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

1. These appeals are brought, by special leave, on behalf of the Commissioner ofKerala, from the judgment of the Kerala High Court dated April 5, 1962, in R. As. Nos.59 The respondent (hereinafter called the "assessee") is an oil miller who purchases cocoanuts and copra for extraction of oil in his own expellers or chekkus for the market. The purchases of the raw materials, cocoanuts and copra, are made ready for spot delivery as also for delivery in Vaida dates. The sales of oils were also made on the same basis by the assessee. All these contracts, ready and forward, are on a large scale and are put through either the Alleppey Oil Millers Association, commission agents or other merchants. The aforesaid contracts are of two varieties ; those on which delivery was intended and those intended to be settled on the Vaida dates, only for price differences. The latter type, forward contracts, for purchase or sale, are all entered in a single account called " Oil Vaida Price Difference Account ". During the calendar years 1952 and 1953, which are the " previous years " corresponding to the assessment years5, the assessee entered into several forward contracts for purchase of copra and sale of oil through the "Alleppey Oil Merchants Association " and recorded in the " Oil Vaida Price Difference Account in the manner aforesaid on which the following net losses were incurred:" Calendar year 1952 Calendar year 1953(Assessment year :(Assessment year :RsDifferences paid 1, 48, 002 1, 77, 915Less : Differences received 1, 21, 754 1, 63, 907Net loss 26, 248 14, 043 (sic)".2. TheOfficer refused to deduct the aforesaid losses in the assessment, holding that they were losses from separate speculative business within the meaning of Explanation 2 to section 24(1) of theAct, 1922 (hereinafter referred to as " the Act "), requiring to be set off only in future years against similar speculative business profits. The assessee appealed to the Appellate Assistant Commissioner who allowed the appeals. The Commissioner offurther took the matter in appeal to the Appellate Tribunal, which remanded the case for further investigation with a view to ascertain the extent to which the transactions would come within the meaning of proviso (a) to Explanation 2 of section 24(1) of the Act. On further hearing of the appeal after remand, there was a difference of opinion between the two Members of the Tribunal on the following point"Whether the losses of Rs. 26, 248 and Rs. 14, 043 incurred by the assessee in the settlement of forward contracts in cocoanut oil in which also he traded during the calendar years ended 1952 and 1953, the previous years for the respective assessment years5, are deductible as business losses under section 10 in the respective assessments ?"3. Thereupon the President made a reference under section 5A(7) of the Act to three other Members of the Tribunal including himself. All the three members agreed with the Judicial Member and held that the two sums mentioned are not deductible as business losses under section 10 of the Act. At the instance of the assessee, the Appellate Tribunal referred the following questions of law for the opinion of the High Court under section 66(1) of the Act:" (1) Whether there are materials for the Tribunal to hold that the aforesaid transactions constitute speculative transactions in the nature of a business within the meaning of the first proviso to section 24(1) ?(2) Whether the losses are deductible under section 10 as business losses of the two assessment years55 ? "4. By its judgment dated April 5, 1962, the High Court answered the first question in the negative and the second in the affirmative. In other words, both the questions were answered in favour of the assessee

Reasoning: 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.