D.b. Income Tax Appeal v. Income Tax Officer, Sri Ganganagar

D.B. INCOME TAX APPEAL NO.75/2002 [M/s Sripal Satyapal Vs. Income Tax Officer, Sri Ganganagar] DATED : 03.01.2007 HON'BLE MR. RAJESH BALIA, J.HON'BLE MR. CHATRA RAM JAT, J. Mr.Anjay Kothari for appellant. Mr.K.K.Bissa for the respondent. ***** This appeal is directed against the order of Income TaxAppellate Tribunal, Jodhpur Bench, Jodhpur dated 14.05.2002relating to the Assessment Year 1990-91. The substantial question of law framed at the time ofappeal dated 04.09.2002 reads as under:- “Whether the ITAT was justified indisallowing the claim for set off of businessloss of Rs.2,54,068/- in the hands of theappellant by applying Section 43 (5) of theIncome Tax Act, 1961 and treating the sameas speculative loss merely for the reason thattransportation charges were not shown to bepaid by the appellant?” The facts necessary for the present purpose are that theassessee is cotton merchants and carries on business ofpurchase and sale of cotton bales. In the previous year relevantto Assessment Year 1990-91 that is to say for the accountingperiod ending on 31.03.1990 amongst other, 22 transactions of cotton bales took place which were held by the Assessing Officerto be speculative transaction. Profit and loss arising therefromwere held to be speculative profit or speculative loss to betreated accordingly under the provisions of Income Tax Act 1961.For treating the said transaction to be speculative reliance wasplaced by the Assessing Officer on Section 43 (5) of the Act of1961 which provides that any transaction of sale and purchase ofgoods, if is settled on due date or otherwise in any mannerotherwise that by actual delivery of the goods is to be treated aspeculative transaction and profit or loss arising out of suchtransaction is to be considered the speculative profit orspeculative loss. The other facts which are necessary for thepresent purpose are that out of 22 transactions, 14 transactionsrelated to the purchase of certain cotton bales through M/sJairamdas Lokesh Kumar commission agent. The physicalgoods in existence were belonging to M/s Ramchandra JagdishPrasad, the firm situated at Shri Vijaynagar Distt. Sri Ganganagarand were lying in his godowns. On the very same date the saidcotton bales were sold by the assessee through the samecommission agent on 22.06.89. The purchase of cotton baleswere stated to have been made in March, 1989. The sale of thecotton bales purchased through M/s Jairam Das Lokesh Kumarwas made to M/s Om Prakash Vimal Kumar who was acting ascommission agent for the real purchaser M/s Oswal Cotton Company at Vijaynagar Distt. Ajmer. The following question has been framed as substantialquestion of law while admitting this appeal arising under Section260 A of the Income Tax Act, 1961. [ the question is repeated] “Whether the I.T.A.T wasjustified in disallowing the claim for setoff of business loss of Rs.2,54,068/- inthe hands of the appellant by applyingSection 43 [5] of the Income Tax Act,1961 and treating the same asspeculative loss merely for the reasonthat transportation charges were notshown to be paid by the appellant?” The facts leading to the present appeal are that theassessee appellant is a Cotton Merchant having his place ofbusiness at Sri Ganganagar. During the previous year relevantto the Assessment Year 1991 with which we are concerned theassessee had made total sales of Rs.3,09,45,481/- whichincluded sales of Rs.39,19,621/51 in which vouchers ofpurchases and sales were of the same date respectively. Suchtransactions numbered in 22. In these transactions the assesseehad suffered a loss of Rs.2,54,638/-. The Assessing Officer wasof the opinion that this loss was a speculative loss as actualdelivery of goods was not taken in these transactions. The facts leading to the present appeal are that theassessee appellant is a Cotton Merchant having his place ofbusiness at Sri Ganganagar. During the previous year relevantto the Assessment Year 1991 with which we are concerned theassessee had made total sales of Rs.3,09,45,481/- whichincluded sales of Rs.39,19,621/51 in which vouchers ofpurchases and sales were of the same date respectively. Suchtransactions numbered in 22. In these transactions the assesseehad suffered a loss of Rs.2,54,638/-. The Assessing Officer wasof the opinion that this loss was a speculative loss as actualdelivery of goods was not taken in these transactions. As is apparent from the orders of the Assessing Officer aswell as the Appellate Orders the emphasis was that the physicaldelivery of goods was not taken by the assessee or his agent inrelation to said 22 transactions and for that reason since physicaldelivery was not taken by the assessee or his agent thetransactions were treated to be speculative in view of subsection [5] of Section 43 of the Income Tax Act, 1961.Consequently it was held that the said speculative loss was notliable to be set off against profits and gains of regular businessand could be set off only against speculative profit. On appeal, this finding was affirmed by the CIT [Appeals]and also by the Tribunal. The Tribunal rested its conclusion onthe premise that since assessee has conducted 22 transactionsthrough Aadatias and commission agents then the saidtransaction could not constitute a speculative transaction if actualphysical delivery of goods have been taken by aadaitias orcommission agent on behalf of assessee. The only test to findout whether the Aadatias or commission agent working on behalfof assessee had taken actual delivery of goods is by ascertainingtransportation charges paid. Since from the perusal of the copiesof the accounts of transactions through M/s Jai Ramdas LokeshKumar which was taken to be an illustrative case of modusoperandi showed that commission agent and brokerage has only been charged