 per ton and actually delivered the ore to another party, viz., Lakhlal Samandas. According to the counsel, though the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the same 2,000 tons of manganese ore on February 28, 1961. The fact that there was actual delivery of the goods, i.e., of ore to the second purchaser under the second contract would only govern and determine the nature of the second transaction between the assessee and the second purchaser and that transaction is undoubtedly an ordinary trading transaction of the assessee but does not fall within the meaning of "speculative transaction". The assessee, therefore, cannot take advantage of that fact in support of its plea that there was ultimately actual delivery of the manganese ore sought to be sold to M/s. Pitty Brothers in the beginning and, therefore, the transaction does not fall within the definition of the "speculative transaction". That apart I may add that the Tribunal which is the final fact finding authority has, on a consideration of the entire material on record, specifically found that the transaction in question with M/s. Pitty Brothers has been settled by the assessee without giving delivery of the goods contracted for. This finding of fact is binding on us in this reference. We have, therefore, to proceed to answer the reference on the basis of the find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the contract. It admits of no doubt that the rights and liabilities of the contracting parties flow from the very contract, which was not fulfilled but breached. The words "contract settled" are not restricted by any conditions pertaining to the time of settlement. The contract may be settled either periodically or ultimately. It does not indicate that the proposed settlement of the contract must be before the expiry of the due date fixed for the performance of the contract. This view of mine gains support from the use of the word "ultimately". The contract may be subsisting at the time of the settlement or a breach of contract might have already occurred by either of the parties to the contract at the time of the settlement. It is pertinent to notice that the definition of "speculative transaction" does not indicate the mode and manner of the date of settlement. The settlement may be periodical or ultimate. The date of settlement is not material, as no time factor has been fixed by Parliament in the definition of "speculative transaction" for such settlement of contracts. The parties may settle the dispute relating to a contract subsequent to the date of the performance of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions are otherwise legal and operative, although there was no actual delivery of the commodity or scrips. In other words, a transaction, which is not otherwise speculative in character under general law may still be speculative for the purpose of income-tax, if there is no actual delivery of the commodity or scrips. This view of mine gains support from a recent decision of the Supreme Court in Davenport and Co. P. Ltd. v. CIT [1975] 100 ITR 715. This was a case under the Indian I.T. Act, 1922. Therein the assessee had contracted to purchase 1,100 bales of 'B' Twill with M/s. Raghunath and Sons Ltd. and M/s. Mahadeo Ramkumar and 2,500 bales of corn sacks from Tulsidar Javaraj on April 17, 1958. The assessee entered into a contract on June 18, 1958 with M/s. Lachhiminarain Kanoria and Co. to sell the aforesaid goods. The assessee did not take actual delivery of the goods, as it had no godowns for keeping the goods. The goods were in the godowns of the mills and the delivery orders had changed hands. The aforesaid transactions resulted in a loss of Rs. 98,534 to the assessee, which was sought to be adjusted as a trading loss in the assessment year 1959-60. The question that fell for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enacting the Explanation 2 of section 24(1) of the Income-tax Act, the legislature did not intend to affect any transaction of sale wherein the goods were not physically delivered by the seller to the buyer but only laid down that if there was no actual or physical delivery, the loss, if any, would be a loss in a speculative transaction which could be allowed to be set off only against a profit in a transaction of the same nature...The object of the Explanation is not to invalidate transactions which are not completed by actual delivery of the goods but only to brand them as "speculative transactions" so as to put them in a special category for income-tax purposes In the light of the aforesaid principles, I am unable to accede to the sub-mission of Shri Chitale, that the definition of "speculative transaction" would be attracted only to cases of settlement of contracts before the breach of the contract. The legislative intendment as could be gathered from the definition of speculative transaction leaves no doubt in my mind that all cases of settlement without actual delivery of the goods or transfer of the scrips contracted, must fall within the definition of "speculative transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract and, therefore, there was no settlement of the contract. I prefer to respectfully agree with the view expressed by the Madras High Court in R. Chinnaswami Chettiar v. CIT [1974] 96 ITR 353. The learned judge, Ramaswami J., who spoke for the court, after quoting the relevant and material passage from the judgment of the Calcutta High Court in CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347, 352 observed at page 359 thus : "The word 'settled' is used in this part of the section without any restriction as to whether it was before breach or after breach. Whether the settlement was before or after breach of the contract is immaterial if actual delivery of the goods is absent." In the present case, admittedly, there was no actual delivery of the ore by the assessee. For all the reasons stated my answer to the question is in the affirmative holding that the payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers is a specultative loss governed by Explanation 2 to s. 24(1) of the I.T. Act, 1922, and not a normal trading loss, which is a permissible deduction from the profits and gains of the assessee from his general trade. The assessee would be entitled to carry fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivery of goods manufactured by him or merchandise sold by him ; or (b) a contract in respect of stocks and shares entered into by a 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 a 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 member ; shall not be deemed to be a specultative transaction. This provision talks of "settlement of a contract otherwise than by actual delivery". This settlement may be periodical or may be ultimate ; but what is contemplated is the "settlement of contract". The term "contract" implies a subsisting contract and not a contract which has ended in a breach. And it is in this view that the matter will have to be considered. It is true that we are not concerned with the legality of the contract or otherwise. The case Davenport and Co. P. Ltd. v. CIT [1975] 100 ITR 715 (SC), on which reliance has been placed by learned counsel for the department is a case not dealing with a situation of breach of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 2. In this Act the following words