Andhra HC (Pre-Telangana)
Commissioner Of Income Tax vs Lakshminarayana Trading Co. on 23 March, 1995
Equivalent citations: 1995(2)ALT781, [1996]219ITR90(AP)
Author: Syed Shah Mohammed Quadri
Bench: S.S. Mohammed Quadri
JUDGMENT Syed Shah Mohammed Quadri, J.
1. To appreciate the controversy debated before us, it may be relevant to note the facts giving rise to the question referred to this Court by the Tribunal under s. 256(1) of the IT Act, 1961.
2. The assessee is a partnership firm doing business in oil. It had entered into a contract with another firm of Gulbarga, Shankerlal Lahoti Oil Mills (seller). The contract was in respect of a tanker of groundnut oil at the rate of Rs. 436 per quintal. It was agreed between the parties that the delivery of the goods should take place on 25th October and 3rd Nov., 1969. The assessee was to furnish C-Form, if required. Pursuant to that contract, the seller took one tanker of groundnut oil by railway freight paid. It also made an invoice regarding the goods covered by railway receipt dt. 4th Nov., 1969, at the rate of Rs. 430 per quintal. That was subject to production of C-Form. So far as the assessee is concerned, it issued C-Form and obtained E-1 Form and thus completed the sale. However, after obtaining the railway receipt, it endorsed the same to Prakash Bros. and thus sold that consignment to that party (hereinafter referred to as "the second purchaser"). In respect of the second sale, the parties entered into a contract on 27th Oct., 1969, but the rate was lesser than the rate at which the assessee agreed to purchase. Consequently, the assessee suffered a loss of Rs. 45,677 which it claimed to set off against the profits from its business. The ITO did not accept the claim being of the view that it was a speculative loss. On appeal to the first appellate authority, i.e., the CIT(A), the contention of the assessee was upheld, but later the first appellate authority under s. 154 of the IT Act, 1961, directed the ITO to deal with the point afresh. This order was upheld by the Tribunal. The ITO thereafter passed a fresh order holding that the loss is a speculative loss. Again the assessee went in appeal before the first appellate authority. The authority took the view that as there was no actual delivery of the goods to the assessee, the transaction was a speculative transaction. This view was, however, not upheld by the Tribunal on further appeal. At the instance of the Revenue, the following question was referred to this Court for opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the transactions in this case are not speculative within the meaning of s. 43(5) of the IT Act, 1961 ?"
3. Sri Habeeb Ansari, learned standing counsel for the IT Department, urged before us that even before the assessee took delivery of the goods, it sold the goods to the second purchaser, as such, the transaction in question between the seller and the assessee was a speculative transaction and, therefore, the loss suffered by the assessee in the transaction could be set off only against the income from the speculative transaction and not from the income of other business.
4. For the purpose of determining the income under the head "profits and gains of business or profession", the terms and expressions used in ss. 28 to 41 are defined in s. 43 of the Act. We are here concerned with sub-s. (5) of s. 43 which defines "speculative transaction" in the following terms :
"'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 scrips......"
5. A reading of the definition, extracted above, shows that where a contract for the purchase or sale of any commodity, which includes stocks and shares, is settled periodically or ultimately, otherwise than by way of actual delivery or transfer of the commodity or scrips, it would be treated as speculative transaction. There are various modes of entering into business transactions. For example, forward contracts, hedging contracts, etc., are contracts where the goods do not pass from the seller to the purchaser but only an account of the sale is maintained on purchase and sale of the goods and such transactions are settled periodically or ultimately without involving the delivery or transfer of the commodity or the scrips. They are dealt with for purposes of setting off and carrying forward of losses. The effect of treating such transaction as speculative transaction is that the loss suffered in such transaction can only be set off against the income earned from speculative business and not against income from other business as contemplated in s. 73 of the Act. We also make it clear that the nature of the transaction as speculative does not carry any stigma as such either with regard to its legality or otherwise. The provision is designed to check the practice of buying up speculative losses and, accordingly, the provisions were amended so as to allow speculative losses to be set off only against speculative gains. To that extent there is no difficulty. The difficulty arises in construing the phrase "otherwise than by the actual delivery or transfer of the commodity or scrips" in the definition. What does this signify ? Having regard to the wording in clause (5) of s. 43, as stated above, the intention is not to allow buying up of speculative losses and to permit setting off of speculative losses against income earned from other speculative business. If in the course of business transactions of sales and purchases of any goods, each transaction is different, and the ultimate purchaser but not the intermediate purchasers, receives the goods, the transaction would fall within the meaning of speculative transaction. But, if there have been successive sales of the same commodity coupled with delivery or transfer of the commodity and the physical delivery is only taken by the ultimate purchaser, in our view, the transaction does not fall within the sweep of speculative transaction. For example, if A sells a certain commodity to B and transfers possession of the commodity by parting with the commodity either by putting the commodity on the carrier, rail or any other transport, and on the way B, the purchaser, sells the commodity to some third party C, the purchase by the first purchaser B cannot, in our view, be treated as speculative transaction for the simple reason that the delivery or transfer of the commodity contemplated under clause (5) of s. 43, has taken place. But then learned counsel for the Revenue relied on certain decisions to show that until and unless the commodity is actually received by the purchaser, it would be within the mischief of speculative transaction. We shall now examine those decisions to test the contention of learned counsel.
