COMMISSIONER OF INCOME TAX GUJARAT III, AHMEDABAD & ANOTHER versus KURJI JINABHAI KOTECHA

Citation: [1977] 3 S.C.R. 26 · Decided: 18-02-1977 · Supreme Court of India · Bench: P.K. GOSWAMI · Disposal: Appeal(s) allowed

Judgment (excerpt)

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COMMISSIONER OF INCOME TAX 
GUJARAT HI, AHMEDABAD & ANOTHER 
v. 
KURJI JINABHAI KOTECIIA 
February 18, 1977 
[P. K. GOSWAMI AND JASWAN.T Sii;GH, JJ.] 
Inco1ne Tax Act 1922-Section 24(1)(2)-Whether expenses incurred in 
carrying 011 illegal business to be deducted-Whether loss arising out of illegal 
business can be set off aKainst profits fro1n le::al business-Whether loss of 
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illegal business can be1 carried forward to 
future 
years-lnterpreration of· 
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statutes-Whether, oupht to be consistent l1dth morality-Whether. i·o1Uinuation 
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of illegal activity to be recognised. 
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. Forward Contracts (Regulation) Act 
1952-Sectlo~J 15(4)-lflegal con· 
tracts-Effect of income tax law. 
The assessee carries oo business of running Oil l\.Hll anJ dealing in ground-
nuts, groundnut seeds . and oil, speculative business in groundnuts,_ groundnut 
oil and groundnut seeds, and speculation business in cotton errands etc. · The 
l.T.0. disallo\lled loss in forward contracts and groundnut oil, groundnuts and 
groundnut seeds .on the ground that it arose out of illegal contracts on account 
of the same being banned under section 15(4) of the Forward Contracts 
(Regulation) Act, 1952. The Appellate Assistant Commissioner on appeal 
confirmed the decision of the I.T.O. but bifurcated the loss into two headings, 
namely, loss incurred in hedging transactions· in the banned items and loss 
incurred •in· speculative transactions. 
On second· appeal, 
the 
Tribunal 
held 
that notwithstanding the illegality of the tran-sactions _ the loss could be 
set 
off and carried forward in accordance with the provisions of section 24(1) and 
24(2) of the Income Tax Act, 1922. The Tribunal accor~ingly directed that 
the loss in hedging transactions of forw&rd business . in the banned contracts 
he set off against the other profits of the asses3ee for the relevant accounting 
year under section 24 ( 1) and that balance of Toss relating, to the speculative 
transactions in the banned contracts be carried forward to the following year 
under section 24(2) of the-Act to be set off against profit of the folTo\\-·ing year 
from speculative business. On reference to the lligh Court, the High Court 
answered both the questions in favour of the assessee and upheld ·the judg-
ment of the Tribunal. The High Court relied on its earlier judgment in the 
crise of C.l.T. v. S.C. Kothari. 
, 
Allowing the appeal by certificate, 
HELD: 
(I) The Joss i~cuITed-;in the hedging transa::tions cannot be set off against 
other profits in the previous year in view of the decision of this Court partly 
reversing the judgment of the High Court in the case of S.C. Kothari. [31C-D] 
Commissioner of Inco1ns.tax. v. S.C. Kothari, 69 ITR 1. applied. 
(2) It is admitted that the contract for specu!ation in the commodity in 
question is banned under the Forward Contracts (Regulation) Act 1952. To 
allow such a loss to be carried forward is to permit a benefit of adjustment 
of loss from an illegal business to spill over '.lnd continue in the fo1lo\ving year 
even in a lawful speculative business. -The ,Speculative business v.·hich is car-
!ied on in the foltowing year must be a business of _]awful speculation pertain· 
1nj! to thf" t'lv.-·fuJ end enforceable-- contracts. 
An assessee- carrying on a law-
ful speculative business in the following year cannot derive benefit by car-
ryin_g forward and setting off a 
loss from illegal speculative business of the 
earher year. Law will assume an illegal business to die out of existence with 
3.tl its- losses to the assessee in the year of loss itself. The assessee can derive 
no benefit on account of the unlawful business in the following year. The 
matter will be different if a lawful speculative business after incurring loss is 
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C.l.T. V. K. J. KOTECHA 
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discontinued and Joss tbereuPOn is carried forward for set off ag_ainst any_ other 
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lawful speculative busines_s in the following year •. It is inconceivable that Jaw 
, can permit an illegal activity to be carried on from which a benefit could be 
obtained. . The concept of carry forward is not the san1e thing a<i the setting 
pff of loss in @. ,Darticular illegal business against· profit of that il1egal business 
fn a particula_r year. The two concepts have to be kept distinctly separate 
even in a taxing statute. It is true that by earning income from illegal trading . 
activity th_e business does not get tainted s

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