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Income-tax Cases Nos. 114 and 115 of 1972, decided on 12th December, 1982.

Income-tax Act (XI of 1922)--

---S. 24--Speculative business--Definition--Dealing in bonus voucher, whether speculative transaction--Loss--Set off--Where the speculative transactions are incidental to the regular business of the assessee and not in the nature of business, he will be entitled to have the amount of loss set off against his income, profits or gains under any other head in that year.

The dealings in bonus voucher were incidental to the business of the assessee. The earning of bonus voucher was co-related to the export and its sale could not be avoided by the assessee. The dealings in bonus voucher was naturally attached to the business and has become its concomitant.

Where any assessee sustains any loss of profit or gain in any year "he shall be entitled to have the amount of loss set off against his income, profit, or gain under any other head in that year". The first proviso to section 24 is an independent provision, which provides that where the assessee is engaged in speculative transaction which are in the mature of business such transaction shall be deemed to constitute a business distinct and separate from any other business carried on by the assessee and any loss sustained by him in such business shall be set off only against the income profit and gains of that business. Therefore, if speculative transactions are not in the nature of business, loss sustained in such dealings shall be set off from the income profit and gain under any other head. The word speculative business has been defined in Explanation 1 to section 24. However, for arguments sake if it is accepted that the dealing in bonus voucher is in the nature of speculative transaction them the first proviso to Section 24 will be applicable, if it is further established [hat such speculative transaction is in the nature of the business of the assessee. Unless it is established the first proviso to S. 24 will riot apply. If the assessee carried on speculative transactions and dealings, which are in the nature of his business then loss resulting from such speculative business/ dealing will be set off against speculative income and gains. But where the speculative transactions are incidental to the regular business of the assessee and not in the nature of business he will be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. In these premises, the argument whether the bonus voucher dealing come within the meaning of Explanation to Section 24(2) is not relevant as the loss was riot sustained in speculative transactions which are in the nature of business.

Iqbal Naeem Pasha for Applicant.

Nasrullah Awan for Respondent.

Date of hearing: 24th November, 1982.

-This judgment will dispose of two Applications filed under Section 66 (1) of the Income-tax Act involving same questions of law in respect of two assessment years. The applicant was engaged in the business of export of rice and dealings in Bonus Vouchers as well. The applicant having purchased rice from the Government of Pakistan used to export the same to foreign countries. In view of bonus voucher scheme, which was prevalent at the relevant time the applicant became entitled to receive bonus vouchers of export of rice. The applicant used to sell the bonus vouchers earned by him. The rates of bonus vouchers were susceptible to price fluctuations, the applicant, therefore, entered into contracts for forward sale of bonus vouchers. During the assessment year 1963-64,

the applicant suffered loss of Rs.1,95,925 on forward sales of bonus voucher which had been debited to the trading account of rice export business. In the same manner for the year 1964-1965, the applicant suffered loss of Rs.2,53,577 which was debited in the like manner. The Income-tax Officer while assessing for the aforesaid assessment years treated the said loss as speculation loss and refused to set off the same against the profits of the applicant. The applicant Filed appeal before the Appellate Assistant Commissioner, which was allowed. However, in appeal filed before the Income-tax Appellate Tribunal the order of the Appellate Assistant Commissioner was set aside. The following questions have been referred:

(1) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the contracts entered into by the Applicant in regard to forward sale of Bonus Vouchers were in the nature of business within the meaning of the first proviso to section 24 of the Income-tax Act.

(2) Whether on the facts and in the circumstances of the case there was any material before the Income-tax Appellate Tribunal to hold that contracts entered into by the Applicant ire regard to forward sale of Bonus Vouchers were not covered by the exception contained in clause (a) of Explanation-l of Section 24 of the Income-tax Act.

(3) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in not setting aside the orders of the Income-tax Officer and the Appellate Assistant Commissioner for the purposes of ascertainment of facts in regard to application of clause (a) of Explanation-1 to Section 24 of the Income-tax Act to the case of the Applicant.

(4) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the case of the Applicant was not covered by the exception contained in clause (b) of Explanation-1 of Section 24 of the Income-tax Act.

