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Petitioner: JUVVI SUBBARAMAIAH & Co. VS Respondent: COMMISSIONER OF INCOME-TAX, ANDHRA PRADESHHonorable Justice VENKATESAMM. J. Swamy,C. Kondaiah
1964 P T D 496
1964 P T D 496
[Andhra Pradesh (India)]
Before Seshachelapati and Venkatesam, JJ
JUVVI SUBBARAMAIAH & Co.
Versus
COMMISSIONER OF INCOME‑TAX, ANDHRA
PRADESH
Case Referred No. 6 of 1961, decided on 24th August 1962.
Loss‑Set‑off‑Principles‑Set off against profits of any other business‑Loss in speculative business‑Whether can be set off against profits of other business‑Speculative transaction‑Test Scope of Expl. 2 to S. 24 (1)‑Interpretation of Statutes‑Taxing Acts‑Indian Income‑tax Act, 1922, Ss. 10, 24 (1), prov., Expl. 2.
The expression "ultimately settled otherwise than by the actual delivery or transfer of the commodity" in Explanation 2 to section 24 (1) of the Indian Income‑tax Act, 1922, means by implication that even if at the outset the parties to a transaction intended the performance or to claim the difference in price, if ultimately the contract is settled otherwise than by actual delivery or transfer of the commodity, it is a speculative transaction for the purposes of set‑off under section 24(1). Explanation 2 is exhaustive and does not permit the importing into income‑tax law of the general notions of wagering or speculative transactions in the domain of contract law. The effect of this Explanation is two fold ‑ (i) where actual delivery of goods, or transfer of the commodity or scripts takes place, the transaction is not ' a speculative transaction, however highly speculative it may be in fact; and (It) even if the original intention was not to gamble in differences, if in fact the contract is settled by payment of the difference it is a speculative transaction under the Act.
In the construction of a taxing Act the Court has primary regard to the statutory words themselves and to their proper judicial construction. Taxing Acts are to be construed strictly in the sense that one has to look merely at what is clearly said, there being no room for any intendment; but a fair and reasonable construction must be given to the language without leaning to one side or the other. In applying the terms of the charge or the terms of an exemption, no considerations of equity or hardship affect the construction of the Act.
In order that proviso (a) to Explanation 2 of section 24 (1) may apply, the following conditions must be satisfied: (i) There should be a contract for actual delivery of goods manufactured by the assessee or merchandise sold by him. (ii) The assessee must have intended to guard against loss through future price fluctuations in respect of those contracts. (iii) In order to guard himself, the assessee must have entered into a contract in respect of raw materials or merchandise in the course of his manufactur ing or merchanting business.
The first proviso to section 24(1) of the :Indian Income‑tax Act, 1922, does not apply to a case where a loss of any business is sought to be adjusted or set off against the profits of any other business, profession or vocation, as such adjustment is to be made under section 10 itself, and subsection (1) of section 24 applies only to cases where loss under one head is sought to be set off against profits under another head. The substantive part of subsection (1) itself would not apply in such a case, and, con sequently, the proviso thereto would not apply either.
It is not open to an assessee to adjust the loss sustained In speculating business against his income derived from other business which are not of a speculative character, but he can lay a claim to a set‑off only against profits derived from a business of a speculative nature.
Generally speaking, where an assessee sustains a loss, it may be set off against profits in one of four ways, viz.
1. If loss is incurred in respect of any source of income, it must be set off against the profit from the same source before the income from the source can be arrived at. This set-off is also appropriately called "deduction" and is allowed on ordinary commercial principles of computing profits.
2. If after allowing the set‑off or deduction, the net result is still a loss, that loss may be set‑off against profits from another source under the same head, and this is allowed because income under each head is computed by adding together the profits from the several sources falling under the same head. For example, where a person carries on several businesses, or both business and profession, he is entitled, apart from section 24, to set off the losses in one business against the profits in another, or losses in business against professional earnings, and tax is levi-able only on the balance of profits after deducting such losses. In such a case section 24 (1) would not be attracted.
3. After setting off losses against profits under the same head, if, the net result is still a loss, it may be set off under section 24 (1) against profits of the same year under any other head. For example, loss in business may be set off against income from property, and loss under the head "income from other sources" may be set off against profits of "business". The exceptions to this rule, however, are speculative loss, and loss falling under the head "capital gains", which cannot be set off against income falling under any other head.
4. If the loss cannot be set off under subsection (1) of section 24 because of the absence or inadequacy of profits of the same year under any other head, it may, under subsection (2) be carried forward and set off against the profits of a subsequent year.
