TaxTMI 
TaxTMI 
1983 (8) TMI 42
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....d that in connection with its oil mill business it had incurred the following losses which, according to the assessee, partook the nature of hedging losses, and the assessee claimed that it was entitled to deduct the same from its business profits Rs. A. Lahi sarson vaida-net loss 2,35,882 B. Moongphali vaida-loss 13,605 -------- Total 2,49,487 &nb....
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....and this court, vide its decision reported in the case of Motilal Padampat Sugar Mills v. CIT [1977] 106 ITR 988, and in ITR No. 665 of 1974 (CIT v. M. P. Sugar Mills (P.) Ltd.) decided on 5th of April, 1978, held that in law the liability to pay additional price did accrue in the year in which the sugarcane was purchased and within which the minimum price was fixed and hence the assessee was entitled to claim deduction of a reasonable estimated amount or, in the alternative, if during the course of the assessment proceedings, the actual amount is quantified, the quantified amount. In view of the said decisions, which are inter parties, the first question referred to us must be answered in the affirmative and in favour of the assessee. A perusal of the appellate order of the Tribunal indicates that so far as the second question is concerned, the main difference between the assessee and the Department was in respect of the interpretation of the provisions contained in s. 43(5) of the Act. Whereas according to the assessee, in the case of manufacture, contracts both for sale and purchase of raw materials if entered into with a view to safeguard the future price fluctuation in resp....
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....ndise, there would be no reason to exclude such transaction from the ambit of s. 43(5)(a) of the Act. It may be that in the case of merchandise one may urge that when one enters into hedging contract in respect of merchandise to guard against loss through future price fluctuation in respect of the merchandise sold, such contract has necessarily to be that of a contract for purchase (we are not concerned with this question in this reference), but then the same thing cannot be said about hedging contracts entered into by a manufacturer in respect of raw material. Even though in the commercial world the cost of raw material plays an important role in determining the price at which a manufacturer agrees to sell or deliver the manufactured goods, yet it does not necessarily mean that future price fluctuation in respect of the manufactured product must correspond to price fluctuation in respect of the raw material. There can be cases where even while the price of raw materials falls, the price of the manufactured goods contracted to be delivered may go up resulting in loss to the manufacturer. In such a case, the loss that is likely to be occasioned to a manufacturer in respect of pri....
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....ure price fluctuations in respect of contracts for actual delivery of goods manufactured or merchandise sold which in the context had to be contracts for sale of the merchandise or manufactured goods, the hedging contracts in respect of such transactions must necessarily be a forward contract of purchase. In coming to this conclusion, the Bench seems to proceed on the assumption that having regard to the nature of commercial transactions, loss suffered because of price fluctuations in respect of a contract for sale of manufactured goods can never be safeguarded by entering into a forward contract for sale of raw materials, the underlying assumption being that fluctuation in price of raw materials necessarily results in similar fluctuation in the price of manufactured goods. In our opinion, such an assumption is not justified. As already indicated by us, there can be cases where while the price fluctuation of manufactured goods may be having an upward trend, the price of raw materials may have a downward trend and in such cases one can enter into forward contracts for sale of raw materials to cover up a possible loss that the manufacturer may suffer in respect of his contract for ac....
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....ing contracts covered by proviso (a) to s. 43(5) could only be entered into with a view to safeguard losses due to future price fluctuation in respect of contract for sale of goods sold and observed thus (p. 242): " Unfortunately, none of the decisions referred to above have considered the proviso to indicate as to whether the phrase 'merchandise sold by him' was a clause qualifying the term 'goods'. It is also clear that so far as the first part of the proviso is concerned, in none of these decisions it has been held that when the proviso talks of a contract in the beginning of the proviso, it is limited to one kind of contract. In fact, the decision of the Gujarat High Court clearly rules that this contract could be both ways so far as the interpretation of the first part of the proviso is concerned. The ultimate conclusion that the hedging contract could only be for purchase and not for sale, it appears, has been derived from the last part of this clause where it is stated 'merchandise sold by him'. And because the phrase uses the words 'sold by him' it is understood to mean that the contract for actual delivery of goods which could be protected could only be a contract of sa....
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....the assessee, he declined to go into the question as to whether or not the hedging contracts contemplated by the proviso could also be by way of forward contracts of sale of raw material or merchandise, as the case may be. In view of the difference of opinion between the two learned judges, the matter was referred to G. P. Singh, the Chief justice, who agreed with Sohani J., that under prov. (a) to s. 43(5) of the Act, it is only hedging contracts entered into to safeguard loss due to future price fluctuation in respect of merchandise or goods sold by the merchant or the manufacturer that could alone be taken out of the definition of speculative transactions. He also did not go into the question as to whether such hedging contracts could be entered into also by way of forward contracts for sale of goods or of raw materials. We are accordingly of opinion that none of the aforementioned three cases, cited by the learned counsel appearing for the Revenue, are helpful to him. In the case of Kirtilal Jaisinglal & Co. v. CIT [1980] 121 ITR 279 (Bom), while dealing with a similar question a Bench of the Bombay High Court referred to Circular No. 23 (XXXIX-4)-D of 1960, issued by the....
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....ice of manufactured goods. Instead, the indications are that the said transactions had been entered into, if at all, with view to guard against the price fluctuation of raw materials which the assessee used in the manufacture of goods and with a view to safeguard the loss through price fluctuation in respect of contracts for actual delivery of the goods manufactured by it. We are unable to accept this submission. After quoting the provisions of s. 43(5) in para. 13 (p. 62 of the paper book) of its appellate order, the Tribunal made the following observation : " It is, therefore, clear that they were transactions of sale on which the assessee earned profits and the losses were mitigated. The reason was only to guard against the fluctuation in market prices ...... In the assessee's case the contracts were for delivery of raw materials or goods produced. There is bound to be some time lag in the production of the goods and during that period prices may fall and in order to safeguard against the same, the assessee deals in forward sale of raw materials... " Again in para. 16 (p. 66 of the paper book) of its order, the Tribunal went on to observe thus, " The proviso provides fo....