COMMISSIONER OF INCOME-TAX VS PARACHA TEXTILE MILLS LIMITED, 1993 PTD-KARACHI-HIGH-COURT-SINDH 1208 (1987)

Income Tax Act (XI of 1922)---

----S. 24(2), Explanation I---Speculative transaction"--Meaning --- Loss resulted in the transaction of Bonus Vouchers settled without the delivery of the scripts (Bonus Vouchers) being not a speculative loss within the meaning of S.24(2), Explanation, could be set off against other business income.

Azad Friends Company Limited v. Commissioner of Income-tax 1970 PTD 465 fol.

Black's Law Dictionary and 1986 P T D 453 ref

K. Salahuddin for Applicant. Ali Athar for Respondents.

Date of hearing: 17th September, 1987.

JUDGMENT

AJMAL MIAN, J.--This is an application under section 66(2) of the Income Tax Act, 1922, hereinafter referred to as the Act, filed by the applicant department for soliciting the opinion of this Court to the following question:--

"Whether, on facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in holding that the loss resulted in the transaction of bonus vouchers settled without the delivery of the scripts (bonus vouchers), was not a speculative loss within the meaning of Explanation I to para. 2 of section 24 of the Income Tax Act, 1922, and could be set off against other business income?"

2. The brief facts leading to the filing of the above reference are that the Federal Government had introduced Bonus Vouchers Scheme on the export of inter alia textile and yarn etc. For the assessment year 1971-72 the respondent disclosed the sale of bonus vouchers of the face value of Rs.38,86,890 for Rs.68,79,795 at the rate of Rs.177. The respondent had also shown deduction of a sum of Rs.3,21,191 on account of difference in the bonus vouchers which they had to pay for settling certain transactions. The Income Tax Officer disallowed the above amount on the ground that the same was speculative loss, The matter was taken up before the learned Income Tax Appellate Tribunal in an Appeal (I.TA. No.5196/KB of 1973-74K) which was allowed by an order dated 17-5-1976 and it was held that neither the bonus vouchers can be treated as a commodity (including stocks and shares), nor the appellant's transactions for the purchase and sale of Bonus Vouchers can be deemed to constitute a distinct and separate business from their normal and regular business of manufacture and sale of cotton textiles and that the above loss of Rs.3,21,191 is an admissible deduction against the income. The department made an application under section 66(1) of the Act for getting the above question referred to this Court for opinion but the above application was declined by the learned Income-tax Appellate Tribunal by an order, dated 10-5-1977. The applicant Department has, therefore, filed the above direct reference.

3. In support of the above reference Mr. K. Salahuddin learned counsel for the applicant has urged that the bonus vouchers is a specie of stocks and shares and, therefore, was covered by Explanation I to section 24 of the Act.

On the other hand Mr. Ali Athar learned counsel for the respondent has submitted that the bonus vouchers were given against the export and, therefore, their sale cannot be included within the ambit of speculative transactions and that factually bonus voucher is neither a stock nor is a share.

In order to appreciate the above contention of the learned counsel for the parties, it may be advantageous to reproduce hereinbelow Explanation I to section 24 of the Act which reads as follows:--

"Explanation I.---The term `speculative transaction', as used in subsections (1) and (2), means a transaction in which a contract for the purchase and sale of any commodity (including stocks and shares) is .periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts but does not include a transaction in which--

(a)a contract in respect of raw materials or merchandise is entered into by a person in the course of his manufacturing or mercantile business to guard against loss through future price fluctuations for the purpose of fulfilling his other contracts for the actual delivery of the goods to be manufactured or the merchandise to be sold by him;

(b)a contract in respect of stocks and shares is entered into by a dealer or investor therein to guard against loss in his holdings of stocks, and shares through price fluctuations; and

(c)a contract is entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member."