Jummarlal Surajkaran v. Commissioner of Income‑tax (1963)
47 I T R 809 fol.
[Cases referred to.]
M. J. Swamy for the Assessee.
C. Kondaiah for the Commissioner.
JUDGMENT
VENKATESAM, J.‑---- The only question referred to this Court for decision under section 66(1) of the Indian Income‑tax Act, 1922 (hereinafter referred to as "the Act") is, "whether, on the facts and in the circumstances of the case, the assessee was entitled to the set‑off of the loss of Rs. 12,300." The relevant facts which appear from the agreed statement of the case drawn up by the Tribunal are as follows :‑‑
The assessee is a firm carrying on business in turmeric. The assessment year is 1956‑57, for which the corresponding previous year is the Diwall year ended November 14, 1955. One of the contentions before the Department as well as before the Tribunal related to the disallowance of Rs. 22,257, which was the loss incurred in a business of speculation. The loss other than Rs. 12,300 was incurred in respect of contracts admittedly in the nature of teji‑mandi contracts prohibited by section 19 of the Forward Contracts (Regulation) Act, 1952, and was disallowed by the Department on the ground of its being an illegal loss. The contention that that loss also should be allowed was given up even before the Tribunal, and also before us, and the argument on behalf of the assessee is confined to the loss of Rs. 12,300. That loss arose in respect of two contracts for future delivery of turmeric, and they resulted in payment of the difference in price of Rs. 10,500 in respect of one contract, and Rs. l,800 in respect of the other, totalling Rs. 12,300. Both the contracts provided for delivery of the goods but the goods in fact were not delivered, though the assessee had stock of the same, because he anticipated that by delivering the goods bin the scheduled dates, he would have suffered heavy losses, and hence paid the price differences.
The Department as well as the Tribunal rejected the assessees contentions, and held that the two transactions were speculative transactions, and the loss resulting there-from could not be treated as a trading loss In computing the profits or gains of any business, profession or vocation carried on by him under section 10(1) of the Act. They also held that the transactions did not amount to hedging transactions protected by clause (a) of the proviso to Explanation 2 to section 24(1). The Tribunal, however, differing from the departmental officers, held that the speculation loss having been proved, it should be allowed to be carried forward and set off against future speculation profits under section 24(2) of the Act.
The assessee is aggrieved by this order, and hence this reference.
Sri Swaminathan, the learned counsel for the assessee, raised the following contentions: -
(1) The two transactions are not speculative, but simply forward contracts, as the test of a speculative or wagering contract is proof of the fact that the common intention of the parties, even at the inception, was only to deal in difference, and in no circumstances to call for or give delivery, which is not the fact in the instant case, and that the test is the same even in income‑tax law. He, therefore, contends that the sum of Rs. 12,300 representing the loss on the two contracts should be treated as trading loss in computing the profits under section 10(1).
(2) Even assuming the transactions are speculative within the meaning of Explanation 2, they are protected by clause (a) of the proviso to that Explanation.
(3) It is incidentally argued that the loss of Rs. 12,300 only consists of two transactions, and cannot be said to constitute the business in speculative transactions within the meaning of Explanation 1 to section 24(l) of the Act.
In order to appreciate these contentions, it is necessary to extract the relevant provisions of the Act. Section 6, with the marginal note "Heads of income chargeable to income‑tax", enacts thus: --
Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income‑tax in the manner hereinafter appearing, namely :‑‑‑
(iii) Income from property.
(iv) Profits and gains of business, profession or vocation.
(v) Income frome other sources.
Section 10, with the marginal note "business", lays down :‑
10. (1) The tax shall be payable by an assessee under the head `Profits and gains of business, profession or vocation', in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely . . . .
Section 24, with the marginal note "set‑off of loss in comput ing aggregate income", reads thus :‑
"24. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year.
Provided that in computing the profits and gains chargeable under the head "Profits and gains of business, profession or vocation', any loss sustained in speculative transactions which are in the nature of a business shall 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
Explanation 1.‑Where the speculative transactions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business.
Explanation 2.‑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 com modity 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.
shall not be deemed to be a speculative transaction."
It may be noted that the first proviso to section 24(1) as well as Explanations 1 and 2 to that subsection and section 24(2) were inserted by the Income‑tax (Amendment) Act, 1953, with effect from 1st April 1952.
It is now well‑settled that under section 6, which classified income under six heads, income‑tax is only one tax which is levied on the sum total of the income classified under the several heads enumerated therein, and is not a collection of distinct taxes levied separately on each head of income. This position is apparent from section 24(1) of the Act.
