LexCOMMISSIONER OF INCOME TAX, GUJARAT versus M/S. S. C. KOTHARI
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950
COMMISSIONER OF INCOME TAX, GUJARAT
v.
M/S. S. C. KOTHARI
October 5, 1971
[K. S. HEGDE AND A. N. GROVER, JJ.)
Income-tax Act (ll of 1922), ss. 10(1) and (2) and s. 24(1)-
Scope of.
Forward Contracts (Regulation) Act, 1952 s.
15 ( 4 )-Contract in
violation of-If illegal
Section 15 ( 4) of the Forward Contracts (Regulation) Act, 1952 is
conceived in the larger interest of the public to protect them against the
malpractices indulged in by members of recognised associations in resoect
of transactions in which their duties as agents come into conflict with
theiI personal interest. · Parliament had made a writing, evidencing or
confirming the consent or authority of a non-member, as a condition of
the contract if the member has entered into a contract on his own account.
. So long as there was no such writing thei'e was no enforceable contract.
Under the Act, there is not only an express prohibition but also punish-
ment for contravention of that prohibition.
The assessee, a registered firm, was a member of the Saurashtra Oil
and Oilseeds Association, and was carrying on the business of commis-
sion agency and general merchants. It was also doing forward business.
During the assessment year 1958-59 it incurred a loss in certain transac-
tions.
Those transactions were in contravention of the provisions of
s. 15 ( 4) of the Forward Contracts (Regulation) Act. The assessee claimed
that the loss was allowable under s. 10( 1) of the Income-tax Act, 1922,
as a deduction against its other business income even if the losses were
incurred in illegal transactions. The Income-tax Officer rejected the con-
tention of the assessee, and also held that the losses incurred in illegal
business could not be deducted from speculative profits under s. 24 of the
Income-tax Act.
The Appellate Assistant Commissioner confirmed the
order. The Tribunal held that the assessee could not set off the loss
against the other income under s. 10(1) of the Income-tax Act hnt was
entitled to do so under s. 24.
On the questions referred . to the High Court namely : (I) Whether
the loss was in respect of illegal contracts, (2) Whether the loss was a·
resnlt of speculative transactions and therefore could be set off undei' s. 24
of the Im:ome-tax Act, and ( 3) whether even if the loss was as a result
of illegal transactions the asscssee was entitled to set off the loss under
s. 10(1) of the Income-tax Act, the High Court did not answer the first
question but held that the losses could be set off both under s. 10 and
s. 24 of the Income-tax Act.
In appeal to this Court.
HELD : (1) It is well settled that contracts which are prohibited by
statute, the prohibition being either express or implied. would be illegal
A
B
c
D
E
F
G
and unenforceable if they are entered into in contravention of the statute.
Therefore. the contracts in the preient case, were illegal contl'acts and the
JI
loss was in respect of such illegal contracts. (955 C-D)
Sunder Lt;l v. Bharat. Ha11dicrafrs, [1968] 1 S.C.R. 608, followed.
A
C.I.T. v. s. c. KOTHARI {Grover, J.)
951
(2) Under Explanation 2 of s. 24 a speculative transaction means
a transaction in whicu a contract for purchase and sale of anv commodity
is periodically or ultim•tely settled otherwi~ than by actual delivery etc.:
but the contract has to be an enforceable contract and not an unenforce-
able one by reason of any taint or illegality. In the present case, the con-
tracts were illegal and unenforceable on account of the contravention of
s. 15(4) of the Forward Contracts (Regulation) Act. The High Court
B
was therefore in error in considering that set off could be allowed under-
s. 24(1) of the Income-tax Act. [959 D-F]
(3) While s. 10(1) of the Income-tax Act imposes a chargs on pro-
fits or gains of a business it does not provide how those pi"ofits are to be
computed.
Secti<.>n 10(2) enumerates various items which are admissible
as deductions but they are not exhaustive. The profits and gains which
are liable to tax under s. 10(1) are what are understood to be such under
c ordinaf} commercial practice. The loss for which the deduction is claimed
mu•t be one that springs directly from the carrying on of the business and
is incidental to it, that is, the profit was earned and the loss was sustained
in the same business. If this is established the deduction must be allowed
provided that there is no ptovision against it. If the business is illegal,
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