A perusal of the above-quoted explanation indicates that the term "speculative transaction" referred to in subsections (1) and (2) of section 25 has been defined in the above-quoted explanation as means a transaction in which a contract for the purchase and sale of any commodity (including stocks and shares) is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts but it does not include (a) a contract in respect of raw materials or merchandise which a person entered into in the course of manufacturing or mercantile business to guard against loss through future price fluctuations, (b) a contract in respect of stocks and shares entered into by a dealer or investor to guard against the loss in his holdings of stocks and shares because of fluctuations in price, and (c) a contract entered into by a member of a forward market or a stock exchange in the course of transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business.

Mr. Salahuddin in furtherance of his above submission has referred to the definition of the term stock given in Black's Law Dictionary which provides as follows:--

"The term `stock' has also been held to embrace not only capital stock of a Corporation but all corporate wealth and resources, subject to all corporate liabilities and obligations."

He has also referred to the case of Dada Sons Hyderabad v. Commissioner of Income Tax (Central), Karachi reported in 1986 P T D 453, in which the facts were that the

assessee claimed a loss of Rs.21,600 on account of settlement difference paid in the gram account and a further sum of Rs.2,600 on account of rape-seed. It was- urged before the learned Income Tax Appellate Tribunal that the original intention was to deliver the goods but due to transport difficulties the goods could not be delivered and therefore settlement had taken place, but the above contention was repelled by the Income Tax Tribunal and it was held that in view of wording of Explanation to section 24 of the Act that transaction was speculative in nature; upon a reference to the High Court the learned Members of the Division Bench upheld the view of the learned Income-tax Appellate Tribunal.

On the other hand Mr. Ali Athar has referred to the case of Azad Friends Company Limited v. Commissioner of Income-tax reported in 1970 PTD 465 in which the facts were that the assessee company was manufacturer of the stationery articles and for that purchased imported raw materials under bonus vouchers which it purchased from the market from time to time. During the assessment year the assessee entered into 19 transactions for the purchase of bonus vouchers but in two of the above transactions no delivery of bonus vouchers was taken and the transactions were settled by payment by the assessee of the differences in prices which resulted into a loss of Rs.20,000 which the assessee sought to adjust against its income. The Income Tax Officer disallowed the above loss. In appeal the Tribunal held that the above two transactions were in the nature of speculative transactions within the meaning of section 24 of the Act and that the same should be deemed to constitute a distinct and separate business and the loss sustained by the assessee could be set off only against the income, profits and gains of such business. Upon a reference to the erstwhile High Court of West Pakistan it was held that the two transactions were not such which could constitute a substantive, systematic or organised course of activity as to make them a distinct and separate business of the assessee and, therefore, subsection (1) of section 24 was not applicable and the loss was adjustable. .

4. In the instant case as pointed out hereinabove the total sale of the bonus vouchers was to the tune of Rs.68,79,795 covering face value of the bonus vouchers of Rs.38,86,890 i.e. at the rate of Rs.177 for the face value of the bonus vouchers of Rs.100. Against the above transaction only some transactions were settled in which the assessee had to pay Rs.3,21,191. The above bonus vouchers were issued against the export and, therefore, they were to be disposed of in order to make good the deficit in the export price. .

We are inclined to hold that the view found favour with the learned income Tax Tribunal that the above transactions cannot be treated as a speculative distinct from the normal business of the respondent assessee and, therefore, the above loss was deductible from the profit account seems to be in consonance with law. We are unable to subscribe to the submission made by the learned counsel for the applicant Mr. Salahuddin that the bonus vouchers are of the specie of stock and share. As a matter of fact bonus vouchers are more akin to an import licence against which inter alia specified commodities could have been imported under the scheme. The case cited by Mr. Ali Athar is applicable to the instant case and not the case which has been relied upon by Mr. Salahuddin.

5. Accordingly our answer to the above-quoted question is in the affirmative. The reference stands disposed of in the above terms with no order as to costs.

These are the reasons in pursuance of a short order of even date.

M.BA./C-291/K Reference answered.