Holding

Transactions not settled by actual delivery or transfer of the commodity are speculative under Explanation 2 to Section 24(1) of the Indian Income Tax Act, 1922.

Summary

Jute Investment Co. Ltd., a trader in gunny bags, entered into four purchase and four sale contracts with the same party, settling the transactions by transferring pucca delivery orders without any physical delivery of the bags, resulting in a loss of Rs. 2.25 lakh which it claimed as an ordinary business loss. The Income Tax Officer held the transactions to be "speculative" under Explanation 2 to Section 24(1) of the Indian Income Tax Act, 1922, and disallowed the loss. While the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal ruled in favour of the assessee, the Calcutta High Court, on reference, held the transactions speculative. The Supreme Court affirmed the High Court, stating that a speculative transaction is one settled without actual delivery or transfer of the commodity, and dismissed the appeal.

Issues considered

Whether transactions settled by transfer of pucca delivery orders without physical delivery of the commodity constitute a "speculative transaction" within the meaning of Explanation 2 to Section 24(1) of the Indian Income Tax Act, 1922.

Legislation cited

Income Tax Act, 1922s. 24(1), s. 66A(2)

Subjects

speculative transactionincome taxSection 24(1)business lossdelivery ordersphysical deliverycommoditytax assessment

Judgment

902

A JUTE INVESTMENT CO. LTD.
v.
COMMISSIONER OF INCOME TAX, WEST BENGAL,
CALCUTTA .
October 10, 1979
B
[N. L. UNTWALIA AND R. S. PATHAK, JJ.]
Indian Income Tax Act 1922, S. 24(1), Explanation 2-Transactions of pur~ "">r-~·
chase. and sale between the same parties by mere transfer of delivery orders
without physical delivery of goods-Transactions if speculative.
The assessee carried on business in purchase and sale of gunnies. By four
c different contracts it purchased gunny bags from one party and sold them to the
same party by four different contracts, all of which resulted.in a loss of Rs. 2.75
lakhs. The contracts were transferable specific delivery contracts falling within
the scope of the bye-laws of the East India Jute & Hessain Exchange Limited
which were approved by the Forward Market Commission. In these transactions
there was_ no physical delivery of goods and there was a transfer of delivery
orders only.
D
Before the Income Tax Officer, the assessee claimed the loss as an ordinary
business loss on the ground that the 1ransactions were entered .into in the ordinary
course of business.
The Income Tax Officer rejected the claim and held that tho transactions in
which delivery were handed over without physical delivery of the goods were
"speculative transactions" within the meaning of Explanation 2 to S. 24(1) -Of
E the Indian Jacome Tax Act.
The Appellate Assistant Commissioner held in favour of the assessee and
his order was upheld by the Income Tax Appellate Tribunal. The High Court
however answered the reference by the Tnbunal in favour of the Revenue and
against the assessee. ·
F Dismissing the appeal this Court,

HEID ; 1. The High Court was right in answering the question i11 favour
of the Revenue. [905 G]
2. Explanation 2 to S. 24(1) defines a speculative transaction as ''a transac>
tion 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
G delivery or transfer of the commodity or scrips .. " What is contemplated by
the explanation is a real or factual delivery or transfer of the commcxlity and
not a notional delivery or transfer. [905 AJ
3. Over-ruling its earlier view in Raghunath Prasad Poddar v. Co1nn1issioner
of Income Tax, Calcutta, (1973) 90 I.T.R. 140, this Court in Da>enport & Co.
(P) Dtd. v. Commissioner of Income Tax, West Bengal ll, (1975) 100 J.T.R.
B 715, upheld the view of the Calcutta High Court that 'unless the transactioo
was settled by delivery or transfer of the commodity it would be a speculative
transaction by reason of Explanation 2 to S. 24(1)'. · [905 B-E]

/
JUTE INVESTMENT co. v. C.l.T. (Pathak, J.) 903

In the instant case, the seller and the buyer of the gunny bags \·vas the same. A
There was no actual delivery or transfer of the gunny bags, but the contracts
were settled between the parties by transfer of pucca delivery orders only.
[905F]

