1974 Supreme(Del) 31

High Court Of Delhi
DELHI FLOUR MILLS CO.LIMITED - Appellant
Versus
COMMISSIONER OF INCOME TAX - Respondent
I.T.R. 52 of 1969
Decided On : 02/08/1974

The loss sustained by the assessee in speculative transactions cannot be set off against its profits in other business, unless the transactions are in the nature of hedging transactions within the meaning of proviso (a) to Explanation 2 of section 24(1) of the Indian Income-tax Act, 1922.

Headnote:

INCOME TAX - Loss in speculative transactions - Whether loss in forward transactions in Matra (a substitute of gram) can be set off against the company's profits of the business - Whether business expenditure claimed for assessment years 1957-58 and 1958-59 under section 10(2)(xv) of the Indian Income-Tax Act, 1922, has rightly been disallowed.

Fact of the Case:

The assessee, M/s. Delhi Flour Mills Co. Ltd., New Delhi, carried on the following businesses: 1. Grinding of wheat for manufacturing atta and wheat products. 2. Manufacturing of ice and maintaining a cold storage. 3. Washing, calendering and dyeing business which is a part of the hosiery department. During the accounting year relevant to the assessment year 1957-58, the assessee entered into forward transactions in Matra (a substitute of gram). These transactions comprised purchases amounting to Rs. 6.82,141.00 and sales amounting to Rs. 6,16,124.00. There was thus a loss amounting to Rs. 66,417.00 resulting from these forward transactions. These transactions were concluded not by actual delivery of the goods but by payment of differences. These transactions were, therefore, in the nature of "speculative transactions" within the meaning of Explanation 2 to section 24(1) of the Act. The assessee claimed a set off of the loss of Rs. 66,417.00 which it had sustained in these forward transactions on two grounds, namely: (i) that these transactions were in the nature of hedging transactions which were saved by the proviso (a) to Explanation 2 of section 24(1) of the Act; and (ii) that even if these transactions were in the nature of speculative transactions, the losses sustained by the assessee in such transactions were liable to set off against its profits in other business.

Finding of the Court:

1. The loss sustained by the assessee in the forward transactions in Matra cannot be set off against its profits in the business of manufacturing atta and other wheat products, as the forward transactions were not in the nature of hedging transactions within the meaning of proviso (a) to Explanation 2 of section 24(1) of the Act. 2. The assessee is entitled to the deduction of the full amounts for which it had made provision for gratuity payable to its employees under the agreement dated 14-2-1956 in the two years under reference.

Issues: 1. Whether the loss of Rs. 66,417.00 was allowable under section 10(1) of the Indian Income-tax Act, 1922 or could be set off against the company's profits of the business under proviso (a) to Explanation 2 of section 24(1) of the said Act? 2. Whether on the facts and in the circumstances of the case, Rs. 52,633.00 claimed as business expenditure for assessment year 1957-58 and Rs. 11,578.00 claimed as such for assessment year 1958-59 under section 10(2)(xv) of the Indian Income-Tax Act, 1922, have rightly been disallowed?

Ratio Decidendi: 1. The plain language of proviso (a) to Explanation 2 of section 24(1) of the Act makes it clear that the raw materials or merchandise in respect of which the forward transactions have been made by a person must have a direct connection with the goods manufactured or merchandise sold by him. Otherwise, the use of the words "raw materials" would have no special significance. 2. The liability of the assessee for payment of gratuity to its employees under the agreement dated 14-2-1956 accrued during the years under reference, as the gratuity was payable to the employees on the happening of events which were certain, and the amount of the liability was also ascertainable.

Final Decision: 1. The first question is answered in the negative, i.e., against the assessee and in favour of the Revenue. 2. The second question is answered in the negative, i.e., against the Revenue and in favour of the assessee.