Kerala High Court
Commissioner Of Income-Tax vs Ajit Spices. (Income-Tax Reference No. ... on 9 December, 1985
Equivalent citations: (1987)52CTR(KER)162, [1987]165ITR755(KER)
JUDGMENT
T. KOCHU THOMMEN J. - The following common question has been at the instance of the Revenue, referred to us by the Income-tax Appellate Tribunal, Cochin Bench :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that forward contract for sales has to be treated as hedging contract and the loss, if any, arising on such forward contract for sales has to be set off as hedging loss against other income of the assessee ?"
The Tribunal upheld the contention of the assessee that the losses which it claimed to set off arose from sales in the nature of forward contracts. The losses arose, the Tribunal found, on account of holding stock, the value of which went down. The Tribunal accepted the assessees contention that the circular issued by the Central Board of Revenue under the repealed Indian Income-tax Act, 1922, governed the transactions in question and enabled the assessee to claim the set-off in terms of section 71 and 72 read with proviso (a) to section 43(5).
It is contended on behalf of the Revenue that the Tribunal went wrong in accepting the claim of the assessee without coming to a finding on the fundamental question as to the existence of a contract pursuant to which the alleged hedging contracts were entered into by the assessee. Counsel for the Revenue submits that the circular of the Board issued under the repealed enactment cannot override the provisions of the present enactment. If the circular were to be read as permitting the set-off even when no contract existed for actual delivery of goods, such circular would be inconsistent with the express provisions of the present Act.
Counsel for the assessee, however, submits that the question whether the circular is capable of being read wide enough so as to include hedging contracts not backed up by pre-existing contract for actual delivery of goods is academic, as in the present case, there was such a contract. Counsel, therefore, submits that the transactions in question cannot be treated as speculative, for these hedging contracts are protected under section 43(5) for the purpose of claiming a set-off under section 71 and connected provisions.
There is considerable force in the submission made on behalf of the Revenue that the circular of the Board issued under the repealed enactment can be binding on the Department only to the extent it is consistent with the provisions of the present enactment. This is clear from section 297 of the Income-tax Act, 1961, which reads :
"297. Repeals and savings. - ...
(2) Notwithstanding the repeal of the Indian Income-tax Act, 1922 (ll of 1922) (hereinafter referred to as the repealed Act), - ...
(k) any agreement entered into, appointment made, approval given, recognition granted, direction, instruction, notification, order or rule issued under any provision of the repealed Act shall, so far as it is not inconsistent with the corresponding provision of this Act, be deemed to have been entered into, made, granted, given or issued under the corresponding provision aforesaid and shall continue in force accordingly."
This means that a circular issued under the repealed enactment will be binding on the Department only to the extent that it is consistent with the provisions of the new enactment.
Whether or not the circular in question is in fact capable of being read in a wider sense, we would read down the circular so as to be consistent with the provisions of the new Act and, therefore, binding on the Department. The circular when so read can, in our view, apply only where there is a pre-existing contract for actual delivery of goods manufactured by the assessee or merchandise sold by him.
We would now read section 43(5) :
"In sections 28 to 41 and in this section, unless the context otherwise requires - ...
(5)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 :
Provided that for the purposes of this clause -
(a) a contract in respect of raw material 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...
shall not be deemed to be a speculative transaction."
The question, therefore, is whether the transactions in question, held by the Income-tax Officer to be speculative, are in fact, as found by the two appellate authorities, saved by proviso (a) to section 43(5) so as to permit the set-off under section 71 and connected provisions.
The order of the Tribunal does not disclose the finding as to the existence of a contract for actual delivery of goods within the meaning of proviso (a) to section 43(5). There is some reference in the Tribunals order to a pre-existing contract. The Tribunal says :
"... We are told that the contracts for actual delivery of goods sold by the assessee is always oral since it is ready delivery..."
From the vague reference to what the Tribunal says, "we are told that contracts are always oral", we are not in a position to proceed on the bases that there is determination of the crucial fact, namely, the pre-existing contract for actual delivery, with reference to which the assessees claim for set off can be considered. We are accordingly of the view that this fact has to be found. If this fact were to be found in favour of the assessee, that is, if the Tribunal were to come to a conclusion that the hedging sales are supported by a pre-existing contract for actual delivery of goods, the assessees claim would have to be allowed. In this connection, we would refer to the decisions of the Supreme Court in Nirmal Trading Co. v. CIT [1980] 121 ITR 54 (SC); Jute Investment Co. Ltd. v. CIT [1980] 121 ITR 56 (SC); Davenport & Co. (P.) Ltd. v. CIT [1975] 100 ITR 715 (SC) and the decision of the Calcutta High Court in D. M. Wadhwana v. CIT [1966] 61 ITR 154 (Cal) (approved by the Supreme Court in Davenport & Co. P. Ltd. v. CIT [l975] 100 ITR 715 (SC)).
Accordingly, we do not answer the question referred to us as the basic fact which requires to be found has yet to be found. We make it clear that the only question which arises for consideration by the Tribunal on the facts of this case is as to the existence of a pre-existing contract for actual delivery of goods and the hedging sales effected by the assessee pursuant to such contract.
We direct the parties to bear their respective costs in these tax referred cases.
A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.