Case: Commissioner of Income Tax, Kerala Vs. Joseph John

first proviso to section 23(5)(a) does not apply to loss incurred by a registered firm in speculative business which is to be kept apart under the first proviso to section 24(1), and is not to be taken into account when computing the total income of the firm under section 23(1), (3) or (4). It was further held in that case that speculation loss of a registered firm kept apart under the first proviso to section 24(1) in computing its total income for one year could not be apportioned between the partners and the registered firm could claim to carry forward such loss and have it set off against speculation profits of the firm of a later year in accordance with section 24(2)As regards the first question, the High Court took the view that the finding of the Appellate Tribunal that the transactions are speculative transactions and not hedging transactions seemed to be based on a misapprehension of the ambit of the assessees business. It was observed by the High Court that the Tribunal had proceeded on the basis that the assessee was only a miller who bought copra, crushed it and then sold the resultant oil. The High Court said that the assessee had, as a matter of fact, the business of buying and selling quite apart from his business as a miller. The assessment order also clearly showed that, in addition to the oil produced in the assessees oil mill, he was selling oil purchased by him. It was argued on behalf of the appellant that the finding of the Appellate Tribunal that the transactions were speculative transactions and not hedging transactions was a finding of fact based on proper evidence and the High Court acted beyond its jurisdiction in interfering with that finding. In our opinion, the argument put forward on behalf of the appellant is well-founded and must be accepted as correct. Upon examination of the order of the Appellate Tribunal we are satisfied that the majority of the Appellate Tribunal entertained no misapprehension with regard to the scope of the assessees business and the High Court had no justification for saying that the Tribunals conclusion was based upon any such misapprehension. It is manifest that the finding of the Appellate Tribunal that the transactions were speculative transactions and not hedging transactions is essentially a finding on a question of fact and it is not open to the High Court to interfere with that finding unless there is no evidence to support that finding or it is perverse. In the present case, there is the admission of the assessee before the Appellate Assistant Commissioner that he was carrying on two different businesses--one of cocoanut oil and the other of speculation in cocoanut oil. By its remand order dated November 29, 1956, the Appellate Tribunal directed the Appellate Assistant Commissioner to ascertain whether the speculative transactions could be said to constitute " hedging " operations and part of the normal trading activity of the assessee. After receipt of the remand order the Appellate Assistant Commissioner required the assessee to produce a full account of the " hedging " transactions out of the " oil satta price difference account " maintained in his books of account. The assessee was required to give full details with regard to each of these contracts but the assessee expressed his inability to furnish these details separately and said that all his transactions both of speculation and hedging were mixed up in the " oil satta price difference account ". It was admitted by the assessee that no separate account of speculative transactions and hedging transactions was maintained and it was not possible to segregate from the so-called account entitled " oil satta price difference account " the transactions which are purely speculative from the hedging transactions. It was therefore held by the Tribunal that there was no evidence produced by the assessee of the hedging transactions and the transactions in question must be held to be speculative transactions which are in the nature of a business within the meaning of the first proviso to section 24(1) of the Act. Explanation 2 of section 24(1) of the Act states" 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 or transfer of the commodity or scrips.Provided that for the purposes of this section, --(a) a contract in respect of raw materials 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(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 speculative transaction. "6. It is manifest that the burden of proof was upon the assessee to show that the transactions are merely hedging transactions within the meaning of proviso (a) and in the absence of any evidence produced on the part of the assessee, Explanation 2 applied to the case and the transactions must be held to be speculative transactions as defined therein. We are accordingly of the opinion that there was sufficient material before the Tribunal to hold that the transactions constituted speculative transactions in the nature of a business within the meaning of the first proviso to section 24(1) of the Act and the first question referred to the High Court must be answered in the affirmative and against the assessee.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]6. It is manifest that the burden of proof was upon the assessee to show that the transactions are merely hedging transactions within the meaning of proviso (a) and in the absence of any evidence produced on the part of the assessee, Explanation 2 applied to the case and the transactions must be held to be speculative transactions as defined therein. We are accordingly of the opinion that there was sufficient material before the Tribunal to hold that the transactions constituted speculative transactions in the nature of a business within the meaning of the first proviso to section 24(1) of the Act and the first question referred to the High Court must be answered in the affirmative and against the assessee.