Mr. Iqbal Naeem Pasha the learned counsel for the applicant has contended that as the dealing in bonus vouchers was not in the nature of business of the applicant it was entitled to the set off. The Income-tax Officer while dealing this aspect of the case held that "the assessee was not a dealer in bonus vouchers in tire sense that it is not his business to buy and sell bonus vouchers. During the years, the assessee had only to sell the bonus vouchers earned. To safeguard such sale, the assessee could sell out in hedge the total amount of bonus vouchers which the assessee earned. There is no question of buying any bonus vouchers in speculation." The Appellate Assistant Commissioner also did not hold that dealing in bonus vouchers was in the nature of business of the applicant. He held that these losses were not from speculative business as these were covered by the exception of clause (a) to the Explanation-1 of Section 24. The Income-tax Appellate Tribunal held that the transactions were in the nature of speculative transaction within the meaning of the first Proviso to Section 24 (1) and the losses from speculative business could not be set off against profits from any other source of income. It was also held that the applicant was carrying on this activity systematically and, therefore, within the meaning of 1st proviso to Section 24 (1) these transactions were in the nature of business.

The applicant was receiving the bonus vouchers as a result of their export performance. In this process, it had collected and was expecting to collect bonus vouchers against its export. The receipt of Bonus Vouchers was co-related with the export and the applicant entered into forward transactions to safeguard future loss, from fluctuation in the price of bonus voucher. There is nothing on record to show that the applicant has dealt with bonus vouchers which it had not earned against its export. From the record it is not established that the applicant was continuously engaged in these dealings even after it had received or become entitled to receive bonus voucher after the export. The Income-tax Officer and the learned Appellate Tribunal have taken into consideration the fact that although rice was shipped from 19-6-1962 to 29-9-1962 the sale of bonus vouchers continued till November 1962. It should have been noted as pointed out by the Appellate Assistant Commissioner that the applicant had continued exporting rice in the next year also, therefore, the applicant could have entered into hedge contract for the clearing months of October and November. The applicant had claimed losses suffered upto September' 1962. It has been also not established on record that applicant had purchased bonus vouchers from the market and sold it for speculative, profit. It was dealing in bonus vouchers earned from its export it is also to be noted that the total transaction of the bonus vouchers was not found to exceed that total stock of the bonus; voucher which was earned by the applicant from its export performance. In these circumstances, it cannot be held that the applicant's dealing in bonus voucher was in the nature of the business. The dealings in bonus voucher were incidental to the business of the applicant. The earning, of bonus voucher was co-related to the export and its sale could not be avoided by the applicant. The dealings in bonus voucher was naturally attached to the business and has become its concomitant.

The learned Tribunal has exhaustively dealt with the case mainly on the question whether the sale of bonus vouchers was in the nature of speculative business.

Section 24 provides that where any assessee sustains any loss of profit, or gain in any year "he shall be entitled to have the amount of loss set off against his income, profit, or gain under any other head in that year". The first proviso to this section has been held to be an independent provision which provides that where the assessee is engaged in speculative transaction which are in the nature of business such transaction shall be deemed to constitute a business distinct and separate from any other business carried on by the assessee and any loss sustained by him in such business shall be set off only against the income profit and gains of that business. Therefore, if speculative transactions are not in the nature of business, loss sustained in such dealing shall be set off from the income profit and gain under any other head. The word speculative business has been defined in Explanation-1 to Section 24. However for arguments sake if it is accepted that the dealing in bonus voucher is in the nature of speculative transaction then the first proviso to section 24 will be applicable if it is further established that such speculative transaction is in the nature of the business of the assessee. Unless it is established the first proviso to Section 24 will not apply. If the assessee carries on speculative transactions and dealings which are in the nature of his business then loss resulting from such speculative business /dealing will be set off against speculative income and gains. But where the speculative transactions are incidental to the regular business of the assessee and not in the nature of business he will be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. In these premises, the argument whether the bonus voucher dealing come within the meaning of Explanation to Section 24(2) is not relevant as the loss was not sustained in speculative transactions, which are in the nature of business of the applicant. For these reasons questions Nos.1 and 2 are answered in the negative. Questions 3 and 4 are not pressed by the applicants. Reference is answered accordingly.

M.B.A. / S-52/ K Reference answered accordingly.

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