Wadhwana (D. N.) v. Commissioner of Income Tax, W.B. (1966) 61 I.T.R.
154, Budg.~ Budge Investment Co., Ltd. v. Co1nmissioner of Income Tax, West
Bengal I Calcutia, (1969) 73 I.T.R. 772, Nana/al M. Sanna & Co. (1') Ltd. v. B
Commissioner of Income Tax, West Bengal-II, (1969) 73 I.T.R. 713 and Murli-
dluir Jhunjhunwala v. Con1missioner of Income Tax~ West Bengal-II, (1969) 73
J.T.R. 727; approved.

CIVIL AFPELLATE JURISDICTION : Civil Appeal No. 2259 of 1972.
From the Judgmeut and Order dated 6-1-1971 of the Calcutta High
Court in I.T.R. No. 86/671. c
P. V. Kapoor, Anil Sachthey, Miss Bina Gupta and Praveen
• •
Kumar for the Appellant.
'-< P. A. Francis and Miss Subhashini for the Respondent.
The Judgment of the Court was delivered by D
PATHAK, J.-This appeal by certificate under s. 66A(2) of the
Indian Income Tax Act, 1922 raises the question whether the trans-
actions in which the assessee was engaged were "speculative transac-
tions" as defined by Explanation 2 to section 24(1) of that Act.
The arnessee carries on business in gunnies. The total purchases E
disclosed by the assessee for the year ended June 30, 1960 amounted
to Rs. 1,01,51,225 and the total sales during that year were shown
at Rs. 1,03,27,208. The purchases a'nd sales included certain
transactions with M~ssrs Kesardeo Shyamsunder. Under . contract
Nos. 96 dated November 11, 1959, 108 dated November 12, 1959,
643 dated April 27, 1960 and 836 dated May 25, 1960, the assessee F
claimed that 5,700 bales of gunny bags were purchased for
Rs. 22,05,000/-. The assessee §ays that he sold them to the same
party under contract Nos. 520 dated March 30; 1960, 540 and 541
dated April 1, 1960 and 610 dated April 19, 1960 for Rs. 19,79,550.
The resvlt was a loss of Rs. 2,25,450. The contracts were transferable
specific de:livery contracts falling within the scope of the bye-laws G
of the East fadia Jute and Hessian Exchange Limited, the bye-laws
having been passed with the concurrence of the Forward Market
Commiss.ion. Admittedly, in the aforementioned transactions of
purchase and sale there was no physical delivery of goods. There
was a transfer of delivery orders only.
H
In the income tax assessment for the assessment year 1961-62,
the relevant previous year being the year ended June 30, 1960, the
904 SUPREME COURT llEPORTS · [1980] 1 S.C.R.

A assessee showed the loss of Rs. 2,25,450/- as an ordinary business
loss. The Income Tax Officer rejected the claim and held that the
transactions in which delivery orders were handed over without physi-
cal delivery of the goods were "speculative transactions" within the
meaning of Explanation 2 to s. 24(1) of the Indian Income Tax Act.
He observed that the loss of Rs. 2,25,450/-, being a loss in specula-
B tion business, would be treated separately. The assessee appealed,
and the Appellate Assistant Commissioner took the view tiJ.at as
"pucca" delivery orders had been transferred, there was a transfer of
documents of title to the goods and, therefore, actual delivery of the
goods must be deemed to have been given. On appeal by the Revenue,
the Income Tax Appellate Tribunal found that the only transaction 1
c which had suffered a loss was the transaction under contract No. 520
which was closed by the reverse purchase contract No. 836. The
less suffered was Rs. 2,99;700/· but the claim made by the assessee
quantified the loss at Rs. 2,25,450/-. In respect of that transaction
the Appellate Tribunal observed that on purchase when the assessee
was deemed to have received delivery the full amount was paid by
D cheque, and similarly when the assessee "sold forward" the full sum
was also paid through cheque. It referred to the trade usage that
cheques were paicl when bills were received and on payment thereof
the pucca delivery orders changed hands. Therefore, said the Tri-
bunal, in form it was a transaction of delivery for cash, and was not
a speculative transaction.
E
At the instance of the Revenue, the Appellate Tribunal referred
the following question to the High Court at Calcutta : -
"Whether, on the facts and in the circumstances of the
case, the loss of Rs. 2,25,450/- was a loss in speculation
transaction within the meaning of Explanation 2 to s. 24 ( 1)
F of the Indian Income Tax Act, 1922 ?"