Generally speaking, where an assessee sustains a loss, it may be set off against profits in one of four ways, viz.
1. If loss is incurred in respect of any source of income, it must be set off against the profit from the same source before the income from the source can be arrived at. This set‑off is also appropriately called "deduction", and is allowed on ordinary commercial principles of computing profits.
2. If after allowing the aforesaid set‑off or deduction, the net result is still a loss, that loss may be set‑off against profits from another source under the same head, and this is allowed because income under each head is computed by adding together the profits from the several sources falling under the same head. For example, where a person carries on several businesses, or both business and profession, he is entitled, apart from section 24, to set‑off the losses in one business against profits in another, or losses in business against professional earnings, and tax is leviable only on the balance of profits after deducting such losses. In such a case, section 24(1) would not be attracted.
3. After setting off losses against profits under the same head, if the net result is still a loss, it may be set‑off under section 24(1) against profits of the same year under any other head. For example, loss in business may be set off against income from property, and loss under the head "Income from other sources" may be set off against profits of "Business". The excep tions to this rule, however, are speculative loss, and loss falling under the head "Capital gains", which cannot be set off against income falling under any other head.
4. If the loss cannot be set off under subsection (1) of section 24 because of the absence or inadequacy of profits of the same year under any other head, it may, under subsection (2), be carried forward and set off against the profits of a subsequent year (vide Anglo French Textile Co. Ltd. v. Commissioner of Income‑tax ((1953) 23 I T R 82).
It may be mentioned that the Supreme Court in the aforesaid case held that the right of carrying forward of loss could be claimed under section 24(2) only if there were profits under another head against which part of the loss could be set off under subsection (1), and if there was no income under any head at all, the loss could not be carried forward. This decision is however superseded by the Income‑tax (Amendment) Act, 1953, by amend ing subsection (2) of section 24, which in terms provides that the whole loss can be carried forward where the assessee had no other head of income, though the right of carrying forward of losses is made subject to the restrictions enumerated in the proviso to that subsection.
The contention on behalf of the assessee is that even after the amendment to section 24 in 1953, the loss in question cannot be said to be the result of speculative transactions, but is an ordinary trade loss. For this purpose, the petitioner's counsel relies upon the decision of this High Court in Alapati Ramamurthi Gelli Krishna Murthi & Co. v. Maddi Seetharamayya (A I R 1958 A P 427, 434) wherein it was laid down, on a review of the case‑law, as follows :‑
"It is also well settled that a contract cannot be held to be a wagering contract without any proof of the fact that the common intention of the parties at its inception was only to deal in differences and in no circumstances to call for or give delivery ..
The mere fact that on settlement of some contracts, the differences were entered in the books does not establish that it was the intention of the parties not to call for and give delivery."
In that case, a claim was made for damages on the ground that the defendant committed breach of a contract to sell gunnies, and it was resisted on the ground that the contract was a wagering contract. Subba Rao, C. J. (as he then was), speaking for the Court, made the above observations, and, on an examina tion of the evidence, held that the contract was not a wagering contract. No exception can be taken to the test laid down in that decision for deciding whether or not a particular contract is a wagering contract within the meaning of section 30 of the Indian Contract Act.
The other decision relied on by the learned counsel for the assessee is Soundarapandia Nadar & Brothers v. Commissioner of Income‑tax ((1950) 18 I T R 163). In that case, the assessees who were carrying on business in grain and rice at Tuticorin in British India, bought the goods at Rangoon through their agents and imported them to Tuticorin where they were sold. The assessees were also entering into forward contracts in respect of these goods through their agents at Rangoon, who sent to them from time to time statements of account in respect of these transactions which were entered in a separate folio in the same account books at Tuticorin. The financing of all the transactions was from Tuticorin and the control of all the transactions was under a single management. In 1937‑38. the assessee carried on business in forward contracts but they stopped it in 1938‑39. They again carried it on in the years 1939‑40 and 1940‑41 when it resulted in a loss. In 1941‑42 the assessee did not deal in forward contracts but they claimed under section 24(2) of the Act that the unadjusted balance of loss carried forward from 1939‑40 and 1940‑41 should be set off against the profits of the year 1941‑42. The Department and the Appellate Tribunal disallowed the claim. But a Bench of the Madras High Court held that the dealing in forward contracts carried on by the assessee in the Rangoon grain market was a part of the general business of the assessee as dealers in rice and grain, and they were therefore entitled to set off the loss against the profits of the year 1941‑42 under section 24(2) of the Act.
