SK. AR. K. AR. SOMASUNDRAM CHETTIAR AND CO. MADURAI versus COMMISSIONER OF INCOME TAX. MADRAS

Citation: [1992] 1 S.C.R. 49 · Decided: 15-01-1992 · Supreme Court of India · Bench: K. RAMASWAMY · Disposal: Dismissed

Judgment (excerpt)

. 
SK. AR. K. AR. SOMASUNDRAM CHETI'IAR AND CO .• MADURAI 
A 
v. 
COMMISSIONER OF INCOME TAX. MADRAS 
JANUARY 15. 1992 
[K. RAMASWAMY AND B. P. JEEVAN REDDY, JJ.] 
B 
Income Tax Act, 1922-Section 24, third proviso, clause (a)-Require-
ments under-Contract--Constructi_o,._contract spoken in first part and in 
second part--Co-relatio~When the clause applies to speculative transac-
tion, indicated. 
Income Tax Act, 1922-Section 24, third proviso, clause (a}-Transac-
tions entered into by assessee whether saved under. 
c 
The appellant-assessee, was a registered firm. It was carrying on 
business in cloth and yarn. Its cloth business consisted mainly in Gada 
manufactured by certain Mills. 
D 
The Income Tax Officer while making the assessment relating to 
the assessment years of 1960-61 and 1961-62, held that the losses of Rs. 
2,04,746 and Rs. 17,000 respectively sustained by the assessee in the two 
assessment years constituted losses in speculative transactions in the 
nature of business and, therefore, could not be set off except against E 
profits from speculation. He carried forward the said loss to be set off 
against speculation profits, if any, in subsequent assessment years. 
The assessee's appeal was dismissed by the Appellate Tribunal, 
though its further appeal to the Tribunal was upheld. 
Before the Tribunal, the assessee, conceding that the transactions 
in question are speculative transactions within the meaning of the 
Explanation 2 to section 24, Income Tax Act, 1922, contended that the 
transactions in question were saved under clause (a) of the proviso to 
F 
Section 24 of the Act. 
G 
The Tribunal held that the transactions entered into by the assessee 
were in the nature of the hedging contracts and, therefore, saved under 
clause (a) of the proviso. 
The Revenue obtained a reference to the High Court on the H 
49 
A 
B 
50 
SUPREME COURT REPORTS 
(1992] 1 S. C.R. 
question, ''whether on the facts and in the circumstances or the case, the 
transactions resulting in the loss of Rs. 2,04,746 in the previous year 
relevant for the assessment year 1960-61 and in the loss or Rs. 17,000 in 
the assessment year 1961~62 were saved from being treated as specula-
tive transactions by clause (a) or the third proviso to Section 24(1) of the 
Income Tax Act, 1922." 
The assessee conceding that the transactions in question were 
speculative transactions, contended before the High Court that the 
transactions were saved by clause (a) of the third proviso to Section 24 . 
. 
• 
The High Court answered the reference in negative, i.e., in favour 
)..__ 
C 
of the Revenue, holding that the transactions in question were not saved 
by clause (a) of the third proviso. 
The assessee-appellant challenged the view taken by the High 
Court in these appeals by special leave. 
D 
On the question, whether the transactions in question were saved 
' E 
F 
G 
H 
by clause (a) of the third proviso to Section 24 of the Income Tax Act, 
1922, dismissing the appeals, the Court, 
HELD : 1.01. When the first part of clause (a) speaks of a contract 
in respect of merchandise, it refers to a contract falling within the 
definition of speculative transaction. But the further requirement of 
clause (a) is that such a contract in respect of merchandise must have 
been entered into by the merchant in the course of his business to guard 
against loss through future fluctuations "in respect of his contracts for 
actual delivery of goods sold by him." Clearly, the contracts referred to 
in the latter part of clause (a) must be contracts for actual delivery of 
goods sold by him. It necessarily means contracts of sale by him and such 
contracts must be for actual delivery of goods. The words "for actual 
delivery of goods" have evidently been put in designedly. [55D-E] 
1.02. 
There need not be co-relation between contract to contract 
but there ought to be a co-relation between the contracts ~poken to in the 
first part of clause (a) and the contracts spoken to in the latter part. 
Unless such co-relation exists between two sets of contracts, the clause is 
not attracted. [55E-F] 
2. Tilt assessee entered into a contract of purchase with the mills 
and a contract of sale with another person. Then he entered into a 
J.-
SOMASUNDRAM CHETII.\R & CO. v. C.I.T. [REDDY, J.] 
51 
contract of purchase with such person in respect of the same goods. He 
A 
then obtained delivery of the cloth from the mills and sold them to the 
third parties. So far as t

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