and in none of the transaction accounts anytransportation charges have been charged either at the time ofpurchase or sale. This itself shows that the Aadatias orcommission agent had not taken the actual delivery of goods onbehalf of the assessee and only the purchase and sale details ordelivery note were exchanged in the books of commission agentin the running account of the assessee. The purchase price andsale price have been debited and credited respectively andultimately the assessee had paid only the difference between thetwo to his commission agent. On the basis of aforesaid reasoningit was found that since there was no actual delivery of the goodstaken by the Aadatia or commission agent ultimately M/sJairamdas Lokesh Kumar and M/s Mahendra Cotton Co., ofBhatinda on behalf of the assessee, the said transaction cannotbe regarded as of regular business. The Tribunal recorded thatwe find that the assessee could not prove that the delivery wastaken by the commission agent on behalf of the assessee. Since the emphasis was laid on non debiting of charges oftransportation for removing the goods from the godowns of theprincipal seller to the godown, of the commission agent oraadatias or assessee's own godown the said fact has foundplace in the question framed at the time of the admission as persuggestion made by the assessee. Since the emphasis was laid on non debiting of charges oftransportation for removing the goods from the godowns of theprincipal seller to the godown, of the commission agent oraadatias or assessee's own godown the said fact has foundplace in the question framed at the time of the admission as persuggestion made by the assessee. The modus operandi relevant for the present purposes asfound by the Assessing Officer may be noticed as an illustrativecase, the transaction which took place on 22.06.1989 throughM/s Jairamdas Lokesh Kumar who is a commission agent for theassessee has been detailed in the orders of the subordinateauthorities. It was noticed that 100 bales of cotton press markR-33 from serial No.11417 to 11516 were purchased by theassessee through M/s Jairamdas Lokesh Kumar and sold to M/sHukamchad Ojha and Co., Sri Ganganagar who was acting forM/s Oswal Cotton Company, Vijaynagar. M/s Jairamdas LokeshKumar had entered into transaction of purchase from M/s OmPrakash Vimal Kumar who was the agent for its principal M/sRamchandra Jagdish Kumar who was holder of cotton bales inquestion. After such purchase of cotton bales, on the assessee'sdirection M/s Jairamdas Lokesh Kumar sold said cotton bales toM/s Hira Chand Ojha who was acting for his principal M/s OswalCotton Company, Vijaynagar Distt. Ajmer. In pursuance of thesetransactions the cotton bales were actually delivered to M/sOswal Cotton Co. Ltd through transport directly from the godwonof M/s Ramchander Jagdish Kumar. There is no dispute thatgoods ultimately moved from the godwons of M/s RamchanderJagdish Prasad as a result of sale transaction at the instance of respondent assessee and goods in question were ultimatelydelivered to final buyer in pursuance of transaction carried on atthe instance of the assessee. The question therefore arises whether the intermediarytransactions which was ultimately culminated in actual delivery ofgoods to M/s Oswal Cotton Company Ajmer could be consideredas speculative transactions in terms of Section 43 [5] of the Act of1961 because actual physical delivery was not taken by any ofthe agents or the principal directing the purchase and sale of the100 bales of cotton to M/s Jairamdas Lokesh Kumar. Learned counsel for the appellant has initially pressed intothe service the contention that since 100 bales of cotton wereascertained at the godwons of M/s Ramchandra Jagdish Prasadto be dispatched to the ultimate buyer M/s Oswal CottonCompany for whom Sri Hukamchand Ojha and Co. hadpurchased 100 bales of cotton from said M/s Jairamdas LokeshKumar who has conducted sale as per direction of assessee and,therefore, it must be taken that the physical delivery of goodswere taken by M/s Jairamdas Lokesh Kumar when heascertained and segregated the goods for the purpose ofdispatching the same to M/s Oswal Cotton Company, whichsatisfies the test of actual delivery of the goods to the assessee. In the alternative it is contended by the learned counsel forthe assessee that in terms of Section 43 (5) of the Act of 1961the requirement is not that physical goods must be taken by theassessee himself but the emphasis is on the fact thattransactions entered into by assessee must ultimately culminateinto the physical delivery of the goods. If that test is applied onthe facts found by the Assessing Officer himself the transaction ofsale and purchase entered into by the assessee has ultimatelyculminated in physical delivery of the goods from the holder ofthe goods to the ultimate buyer of the goods. If the actualphysical delivery of the goods has taken place as a result oftransaction carried out by the assessee then the transaction ofthe assessee cannot be termed as speculative transaction andloss arising therefrom cannot be treated as speculative loss tobe dealt with separately. It will be apposite to notice the provision of Statutein the light of which the consequences of the facts found by theAppellate Authority must be determined. Section 43 (5) readsas under:- (5)“Speculative transaction means a transaction inwhich a contract for the purchase or sale of anywhich a contract for the purchase or sale of any commodity, including stocks and shares, isperiodically or ultimately settled otherwise than bythe actual delivery or transfer of the commodity orscrips:- Provided that for the purposes of this clause:- [a] a contract in respect of raw materials ormerchandise entered into by a person in the courseof his manufacturing or merchanting business toguard