6. In Raghunath Prasad Poddar vs. CIT (hereinafter referred to as "Raghunath Prasad's case"), the case arose under the Indian IT Act, 1922, wherein Expln. 2 to s. 24(1) was verbatim the same as clause (5) of s. 43 of the IT Act, 1961. There the assessee was a dealer in jute and jute goods. He, having purchased the goods obtained pucca delivery orders relating to gunny bags from various parties but then transferred those orders to buyers after receiving the price of those goods. There the goods were not delivered."Pucca delivery orders" were only handed over to the purchaser which was the subject matter of deal in subsequent transactions. The Tribunal was of the opinion that since the goods covered by the delivery orders were not actually delivered to the buyers, the loss incurred in those transactions was speculative within the meaning of the Explanation and could not be allowed to be set off against the assessee's profits from non-speculative business. On a reference, the High Court of Calcutta agreed with the view of the Tribunal. The Supreme Court held that to have a valid transfer of a commodity to be effective it was not necessary that the transfer in question should be followed up by actual delivery of the goods to the transferee and that in a case where the goods were transferred or delivered to the transferee's, transferee the first transfer would be valid and would not be a speculative transaction. A close reading of that judgment shows that there the gunny bags were with the original seller who did not part with the same. This judgment of the Supreme Court was considered in Devenport & Co. P. Ltd. vs. CIT by a Bench of three Judges but was not approved. The learned Judges considered the cases relied upon in Raghunath Prasad's case (supra) and held that the transaction involved in that case was speculative business. What actually happened there was that a private company which carried on business in tea garden tools and requisites acted as agent for selling tea. It entered into certain transactions for the purchase of jute goods and their sale and for the first time entered into a transaction in jute. The company had no godown and did not handle them at all. Only delivery orders addressed to the mills changed hands. That business resulted in loss. It was the nature of that business which fell for the consideration of the Supreme Court. Explaining the meaning of "actual delivery" in Expln. 2 to s. 24(1) of the Indian IT Act, 1922, it was observed, "it meant real as opposed to notional delivery". The Supreme Court approved the judgment of the Calcutta High Court which laid down that the definition of "delivery" in s. 2(2) of the Indian Sale of Goods Act, 1930, which includes both actual and constructive or symbolical delivery, had no bearing on the definition of speculative transaction in the Explanation and that a transaction which was otherwise speculative would not be speculative within the meaning of the Expln. 2 if the actual delivery of the commodity or the scrips had taken place. But, on the other hand, the transaction which was not otherwise speculative in nature might yet be speculative within the meaning of Expln. 2 if there was no actual delivery of the commodity or the scrips. They added that the Explanation did not invalidate the speculative transaction which was otherwise legal but gave a special meaning to that expression for purposes of income-tax. From the above judgment also, it is clear that there also the goods did not move from the first seller. What all was dealt with was only delivery orders which changed hands from the sellers to the purchasers.
Jute Investment Co. Ltd. vs. CIT was also a case of gunny bags.
There the assessee bought from and sold to third parties gunny bags and suffered resultant losses. The nature of the transaction there was also held to be a speculative transaction as there was no physical delivery of the goods but only a transfer of pucca delivery order and payment under the trade usage was made by cheque. The Supreme Court referred to the fact that the principle laid down in Raghunath Prasad's case (supra) was overruled. The facts were somewhat identical. Here also it may be pointed out that the goods never moved from the original seller.
