1978 (7) TMI 35 - HC - Income Tax

Court rules Rs. 78,050 as profit in S.Y. 2015 taxable. Assessee to bear revenue costs.

Commissioner Of Income-Tax, Bombay City Versus Arjan Khimji And Co.

Commissioner Of Income-Tax, Bombay City Versus Arjan Khimji And Co. - [1980] 121 ITR 421, 9 CTR 263, 1 TAXMANN 550 Issues Involved:1. Whether the sum of Rs. 78,050 standing to the credit of the 'Shri Nava Kapas and Rui Hedge Account' represented assessable income for the year under reference.2. Whether the sum of Rs. 78,050 was correctly carried forward and accounted for in the subsequent accounting year.Issue-wise Detailed Analysis:1. Assessability of Rs. 78,050 as Income:The assessee, a partnership firm engaged in wholesale cotton business, maintained two accounts for hedging transactions: one for profit or loss from hedging transactions pertaining to the year, and another styled as 'New Kapas and Rui Hedge Account.' On the Diwali of S.Y. 2015, the latter account showed a credit balance of Rs. 78,050. The ITO considered this amount as profit for the assessment year 1960-61, as the books were maintained on a mercantile system. The AAC confirmed this view, stating that the amount was received as a result of contracts settled in the accounting year and was not notional. The Tribunal, however, accepted the assessee's contention that the hedging contracts and ready contracts should be considered as one integrated operation, and thus, the profit should be determined only when the ready business was completed. The Tribunal found that the net result of both transactions should be combined and considered for assessment. The Tribunal concluded that the method of accounting followed by the assessee, which combined the results of both hedging and ready contracts, was proper.2. Carry Forward and Accounting of Rs. 78,050:The Tribunal's decision to treat the hedging and ready contracts as an integrated operation was challenged by the revenue. The revenue argued that hedging contracts are independent transactions and should be assessed separately. The Tribunal's reliance on the definition of 'speculative transaction' under section 43(5) of the I.T. Act, 1961, was deemed erroneous. The Tribunal's view that the cumulative effect of hedging and ready contracts should be considered when actual delivery is effected was rejected. The court held that hedging contracts and future delivery contracts are independent transactions, and the profit from hedging contracts should be assessed in the year it accrues. The court noted that the sum of Rs. 78,050 was actually received by the assessee and should be treated as income for S.Y. 2015, as it was not a notional figure but actual profit. The court found that the method of accounting followed by the assessee, which treated the profit as a liability in the balance-sheet, was not permissible.Conclusion:The court concluded that the sum of Rs. 78,050 accrued to the assessee as profit in S.Y. 2015 and should be subject to tax in that year. The answer to the question referred was in the negative, in favor of the revenue. The assessee was ordered to pay the costs of the revenue.