1986 PLP 453 (PTD)

NAIMUDDIN, C.J.‑‑By this Income‑tax Reference under section 66(1) of the Income‑tax Act, 1922, following two questions have been referred to this Court for answer:‑ "(1) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the losses of Rs.21,600 and Rs.2,601 in the gram and rape‑seed accounts were speculative transactions within the meaning of the Explanation to section 24(2) of the Income‑tax Act? (2) If answer to question No. 1 is in the affirmative, whether speculation losses can be set off against the profits of another business activity under section 10 of the Income‑‑tax Act in spite of the First proviso to section 24(1) of the Income‑tax Act."

2. The reference relates to the assessment year 1960‑61.

3. The relevant facts are that in the gram account (Karachi) the applicant claimed a loss of Rs.21,600 on account of settlement differences paid and in the rape‑seed account they claimed a loss of Rs.2,

600. It was argued before the Income‑tax Appellate Tribunal that the original intention was to deliver the goods but due to transport difficulties the goods could not be delivered and, therefore, settlement had to take place. Before the Tribunal reliance was placed by the counsel of the assessee on the following cases. Jagannath Mahadeo Prasad v. Commissioner of Income‑tax, U. P., (1965) 55 I. T. R. 501, Gauri Dutt Bhagwan Das and Co. v. Commissioner of Income‑tax, U.P. (1965) 56 I.T.R. 423, Sada Sukh Johri Lal v. Commissioner of Income‑tax, U.P., (1965) 56 I. T. A. 433.

4. However, the argument was repelled in view of the clear wording of the explanation to section 24 of the Act and the transactions were held by the Tribunal as speculative in nature. The Tribunal also found that because of the proviso to section 24(1), a speculative loss could be set off only against income of the speculative transactions. The Tribunal also took the view that the proviso to section 24(1) is a Substantive enactment, which control, the provision of section 10(1) of the 1nconie‑tax Act, 1922.

5. We may reproduce herein below the provisions of section 24 of the Act, which reads as‑ "Explanation:‑The term "speculative transaction", as used in subsections (1) and (2), means a transaction in which a contract for the 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 but does not include a transaction in which:‑ (a) a contract in respect of raw materials or merchandise is entered into by a person in the course of his manufacturing or mercantile business to guard against loss through future price fluctuations for the purpose of fulfilling his other contracts for the actual delivery of the goods to be manufactured or the merchandise to be sold by him, (b) a contract in respect of stocks and shares is entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations, and (c) a contract is entered into by a member of 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."

6. Today the applicants and their counsel are called absent. We have, however, heard Mr. A.A. Dareshani learned counsel for the respondent.

7. We may at the very outset state that in view of the clear language,, of the Explanation to section 24(1) of the Income‑tax Act, 1922, the intention of the petitioners that they wanted to purchase grams and rape‑seeds and not to enter into a speculative transactions was immaterial for the explanation clearly treats a contract for purchase and sale of any commodity which was periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips considered as a speculative transaction. Accordingly, we hold that the loss on account of the speculative transaction could be set off only against the income of the speculative transaction.

8. Now, so far as the first two cases reported as Jagannath Mahadeo Prasad v. Commissioner of Income‑tax U. P. (1965) 55 I.T.R. 501, Gauri Dutt Bhagwan Das and Co. v. Commissioner of Income‑tax U.P. (1965) 56 I.T.R. 423, and relied upon before the Income‑tax Appellate Tribunal, are concerned it may be stated that they were considered by the Supreme Court of India in the appeal. The judgments in the said two cases were reversed by a common judgment, dated 2nd August, 1968, and is reported as Commissioner of Income‑tax, U.P. v. Jagannath Mahadeo Prasad, Commissioner of Income‑tax U.P. v. Gauri Dutt Bhagwan Dass and Co. (1969) 71 I.T.R.