There is another judgment of the Bombay High Court where this question was considered; it is Sind National Sugar Mills P. Ltd. vs. CIT . That also arose under Expln. 2 to s. 24(1) of the Indian IT Act, 1922. In that case the transactions in question were forward transactions in jute and hessian. The assessee-company was dealing in sugar, hessian, gunny bags, etc. In the business it suffered a loss and sought to set off the loss against its other business income. The ITO negatived this claim but he apportioned 50% of the amount to speculative transactions and 50% to non-speculative transactions. On appeal the AAC agreed with the view of the ITO that the transactions were speculative transactions. The assessee unsuccessfully appealed before the Tribunal. On a reference to the Bombay High Court it was held that since the assessee failed to give the necessary particulars the transactions were speculative transactions as there was no delivery of the goods. From the above narration of facts it is clear that the transactions were forward transactions where the goods were not received or delivered. It is also a case where the first seller did not part with the goods.
Under the IT Act, 1961, the question whether the transaction was a speculative transaction fell for the consideration of our High Court in CIT vs. Puttaiah Seshaiah & Co. . In that case during the accounting year relevant to the asst. yr. 1971-72, the assessee entered into 148 contracts for sale of oil. Out of those contracts it performed 135 contracts by delivery of goods. Only in respect of 13 contracts it could not perform by supplying oil for want of wagons but settled them by paying the price difference. In the relevant accounting year, the assessee claimed set off of the amount of loss arising out of payment of the price difference against the profits of its business which was disallowed by the ITO. On appeal the first appellate authority confirmed the order of the ITO but on further appeal the Tribunal took a different view. On reference a Division Bench of our High Court opined that the assessee was not entitled to set off of loss arising from payment of the price difference in respect of unfulfilled contracts of sale against the profits from its regular business. Here again we notice that the goods remained with the original seller only.
From the above discussion it follows that every case of non-delivery of goods does not make the transaction a speculative transaction. We can derive support for this view from the judgment of the Supreme Court in CIT vs. Shantilal P. Ltd. . In that case the assessee-company entered into a contract to sell folic acid within three months of the contract at Rs. 440 per kg. As the price of folic acid shot up by about five times the assessee could not perform the contract but preferred to go for arbitration and pay damages determined by the arbitrator. This payment of damages was sought to be set off against income from other business. The ITO held the loss to be a speculative loss and rejected the claim. The AAC, however, did not agree with the ITO and held that it was business loss. The Tribunal agreed with the approach of the first appellate authority and dismissed the appeal of the Department. The following question was referred to the Supreme Court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the order of the AAC that the loss suffered by the assessee was not a loss incurred in a speculative transaction within the meaning of s. 43(5) of the IT Act, 1961 ?"
After considering the definition of "speculative transaction" contained in clause (5) of s. 43, it was observed that the law had spoken of a settlement of the contract and a contract was settled when it was either performed or the promisee dispensed with or remitted, wholly or in part, the performance of the promise made to him or accepted, instead of it, any satisfaction which he thought fit and in that sense s. 43(5) had to be understood and it was held that the transaction could not be described as a speculative transaction within the meaning of clause (5) of s. 43 as there was a breach of the contract and on a dispute between the parties damages were awarded as compensation by way of arbitration award. The question was thus answered in the affirmative and in favour of the assessee and against the Revenue.
7. In view of the above discussion of case law with regard to the provisions of s. 43(5), we may now revert to consider the scope of that section under general principles. Any trader in commodities generally intends to buy and sell the commodity with a stipulation that the delivery of the commodity by the seller to the purchaser is an essential ingredient of that transaction. Under the Sale of Goods Act such delivery can be made either by physical delivery of the commodity directly to the purchaser or to the carrier for him or by transferring the document of title to the commodity. In the expression "otherwise than by actual delivery or by transfer of the commodity" these two modes of delivery must be contemplated. Taking this expression along with the previous phrase "settled periodically or ultimately", it would mean that in such a settlement of the contract, delivery of the commodity was never contemplated at all. In other words, speculative transactions are such that the parties never contemplate delivery of the commodity but only trade in the documents of title.
8. From the above discussion, it follows that where the nature of transaction entered into between the parties is such that under the contract the seller parts with the possession of the goods and while the goods were in transit the buyer enters into subsequent transaction then so far as the first seller and the first buyer are concerned, there would be actual delivery of the goods as the first seller had parted with the possession of the goods and handed them over to the carrier which would amount to delivery to the buyer, the transaction cannot be regarded as a speculative transaction. If we are correct in our view on this, there would thus be transfer of commodity to the buyer in the instant case and the transaction would be out of the mischief of clause (5) of s. 43. In the result, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.