1973 (9) TMI 32 - HC - Income Tax

Forward contract losses deemed speculative under Indian Income-tax Act. No correlation, not hedging, denied offsetting.

Gomraj Fatehchand And Another Versus Commissioner Of Income-Tax, Madras

The court upheld the Tribunal's decision that losses from forward transactions were speculative under Explanation 2 to section 24(1) of the Indian ... Hedging Transaction Issues Involved:1. Whether the losses incurred in forward transactions were speculative under Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922.2. Whether the forward transactions could be considered hedging transactions and thus not speculative.Issue-wise Detailed Analysis:1. Speculative Nature of Forward Transactions:The assessee, a registered firm dealing in camphor, claimed losses from forward contracts for the assessment years 1959-60 and 1960-61. The Income-tax Officer rejected the contention that these were hedging transactions, noting that the forward transactions were settled by payment of differences rather than actual delivery of goods. The Tribunal upheld this view, categorizing the losses as speculative under Explanation 2 to section 24(1), which defines a speculative transaction as one settled otherwise than by actual delivery or transfer of the commodity. The court agreed with the Tribunal, emphasizing that the forward transactions did not involve actual delivery but were settled by price differences, thus falling within the scope of speculative transactions as per Explanation 2.2. Hedging Transactions:The assessee argued that the forward transactions were hedging transactions intended to guard against losses due to price fluctuations and should not be considered speculative. However, the Tribunal found no evidence that the forward purchases were correlated with specific forward sales. The court referenced a recent decision in T.C. No. 278 of 1967, which clarified that only purchase transactions entered into to guard against future price fluctuations in respect of contracts of sale for actual delivery would qualify as hedging under clause (a) of the proviso. Since the assessee failed to demonstrate this correlation, the court concluded that the transactions did not qualify as hedging and remained speculative.Conclusion:The court upheld the Tribunal's decision, affirming that the losses in question were speculative under Explanation 2 to section 24(1) and could not be set off against other profits. The questions referred were answered in the affirmative, and costs were awarded to the revenue.