against loss through future price fluctuations inrespect of his contracts for actual delivery of goodsmanufactured by him or merchandise sold by him; or [b] a contract in respect of stocks and shares enteredinto by a dealer or investor therein to guard againstloss or in his holdings of stocks and shares throughprice fluctuations; or [c] a contract entered into by a member of a forwardmarket or a stock exchange in the course of anytransaction in the nature of jobbing or arbitrage toguard against loss which may be arise in theordinary course of his business as such member;shall not be deemed to be a speculativetransaction;” On perusal of the aforesaid provision it envisages thatthere is no reference for requirement of actual delivery or transferof the commodity or the scrips by the assessee or his agent. Theemphasis is on settlement of transaction otherwise than by theactual delivery or transfer of the commodity or the scrips.Therefore, in our opinion the Appellate Authority as well as theAssessing Authority misdirected themselves in law by focusingtheir attention on actual physical delivery being taken by theassessee or his agent rather than considering whether transactions entered by the assessee were ultimately settled bydelivery of goods or otherwise. If we consider the modus in which the transactions haveproceeded it leaves no room of doubt that ultimately theyresulted in actual delivery of goods only in pursuance to saidtransactions. Actual delivery of goods were not independent oftransaction conducted at the instance of the assessee. Thetransaction of sale and purchase of commodities entered by theassessee through his commission agent or agents whether at SriGanganagar or at Punjab have been settled by actual delivery ofgoods to the last person in the chain and not otherwise then byactual delivery of the goods. The fact that the account of theassessee with his agent or commission agent has been settledon commercial principles by finding out what is the cost incurredon behalf of the assessee and what payment he has received onbehalf of the assessee is not relevant for the purpose ofdetermining the actual nature of transaction nor what chargeshave actually been debited to the assessee's account by theprincipal seller of the goods is relevant. The other may be relevant for the purpose of finding whenthe property of goods passed on to the buyer under Section 18 ofthe Sale of goods Act which envisages that property in goods The other may be relevant for the purpose of finding whenthe property of goods passed on to the buyer under Section 18 ofthe Sale of goods Act which envisages that property in goods passed when the goods are ascertained and where thetransaction of sale of goods is in respect of ascertained goods,the property in goods passes to buyer immediately. In the factsof present case, it can be said that when assessee's agentascertained the 100 bales of cotton at site namely the ginningfactory of Ramchander Jagdish Chander, the property in those100 bales passed on to buyer and thereafter said goods wereheld by the holder on behalf of buyer as a bailee. But that doesnot amount to physical delivery of the goods to the buyer.Therefore, so far as the finding of the Tribunal that physicaldelivery of the goods were not taken by the assessee or hisagent may be true but catch lies in the fact of taking thephysical delivery of the goods by the assessee is not the testfor determining the speculative transaction in terms of Section 43(5) but the test is settlement of the transaction entered into by theassessee on his behalf otherwise then by actual delivery of thecommodity or scrips. As we have noticed that ultimate settlementof the transaction entered into by the assessee has been settledby the actual delivery of the goods to ultimate buyer, therefore interms of sub-section (5) of Section 43, the transactions cannot bebranded as speculative transaction. The non-debiting of transport charges when the goodshave not actually moved from godown of holder of goods to godown of assessee or assessee's agent cannot be decisive ofactual delivery of goods having been made in pursuance of salemade by the assessee. The real test is whether the goods havebeen actually delivered to a buyer in pursuance of transaction ofsale entered into by or on behalf of the assessee or independentof it. Since in the present case on the facts found by theRevenue Authority the ultimate delivery of goods was only inpursuance of transaction carried out at the instance of theassessee, it cannot be said that the transaction has been settledotherwise than by actual delivery of commodity so as to inviteoperation of Section 43 (5). So long as nexus between actualdelivery of goods and the transaction of sale conducted byassessee himself or through his agent exist, the actualsettlement of account between the assessee and his agentcannot affect the nature of transaction from real to speculative.In such event actual payment or receipt is merely a convenientmode of settling the account, distinct from settling thetransaction. In these circumstances, it must be held that Tribunal hasseriously erred in law in holding that the transactions in questionare speculative transactions and considering the loss arisingtherefrom as speculative loss. Since on true interpretation of Section 43 (5) thetransaction in question must be held to be non-speculative, lossarising therefrom is liable to be set off against profit and gainsarising from the regular business of the assessee in ordinarycourse. As a result, the appeal is allowed the orders passed bythe Tribunal, CIT [Appeals] and Assessing Officer are set aside.The Assessing Officer is directed to recompute the profit andgains of business by considering the loss in question to bebusiness loss and make assessment accordingly. No costs. , J. , J. mamta