DAVENPORT & CO. PVT. LTD v. COMMISSIONER OF INCOME-TAX, WEST BENGAL

The appellant (hereinafter referre~ to as the assessee) is a pr!v.ate limited company carrying on business m t~a garden tools and. re9ms1tes and also acting as agents for selll.1g tea; m fact the bulk of. its mco!11e was from selling commission on tea. The assessment year m 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 tra!llsac- tions in jute. On April 17, 1958 the assessee had contracted to pur- clmse 1100 bales of B-Twill and 2500 bales of corn sacks; the contract for B-Twill was with two parties, M/s. Raghunatl) & Sons (P) Ltd. for 500 bales and M/s. Mahadeo Ramkumar for 600 bales. The corn sacks were all purchased from Tulsider J eweraj under three contracts for 800 bales, 1000' b>ales and 700 bales respectively. On June 18, .. --< I. ~I ~' )_ 18 2 SUPREME COURT REPORTS [1976] 1 s.c.R. 1958 the assessee entered into a contract with M/s. Lachhminarain Kenoria & Co. to sell the aforesaid quantities of B-Twill and corn sacks. The assessee had no godown for keeping the goods and had not Jrand led them. The goods were in the godown of the mills i1,1d only delivery orders addressed to the mills changed hands. The amount realised on sale to M/s. Lachhminarain Kanoria & Co. came to Rs. 10,49,865/-. The ussessee had however purchased the corn sacks and B-Twill for Rs. 11,48,399. The transactions thus resulted it1 a loss of Rs. 98,534/- to the assessee and the assessee claimed adjust ment of this loss in the computation of its J,1come for the assessment year 1959-60. The Income-tax Officer held that the transactions in volving mere transfer of delivery notes und not actual deliveri of the goods were of a speculative character as contemplated in explanation 2 to sec. 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: Bayana Bhimayya and Sukhdevi Rathi v. The Govt. of Andhra Pradesh (') and Duni Chaiul Rataria v. Bhuwalke Brothers Ltd. (2) 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, West Bengal(') to hold that this case came within the scope of sec. 24 ( 1) read with explanation 2 and res tored the order of the Income-tax Officer. On the application of the ;issessee the Tribunal referred to the High Court the following question uf law : "Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the transactions described above entered mto by the assessee were speculative tmnsactions within the meaning of explanation 2 to section 24(1)''. The High Court answered the question in the affrmativc and ngainst the assessee. The correctness of that decision is challenged in this appeal. Sectiaa 24(1) so far as it is material for the purpose of this appeal is in these tcfll1s : "Where any assessec 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 charge able under the head 'profits and gains of business, profession transactions or vocation', any loss sustained in speculative (I) (1961] 3 S. C.R. 267. (2) [1955] i S. C. R.1071. (3) (1966) 61 I. T. R. 154. B c [) E [I (~ II '-;. ) .i Jr A B c D E G .... DAVENPORT & co. v. C.1.T. (Gupta, J.) 183 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 : (The second proviso is not relevant for the present purpose.) Explanation 1 : Where the speculative transactions carried on are of such a nature as to constitute a business, the busi ness shall be deemed to be distinct and separate from any other business. Explanation 2 : A speculative transaction means a ftansac tion in which a coatract for purchase and sale of any com modity including stocks and shares is periodically or ulti- mately settled otherwise than by the actual delivery or trans fer of the commodity or scrips. (The rest of the section i:; also not relevant.)" Before us both sides admitted that the question is covered by the decision of this Court in Raghunath Prasad Poddar v. Commissioner uj Income-tax, Calcutta l') where it was held that such transactions were .10t speculative transactions within the meaning of explanation 2 to sec. 24(1). The learned counsel for revenue however prayed for re-consideration of the decision on a fresh examination of the problem. In Raghuna:h Prasad Poddar v. Commissioner of Income-tax, Calcutta (supra) the assessee, a company dealing in jute and jute goods, purchased pueca delivery orders (in short P.D.Os.) in respect of gunny bags from various parties after paying the full price of the goods covered by the delivery orders and P.D.Os. to buyers after receiving the price fixed for the sale of thOse the decision in D. M. Wadhwana goods. The Tribunal v. Commissioner of Income-tax (supra) held that the sales in question were speculative and consequently the losses suffered by the assessee in these transactions could not be set off against the profits mado by the assessee's non-speculative business. The High Court on reference following its earlier decisions in D. M. Wadhwana's case and Manalal M. Verma & Co. (P) Ltd. v. Commissioner of Income tax( 2 ) answer ed the questions referred to it, which are similar to the question for- mulated in this case, in favour of the revenue. This Court reversed the decision on appeal. transferred following The view taken in Rashundth Prasad' s case appears to be based on three earlier decisions of this Court. Duni Chand Rataria v. Bltuwalke Brothers Ltd. (supra) Beyanna Bhimayya and Sukhdevi Rathi v. The Gover1U11e11t of Andhra Pradesh (supra) and State of Andhra Pradesh v. Ko/la Sreeramamurthy( 8 ). The Raghunath Prasad's case proceeds like this : reasoning (I) (1973) 90 I. T. R. 140. (2) (1969) 73 I. T. R. 713. (3) [19631 IS. C.R. 18 184 SUPREME COURT REPORTS [1976] 1 S.C.R. To effect a valid transfer of any commodity, it is not necessary that the transfer in question should be followed up by actual de.livery of the goods to the transferee. Even if the goods are delivered .to the transferee's transferee, the first transfer also will be a valid transfer. What has to be seen in such cases is whether the ultimate purchaser of the P.D.Os. has taken actual delivery of the goods sold. It is errone- ous to think that if any transfer of the P .D.Os. is not followed up by actual delivery of the goods to the transferee, that transaction is to be considered as speculative. The following observation in Duni Chand Rataria v. Bhuwalke Brothers Ltd. (supra) was relied on in support of ·the; view taken : "Th~ sellers handed over these documents (like delivery orders) to the buyers against cash payment, and the buyers obtained these documents in token of delivery of possession of the goods. They in turn passed these documents from hand to hand until they rested with the ultimate buyer who took physical or manual delivery of possession of those goods. The constructive delivery of possession which was obtained by the intermediate parties was thus translated into a phvsical or manual delivery of possession in the ultimate analysis eliminating the unnecessary process of each of the intermediate parties taking and in his turn giving actual delivery of possession of the goods in the narrow sense of physical or manual delivery thereof." In Duni Chand Rataria's case this Court was interpreting the words "actual delivery of possession" occurrinq in sec. 2(1) (b )(i) of West Bengal Jute Gootls Future Ordinance, 1949. The question for determi nation in that case was whether certain contracts between the appel lant and the respondents could be called contracts involvin~ actnal delivery of possession of the goods concerned. Referring to the defini tion of "delivery" in sec. 2(2) of the Indian Sale of Goods Act, 1930 it was observed that this would include actual deliverv as also symbolic or constructive delivery, and having regard to the mischief which was sought to be averted by the promulgation of the Ordinance -to prevent persons who dealt in differences only and never intended to take delivery under any circumstances-it was held that the intend ment of the Ordinance was that "actual delivery of possession" was actual deliverv as contrasted with mere dealin~s in differences and such actiral delivery included within its scope symbolic and contructive delivery of possession. With respect, these observations made quite a different context do not appear to us to be of assistance in interoreting explanation 2 to sec. 24(1) of the Indian Income-Tax Act, 1922. The other decision referred to in Raghunath Prasad' s case, Bayanna Bhimayva and Sukhdevi Rathi v. The Government of A ndhra Pra desh ( sunra) was a case under the Madras General Sales Tax Act, The appellant in that case who dealt in gunnies eiatered into 1939, contracts with two mills agreeing to purchase gunnies at a cermin rate A B C D E F G H .... DAVENPORT & co. v. C.I.T. (Gupta, J.) 18 5 A B c D E F G H for future delivery and also entered into agreements with third parties by which they charged something extra from the third parties and handed over to them the delivery orders described as kutcha delivery The mills however did 11ot accept the third parties as con orders. tracting parties but only as agents of the appellants. The tax authori ties treated the transaction between the appellants and the third parties as a fresh siale and sought to levy sales tax on!this as well, to.which the appellants objected saying that tljere was Only one sale. It was held that a delivery order being a document of title to the goods cover ed by it, possession of the document no( only gave one the right to recover the goods but also to transfer them to another by endorsement or delivery, and that there being two separate transactions of sale, one between the mills and the original purchasers, and the other between the original purchasers and the third parties, tax was payable at both the points. fa reaching this conclusion the court observed : "At the moment oi delivery by the mills to the third par ties, there were, in effect, two deliveries, O~(> by the mills to the appellants, represented, in so far as tbe mills were con cerned, by the appellants' agents, the third' parties, and the other, by the appellants to the third parties as buyers from the appellants. These two deliveries might synchronise point of tlme, but were separate, i\:l point of fact and in the eye of law." Here also the only question was whether on the facts of the case there were two separate transactions of sale so that iax was payable at both the points under the Madras General Sales Tax Act, 1939. The observation made in this context does not also seem to us relevant to the question under consideration i\:l the appeal ibefore us. Another authority on which the decision in "Rtighunath Prasad's (supra) case relies is State of Andhra Pradesh v. Kol/a Sreerama murthy, (supra) which is also a case under the Madras General Sales Tax