and expressions are used in the following senses, unless a contrary intention appears from the context :---.......... (h) an agreement enforceable by law is a contract : ........" It is, therefore, clear that "contract settled" would presuppose an enforceable contract and admittedly, when a breach has been committed there is no enforceable contract at all and in this view of the matter the settlement of the damages as a result of breach of contract would not be interpreted to mean that the contract is settled otherwise than by actual delivery of goods. The word "contract" has been given a meaning by s. 2, cl. (h) of the Contract Act-and it could not be doubted that when the legislature used this word in a subsequent legislation in the same context it was used to convey the same meaning unless there is anything indicated to the contrary. The well-known rule of interpretation as stated by Craies in his work on Statute Law is : " It has been held that, where the legislature has given to words a statutory definition in one statute, and has used the same words in a similar connection in a later statute dealing with the same subject-matter, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act followed the decisions in CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347 (Cal) and Daulatram Rawatmull v. CIT [1970] 78 ITR 503 (Cal), and observed : " What is important to be noticed is that the contract for purchase or sale of any commodity must be settled otherwise than by the actual delivery or transfer of the commodity or scrips. A contract can be settled only during the subsistence of the contract. If a breach occurs by the non-performance of the contract by actual delivery or transfer of the commodity or scrips and thereafter the parties to the contract settle the amount of damages by paying the difference between the contract price and the market price on the due date of performance that would not amount in law to settling a contract. What is settled in such a case is settling the damages consequent on the breach." It is not very material to go into the meaning of the word "settled", but in order to interpret the term "contract settled" we will have to go to the meaning of the term "contract" itself, and it must be stated with respect that "contract" will have to be understood in the same manner as is understood under the Contract Act itself. And if we interpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined under s. 43(5) of the I.T. Act. In this view of the matter, in my opinion, the question cannot be answered in the affirmative. It has to be stated that payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers is not a speculative loss governed by Explanation 2 to s.24(1) of the Indian I.T. Act, 1922 (section 43(5) of the 1961 Act). In view of this, in my opinion, the assessee shall be entitled to costs of this reference. Counsel fee Rs. 250 (two hundred and fifty) if certified. [On a difference of opinion between C. Kondaiah and G. L. Oza JJ.] G. G. SOHANI J.--As there was a difference of opinion between Kondaiah J. and Oza J., who heard this reference, on the question of law referred to this court by the Income-tax Appellate Tribunal, the case came up before me for consideration. The question of law that has been referred to this court for its opinion is as follows : "Whether, on the facts and in the circumstances of the case, payment of Rs. 30,000 to M/s. Pitty Brothers, Bombay, is a speculative loss governed by Expln. 2 to s. 24 of the Indian I.T. Act, 1922, corresponding to s. 43(5) of the 1961 Act, or is a normal trading loss?" The material facts giving r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 30,000 by the assessee to M/s. Pitty Brothers on account of compensation for breach of contract was not a bogus transaction but was a genuine one. The Tribunal, however, rejected the claim of the assessee to set off that amount as a normal trading loss on the ground that the transaction in question was a speculative transaction and by virtue of the provisions of Expln. 2 to s. 24(1) of the Indian I.T. Act, 1922, hereinafter called the Act, the assessee was not entitled to set off that loss as a normal trading loss. At the instance of the assessee, the Tribunal referred the aforesaid question of law to this court for its opinion. When the matter came up for consideration before this court before a Division Bench consisting of Kondaiah and Oza JJ., my learned brother, Kondaiah J., answered the question in the affirmative holding that the payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers was a speculative loss and not a normal trading loss. My learned brother, Oza J., however, held that the question of law referred to this court for its opinion could not be answered in the affirmative and the payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers was not a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction" as contained in Expl. 2 to s. 24(1) of the Act. Shri Chitale, learned counsel for the assessee, tried to urge that the transaction in question was not of such a speculative nature as is generally understood by that expression. In the absence of a definition of a "speculative transaction" provided by Expln. 2 to s. 24(1) of the Act, an enquiry into the question as to whether the transaction in question is or is not of a speculative nature, as generally understood, might have been relevant. Learned counsel for the assessee, however, contended that the definition of "speculative transaction" contained in Expln. 2 to s. 24(1) of the Act, should be so interpreted as not to destroy the essential nature of a specultative transaction. Reliance was placed on a decision of the Supreme Court in Hariprasad Shiv Shankar Shukla v. A. D. Divikar [1957] SCR 121. The facts of that case are, however, distinguishable. In that case, the Supreme Court was considering the scope of the expression "retrenchment" and the meaning of the word "retrenchment" had to be ascertained in the light of the definition contained in s. 2(oo) of the Industrial Disputes Act, 1947, unless there was anything r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ore was settled by the parties ? The answer to this question depends, in my opinion, upon the meaning to be given to the expression "settled", occurring in Expln. 2 to s. 24(1) of the Act. This expression has not been defined by the Act. Shri Mathur, learned counsel for the department, contended that the dictionary meaning of that term, which is "to arrange matters in dispute", "to come to terms or agreement with a person", should be given to it. But, as pointed out by Lord Esher M. R., in Unwin v. Hanson [1891] 2 QB 115, 119 (CA) : "If the Act is one passed with reference to a particular trade, business, or transaction, and words are used which everybody conversant with that trade, business, or transaction, knows and understands to have a particular meaning in it, then the words are to be construed as having that particular meaning, though it may differ from the common or ordinary meaning of the words." Is it not then reasonable to assume that the legislature, while defining a "speculative transaction" in Expln. 2 to s. 24(1) of the Act, used words which people conversant with speculative transactions and stock exchange employ? In a stock exchange, there are certain days mar ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