Admittedly, the learned Judges In that case were construing section 24(2) of the Act before its amendment in 1953, and the main question for consideration was, whether to dealings in different commodities, or the carrying on of different lines of business, would constitute the same business or not, within the meaning of section 24(2). On the facts of that case, the learned Judges found that under the forward contracts the assessee had the undoubted right to demand delivery in case of purchases, and that it could not be said that from the beginning they did not entertain the intention of taking delivery under those contracts, and had in view only speculation upon the fluctuations of the grain market at Rangoon, that the agents sent extracts of accounts to Tuticorin, and they were all entered in the same account books, though in a different folio, anal that the financing of all the transactions, whether they related to‑ purchases or whether they related to forward contracts, was from Tuticorin and the control of all the transactions was under a single management. It was held that the mere fact that the forward contract business could be separated, if trouble was taken to go through the accounts and to separate the dealings, does not make this business a distinct business from the other business of the assessee, as it is the common practice of every merchant to enter under separate heads each line of business in order to ascertain whether that particular line was fetching profit or ending in loss, and that circumstances did not give the business a distinctive character so as to detract from its being the same business within the meaning of section 24(2) of the Act. We fail to see how this decision assists the assessee in the interpretation of the section after the amend ment.
Section 24, it must be observed, is ill‑drafted. The effect of section 24(1) after the amendment in 1953, may however be stated thus .‑
(1) Where an assessee sustains a loss of profits or gains in any year under any of the heads in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year.
(2) According to its first proviso, in computing the profits and gains chargeable under the head "Profits and gains of business, profession or vocation", any loss sustained in specula tive transactions, which are in the nature of a business shall 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. In other words, loss sustained in specula tive transactions, which are in the nature of a business, shall be taken into account to the extent of the amount of profits and gains in any other business, consisting of speculative transac tions. The ingredients of the proviso, therefore, are (i) the loss sustained should relate to speculative transactions ; (ii) those transactions should be in the nature of a business ; and (iii) the loss shall be taken into account only to the extent of profits and gains in any other business consisting of specula tive transactions.
(3) Explanation 1 lays down that, where speculative transac tions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business, i.e., speculative transactions in the nature of a business shall be distinct and separate from any other business.
(4) Explanation 2 gives the meaning of "speculative trans action" as a transaction in which a contract for purchase and sale of any commodity including stocks and shares is periodi cally or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips. This Explanation reveals that, if a contract for the purchase and sale of any commodity is periodically settled otherwise than by actual delivery or transfer of the commodity, or ultimately settled otherwise than by actual delivery or transfer, it is speculative transaction.
The contention of Sri Kondaiah on behalf of the revenue is that though in the law of contract, when there is no intention at the outset to accept differences, a transaction will not Esc specula tive, in the income‑tax law that is not the position, and that according to Explanation 2, even if the intention of the parties at the outset was to take delivery of the goods, if in fact the contract was settled otherwise than by actual delivery or transfer of the goods, it is a speculative transaction. This contention of the Department, in our opinion, must be upheld.
It is well established that the ordinary canons of statutory construction apply to taxing Acts. But, in addition, there arc some canons which have special reference to such Acts. In the construction of a taxing Act the Court has primary regard to the statutory words themselves and to their proper judicial construc tion. Taxing Acts are to be construed strictly, in the sense that one hag to look merely at what is clearly said, there being no room for any intendment ; but a fair and reasonable construction must be given to the language without leaning to one side or the other. Whether in applying the terms of the charge or the terms of an exemption, no considerations of equity or hardship affect the construction of the Act (vide Halsbury's Laws of England, third edition, volume XX, paragraph 32, page 27).
Bearing these principles in mind, Eplanation 2 may now be examined. It, no doubt, speaks of a periodical settlement of the differences in price otherwise than by actual delivery or transfer, but it also speaks of the ultimate settlement of the contract other wise than by actual delivery or transfer of the goods. The words
"ultimately settled otherwise than by the actual delivery of transfer of the commodity" are very significant, and must be given effect to. They can only mean, by implication, that even if at the outset the parties intended the performance or to claim the difference in price, if ultimately the contract is settled otherwise than by actual delivery or transfer of the commodity, it is a speculative transaction. The reason for the Explanation is quite obvious, as the Legislature is aware that, under the general law, it will not be a speculative transaction. This definition, to our minds, is exhaustive, and does not permit the importing into income‑tax law the general notions of wagering or speculative transactions in the domain of contract law. The effect of this Explanation is thus two‑fold : (i) where actual delivery of goods, or transfer of the commodity or scrips takes place, the transaction !s not a speculative transaction, however highly speculative it may be in fact ; and (ii) even if the original intention was not to gamble in differences, if in fact the contract…
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