Act, 1939. The respondent in that case, a dealer in gunny bags, purchased gunnies from the mills on terms of written contracts which were on printed forms. These contracts were entered into by brokers acting for the respondent who sent him 'Bought-Notes' setting out the terms upa,1 which the purchases had been effected from the mills. The mills having received a part of the purchase money in terms of the contract issued delivery orders directing the deliyery of goods as per Instead of taking delivery himself, the respondent en the contract. dorsed the delivery orders and these passed through several hands before the ultimate holder of the delivery orders presented them the mills and obtained delivery of the gunnies on payment. The question that arose for decision was whether the transactions entered into by the respondent were mere sales of delivery orders or sales of goods so as to bring them to charge under sec. 3 of the said Act. At the date of the contract for purchase by the respondent, the goods which were the subject matter of the purchase wer~ not appropriated to the cmtract so that there was no completed sa)e since no property In COnfidering the effept of passed, but only an agreement for sale. ' ') 186 SUPREME COURT REPORTS [1976] l S.C.I\. the position that the property in the goods passed to the ultimate en dorsec of the delivery orders, Mr. Justice Ayyangar speaking for the Court relied on an English decision, Butterworty v. Kingsway(I) hold that though the respondent and his transferees had not acquired any title to the goods, the title acquired by the ultimate endorsee of the delivery orders went to feed their previously defective titles and ensured to their benefit. His Lordship further observed that this was the principle that formed the basis of the decision in Bayanna Bhime yya's (supra) case. Here again, the question that was considered has hardly any connection with sec. 24 of the Indian Income-Tax Act 1922, and the observations made in this case cannot be a guide to the solutim1 of the problem arising in the case before us. Sec. 6 of the Indian Income-Tax Act, 1922 enumerates the heads of income chargeable to income-~ax. Sec. 24(1) of the Act provides that where an assessee sustains a loss under any of these hea<rs any year, he shall be entitled to have the loss set of!' against his income, profits or gains under any other head hi that year. This general pro vision is qualified by the first proviso which permits the set off of a loss in speculative business against the assessee's profits and gains, if any, in a similar business only. Explanation 1 says that where the speculative transactions are of such a nature as to cm1stitutc a busihcss. the business shall be deemed to be distinct and separate from any other business. Explanation 2 defines a spe.culativc transaction as a tra'.1saction in which a contract for purchase and sale of any commodity is periodically or ultimately settled otherwise than by the actual <leli- ''cry or transfer of the commodity. The words actual delivery explanation 2 means real as opposed to notional delivery. For incomc tax purposes speculative transaction means what the defimlion of that expression in explanation 2 says. Whether a tnmsaction is specul\J.- tive in the general sense or under the Contract Act is not relevant for in sec. the purpose of this explanation. The definition of "delivery" 2(2) of the Sale of Goods Act which has been held to include both actual a:ud constructive or symbolical delivery has no bearing on the definition of speculative transaction in the explanation. A transac tion which i> 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; o>,1 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 docs not invalidate speculative according to explanation 2 if there is no actual delivery meaning to that exprcssida for purposes of income-tax , only. In D. M. Wadhwana v. Commissioner of Income-tax (supra) on which the Tribunal's decision in 'this case is based, the Calcutta High Court observed : "The explanation to sec. 24(1 ), however, does not pre vent persons from entering into contracts !,1 which the buy- ers and sellers may not actually hand over the goods physi- cally. The explanation is only desigi11!d at segregating for (!) [1954) 2 All E. R. 694. A R c D E F G H <- j ' J DAVENPORT & CO, v. C.l.T, (Gupta, J.) 187 income-tax purposes loss sustained in transactic:lns of a cer It may be that such transactions are not specula- tain kind. tive in the light of sec. 30 of the Contract Act .......... In enacting the explanation 2 of sec. 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 invali date the transaction which are not completed by actual deli very of the goods but only to brand them as speculative trans actions so as to put them in a special category for incomc tax purposes." In our opinion this is a correct statement of law. This. aspect 0£ the matter was not considered in Raghunath Prasad Poddar v. Commissioner of Income-tax, Calcutta. (supra) we think the law on the point was correctly stated in D. M. Wadhwana v. Commissioner of l11Come-tax, (supra) and in our opinion the question referred to the High Court in the present case has been correctly ((nswered. The appeal is llccordingly dismissed but in the circumstances of the case ll'ithout any order as to costs. V.M.K. Appeal dismissed A B c D -