Hedging contracts under income tax law protect only dealings tied to actual delivery sale contracts, not profit-seeking speculation.

Clause (a) of the third proviso to section 24(1) of the Indian Income-tax Act, 1922 protects only hedging contracts in respect of raw materials or merchandise entered into in the course of manufacturing or merchanting business to guard against loss from future price fluctuations on actual delivery sale contracts. Transactions lacking a direct nexus with such delivery contracts, or entered into to secure better prices and higher profit, do not fall within the proviso and remain speculative. On the facts, the assessee failed to prove the requisite connection for some items and failed to show anything more than profit-seeking dealings for the rest, so the losses were treated as speculative and deduction as business loss was denied.

---

---

Issues: Whether transactions entered into by the assessee, though speculative within Explanation 2 to section 24(1), were saved from being treated as speculative by clause (a) of the third proviso to section 24(1) of the Indian Income-tax Act, 1922.

Analysis: Clause (a) of the third proviso applies to contracts in respect of raw materials or merchandise entered into in the course of manufacturing or merchanting business to guard against loss through future price fluctuations in respect of contracts for actual delivery of goods manufactured or merchandise sold. The provision was construed as covering only hedging contracts closely connected with actual sale contracts and not every purchase or sale transaction entered into to make profit or to protect a general line of business. On the facts, the assessee's transactions did not show the necessary connection with contracts for actual delivery of goods sold by it. In respect of some items, the assessee could not establish the nature of the transactions at all, and in the remaining items the evidence showed that the object was to secure a better price and higher profit rather than to guard against loss.

Conclusion: The transactions were not brought within clause (a) of the third proviso and remained speculative transactions; the assessee's claim for deduction as business loss failed.

Final Conclusion: The reference was answered against the assessee and the revenue's stand that the losses were speculative was upheld.

Ratio Decidendi: Clause (a) of the third proviso to section 24(1) protects only those hedging contracts in respect of merchandise that are entered into to guard against loss in relation to actual delivery sale contracts, and not speculative purchase or sale dealings lacking that direct contractual nexus.

---