Forward commodity contracts settled by differences were treated as speculative losses, outside the hedging exception under tax law.

Forward commodity contracts in camphor settled by payment or receipt of price differences, without actual delivery or transfer of delivery orders, fall within the speculative-transaction definition in Explanation 2 to section 24(1). The hedging exception in proviso (a) does not apply unless the forward purchases are shown to be linked to identified forward sales and entered into to protect against price fluctuations in specified existing contracts. On the stated facts, the losses were treated as speculative losses and were not allowable for set-off against other profits.

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Issues: Whether losses arising from forward contracts in camphor, settled by payment or receipt of price differences without actual delivery, were losses in speculative transactions under section 24(1), and whether they were excluded as hedging transactions under proviso (a) to Explanation 2.

Analysis: Explanation 2 to section 24(1) treats as speculative a contract for purchase or sale of a commodity which is ultimately settled otherwise than by actual delivery or transfer of the commodity. The assessees' contracts were not completed by delivery of goods or delivery orders, but by payment or receipt of differences. The Supreme Court decisions relied on for the proposition that ultimate delivery through transfer of delivery orders may take a transaction outside the Explanation did not assist, because no such transfer or delivery mechanism existed here. On hedging, the assessees did not establish that the forward purchases were entered into with reference to any identified forward sales or that they were undertaken to guard against loss through future price fluctuations in respect of specified sale contracts already entered into. The statutory proviso therefore was not attracted.

Conclusion: The losses were rightly treated as losses sustained in speculative transactions under Explanation 2 to section 24(1), and they were not allowable as set-off against other profits.

Final Conclusion: The references were answered against the assessees and in favour of the Revenue.

Ratio Decidendi: A forward commodity contract settled by payment or receipt of differences without actual delivery, and not shown to be correlated with identified sales for the purpose of guarding against price fluctuation, falls within the speculative-transaction definition and outside the hedging exception.

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