Case: Davenport &amp; Co. Pvt. Ltd Vs. Commissioner Of Income -Tax, West Bengal

The appellant (hereinafter referred to as the assessee) is a private limited company carrying on business in tea garden tools and requisites and also acting as agents for selling tea ; in fact the bulk of its income was from selling commission on tea. The assessment year in question is 1959-60 ; in the relevant previous year which ended on June 30, 1958, the assessee for the first time in its history entered into certain transactions in jute. On April 17, 1958, the assessee had contracted to purchase 1, 100 bales of B-Twill and 2, 500 bales of corn sacks ; the contract for B-Twill was with two parties, M/s. Raghunath & Sons (P.) Ltd. for 500 bales and M/s. Mahadeo Ramkumar for 600 bales. The corn sacks were all purchased from Tulsidar Jewaraj under three contracts for 800 bales, 1, 000 bales and 700 bales respectively. On June 18, 1958, the assessee entered into a contract with M/s. Lachhminarain Kanoria & Co. to sell the aforesaid quantities of B-Twill and corn sacks. The assessee had no godown for keeping the goods and had not handled them. The goods were in the godown of the mills and only the delivery orders addressed to the mills changed hands. The amount realised on sale to to M/s. Lachhminarain Kanoria & Co. came to Rs. 10, 49, 865. The assessee had, however, purchased the corn sacks and B-Twill for Rs. 11, 48, 399. The transactions thus resulted in a loss of Rs. 98, 534 to the assessee and the assessee claimed adjustment of this loss in the computation of its income for the assessment year 1959-60. The Income-tax Officer held that the transactions involving mere transfer of delivery notes and not actual delivery of the goods were of a speculative character as contemplated in Explanation 2 to section 24(1) and the loss could be set off only against speculation profits, and as there were no speculation profits in that year, he held that the loss would be carried forward and set off against speculation profits in the future. The Appellate Assistant Commissioner on appeal by the assessee held that the transactions were not speculative and the loss should be treated as business loss relying on two decisions of this court : Bayyana Bhimayya v. Government of Andhra Pradesh and Duni Chand Rataria v. Bhuwalka Brothers Ltd. The department took an appeal to the Tribunal and the Tribunal relied on the decision of the Calcutta High Court in D. M. Wadhwana v. Commissioner of Income-tax, to hold that this case came within the scope of section 24(1) read with Explanation 2 and restored the order of the Income-tax Officer. On the application of the assessee the Tribunal referred to the High Court the following question of law" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the transactions described above entered into by the assessee were speculative transactions within the meaning of Explanation 2 to section 24(1)? "The High Court answered the question in the affirmative and against the assessee. The correctness of that decision is challenged in this appeal.

Court's reasoning:
The observation made in this context does not also seem to us relevant to the question under consideration in the appeal beforeagain, the question that was considered has hardly any connection with section 24 of the Indian Income-tax Act, 1922, and the observations made in this case cannot be a guide to the solution of the problem arising in the case before usSection 6 of the Indian Income-tax Act, 1922, enumerates the heads of income chargeable to income-tax. Section 24(1) of the Act provides that where an assessee sustains a loss under any of these heads in any year, he shall be entitled to have the loss set off against his income, profits or gains under any other head in that year. This general provision is qualified by the first proviso which permits the set-off of a loss in speculative business against the assessees profits and gains, if any, in a similar businessa transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of this Explanation. The definition of " delivery " in section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolical delivery has no bearing on the definition of speculative transaction in the Explanation. A transaction which is otherwise speculative would not be a speculative transaction within the meaning of Explanation 2 if actual delivery of the commodity or the scrips has taken place ; on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative according to Explanation 2 if there is no actual delivery of the commodity or the scrips. The Explanation does not invalidate speculative transactions which are otherwise legal but gives a special meaning to that expression for purposes of income-taxD. M. Wadhwana v. Commissioner of Income-tax, on which the Tribunals decision in this case is based, the Calcutta High Court observed" The Explanation to section 24(1), however, does not prevent persons from entering into contracts in which the buyers and sellers may not actually hand over the goods physically. The Explanation is only designed at segregating for income-tax purposes loss sustained in transactions of a certain kind. It may be that such transactions are not speculative in the light of section 30 of the Contract Act ... In enacting the Explanation 2 of section 24(1) of the Income-tax Act, the legislature did not intend to affect any transaction of sale wherein the goods were not physically delivered by the seller to the buyer but only laid down that if there was no actual or physical delivery, the loss, if any, would be a loss in a speculative transaction which could be allowed to be set off only against a profit in a transaction of the same nature ... The object of the Explanation is not to invalidate transactions which are not completed by actual delivery of the goods but only to brand them as speculative transactions so as to put them in a special category for income-taxour opinion this is a correct statement of the law. This aspect of the matter was not considered in Ragunath Prasad Poddar v. Commissioner of Income-tax . We think the law on the point was correctly stated in D. M. Wadhwana v. Commissioner of Income-tax, and in our opinion the question referred to the High Court in the present case has been correctly answered.