296. In reversing the judgments reliance was placed on several cases and we may here refer two of them namely, Keshavlal Premchand v. Commissioner of Income‑tax, Ahmedabad (1957) 31 I.T.R. 7, Commissioner of Income‑tax v. Kantilal Nathuchand (1967) 63 I.T.R. 318, 321 and we may quote here the relevant passage from the first mentioned case, which reads as follows:‑ "In KESHAVLAL PREMCHAND'S case (1957) 31 7.T.R. 7, the assessee had suffered a loss in speculative business carried on by him in the year of account. His contention was that he was entitled to take this loss into account in arriving at the profits and gains of his business (of non‑speculative nature). Mr. Pakhivala, who argued the case before the Bombay High Court, put forward the view that section 24(1) read with the proviso referred only to a case where the assessee was claiming the right to set off the loss, which he had suffered under one head against a profit which he had earned in another head. The section, therefore, had no application when the assessee wanted to adjust or set off a loss against a profit under the same head. It was urged by him that the assessee in claiming to set off his speculative loss against his business profits under the same head. was not claiming the benefit of any right conferred by section 24(1) and, therefore, the proviso had no application. The argument was elaborated further by referring to the true nature and function of a proviso, which was to except or take out a particular portion from the field dealt with by the section. Chagla C.J., who delivered the judgment of the Bombay Bench, had no difficulty in coming to the conclusion that, on the language of the proviso itself and on the scheme of the Act, the Legislature in enacting the so‑called proviso, was enacting a substantive provision dealing with the mode of computing the profits and gains chargeable under the head "profits and gains of business, profession or vocation" and that the Legislature had provided that when profits and gains were computed the loss sustained in a speculative transaction must not be taken into account except to the extent of the amount of profits and gains, if any in any other business consisting of speculative transactions. The learned Chief Justice further referred to the mischief, which was aimed at by the Legislature in enacting the proviso. In recent times businessmen were known to buy speculative losses in order to reduce their profits and the Legislature wanted to put an end to that mischief which could only be done by preventing the assessee from reducing his profits by speculative losses. The Bombay decision was followed by the Madhya Pradesh High Court in Commissioner of Income‑tax v. Ramgopal Kaniyalal (1960) 38 I.T.R. 193, as also by the Division Bench of Punjab High Court in Manohar Lai Munshi Lai v. Commissioner of income‑tax (1962) 44 I.T.R.

618. The matter ultimately went to a Full Bench of the Punjab High Court in Commissioner of Income‑tax v. Ram Sarup (1962) 45 I.T.R. 248, in which after reviewing the entire case law and examining the various aspects relevant to the question the view expressed by Chagla, C.J. in 'the Bombay case was accepted as correct. Similarly in Jummar Lal Surajkaran v. Commissioner of Income‑tax (1963) 47 I.T.R. 809, Sree Hanuman Investment Company v. Commissioner of Income‑tax (1963) 48 I.T.R. 915 and Joseph John v. Commissioner of Income‑tax (1964) 51

1. T. R. 322, the consideration which prevailed in Keshavlal Premchand's case (1957) 31 I.T.R. 7 were accepted as correct."

9. The Supreme Court of India in the other case, namely, Commissioner of Income‑tax v. Kantilal Nathuchand (1967) 163 I.T.R. 318, at p. 321 observed of the report as follows:‑ "Section 24 is, thus, a provision laying down the manner of computation of total income. The principal clause of section 24(1) lays down that, if there be a loss of profits or gains in any year under any of the heads mentioned in section 6, that loss has to be set off against the income, profits or gains of the assessee under any other head in that year. If this provision had stood by itself without any provisos, the result would have been that all losses incurred by an assessee under any of the heads mentioned in section 6, would be adjusted against profits under all other heads, and then the total income of the assessee would be worked out on that basis. The first proviso to this subsection, however, lays down an exception to this general rule contained in the principal clause. The exception relates to income from business consisting of speculative transactions, and places the limitation that losses sustained in speculative transactions are not to be taken into account in computing the profits and gains chargeable under the head 'Profits and gains of business, profession or vocation', except to the extent that they will be set off against profits and gains in any other business which itself consists of speculative transactions. The effect of the proviso is that if there are profits in speculative business, those profits are added to income under the other heads mentioned in section 6 for purposes of computing the total income of the assessee in order to determine the tax under section 23 of the Act. On the other hand, losses in speculative business are not to be taken into account when computing the total income, except to the extent to which they can be set off, against profits from other speculative business. The first proviso, thus, clearly limits the applicability of the principal clause of section 24(1) and when applied, it governs the manner in which the total income of the assessee is to be computed. In the case before us, the Income‑tax officer was clearly right in the assessment years 1958‑59 and 1959‑60 in not setting off the losses in the speculative business against the income earned in those years ‑ either from property or from ready business in kappas."

10. We accordingly, answer the first question in the affirmative and the second question in the negative. M.B. A. Reference answered.