The reference was answered by the High Court jn favour of the
Revenue.
In this appeal, it is contended on behalf of the assessee that the
G High Court erred in holding that in order to take a transaction out
of the definition of "speculative transaction" in Explanation 2 to
s. 24(1) of the Indian Income Tax Act, 1922, there must be actual
delivery of the commodity itself and that delivery of pucca delivery
orders without anything more did not constitute "actual delivery"
within the meaning of that provision. It is urged that the giv'.ng and
H taking of pucca delivery orders amounts to actual delivery of goods,
Pucca delivery orders, it is stated, are documents of title to goods. In
our opinion, the contention cannot be accepted. Explanation 2 to s.
JUTE INVESTMENT CO. V. C.I.T. (Pathak, J.) 905

24 (1) defines a speculative transaction as "a trausactiou iu which a A
·contract for purchase and sale of any commodity including stocks
~nd shares is periodically or ultimately settled otherwise than by the
• actual cielivery or transfer of the commodity or scrips ........ ". It
is apparent that what is contemplated is a real or factual delivery or

.
transfer, and not a notional delivery or transfer.
The Calcutta High Court, in a series of decisions including
B
Wadhwana (D.M.) v. Commissioner of Income Tax W. B.(') Budge
Budge Investment Co. Ltd. v. Commissioner of Income Tax, W. Bengal
I, Calcutta('), Nana/al M. Varma & Co. (P) .Ltd. v. Commissioner
of Income-t'ax West Bengal(') a'ld Murlidhar Jhunjhunwala v.
Commissioner of Income Tax, West Bengal II('), held that unless c
the transaction was settled by actual delivery or transfer of the com-
modity it would be a speculative transaction by reason of Explana-
tion 2 to s. 24 ( 1). Subsequently, in Raghunath Prasad Poddar v.
Commissioner of Income Tax, Calcutta(•) the Supreme Court took a
more liberal view aud laid down that if the original transaction of sale
and purchase of goods was followed by one or more subsequent con- D
tracts in respect of the same goods the original transaction would not
be a speculative trausaction if actual delivery of the goods sold was
·effected to the ultimate purchaser ·of the pucca delivery orders. The
restricted view taken by the Calcutta High Court iu Nana/al M.
Varma & Co. (P) .Ltd. (supra) was dispproved. But recently a
larger bench of this Court in Davenport & Co. P. Ltd. v. Commissioner E
·Of Incom" Tax, West Bengal ll(6) has overruled Raghunath Prasad
.Poddar (supra) and preferred the strict view adopted by the Calcutta
High Court. The case before us, however, is a simple one. The
transactions took place between the assessee and Messrs Kesardeo
·Shyamsunder alone. It is not disputed that there was no actual deli-
very or transfer of the gunny bags. The contracts were settled bet- F
ween the parties by transfer of pucca delivery orders.
Accordingly, we hold that the High Court was right in answering
the question in favour of the Revenue and against the assessee.
The appeal is dismissed with costs.
G
N.V.K. Appeal dismisud.

(1) (1966) 61 I.T.R. 154.
(2) (1969) 73 l.T.R. 772.
(3) (1969) 7.l I.T.R. 713.
(4) (1969) 73 I.T.R. 727·
'(5) (1973) 90 I.T.R. 140.
<(6) (1975) 100 I.T.R. 715.