1987 (8) TMI 48 - HC - Income Tax

Court affirms speculative nature of transactions over hedging, despite assessee's legal arguments

The High Court affirmed the Tribunal's decision that the transactions in question were speculative and not hedging transactions. The court held that the ... Loss, Speculative Transactions Issues Involved:1. Whether the losses incurred by the assessee were speculative transactions u/s 24(1) of the Indian Income-tax Act, 1922, and u/s 43(5) of the Income-tax Act, 1961.2. Whether the transactions were hedging transactions.Summary:Issue 1: Speculative TransactionsThe assessee, a manufacturer of jute goods, entered into forward contracts for the sale of standard jute goods but later switched to manufacturing special quality jute goods for higher profits. This led to losses in covering the forward contracts of sale. The Income-tax Officer held that these transactions were speculative as they were settled otherwise than by actual delivery of goods, conforming to the definition of speculative transactions u/s 24(1) of the 1922 Act and u/s 43(5) of the 1961 Act. The Appellate Assistant Commissioner and the Tribunal upheld this view, stating that the transactions were not hedging transactions as they were not entered into to guard against losses through future price fluctuations.Issue 2: Hedging TransactionsThe assessee contended that the transactions were hedging transactions within the meaning of proviso (a) to Explanation 2 to section 24(1) of the 1922 Act and proviso (a) to section 43(5) of the 1961 Act. However, the Tribunal held that the transactions were not hedging transactions, as only contracts for the future purchase of raw materials to guard against future price fluctuations would qualify. The forward contracts of sale and subsequent purchase contracts were not considered hedging contracts. The Tribunal's conclusion that the transactions were not hedging transactions was based on the fact that the assessee was primarily a manufacturer and not a dealer.Legal Precedents and ConclusionThe assessee cited several Supreme Court decisions to argue that the Tribunal's conclusion was a mixed question of law and fact. However, the Tribunal's finding that the transactions were speculative and not hedging was not challenged as perverse or contrary to evidence. The High Court held that the Tribunal is the final fact-finding authority and its findings cannot be overturned unless challenged by an appropriate question. The High Court affirmed the Tribunal's decision, answering the question in favor of the Revenue, stating that the transactions were speculative and not hedging transactions.