Calcutta H.C : This reference arises out of the income-tax assessment of Nuddea Mills Co. Ltd., the assessee, for the asst. yrs. 1961-62, 1965-66 and 1966-67, the relevant accounting years ending on the 31st March of the calendar years 1961, 1965 and 1966.

Counsel Appeared

Dr. D. Pal, A.C.S. Chari & Miss M. Seal, for the Assessee : B.K. Bagchi & M.L. Bhattacharya, for the Revenue

DIPAK KUMAR SEN, J.:

This reference arises out of the income-tax assessment of Nuddea Mills Co. Ltd., the assessee, for the asst. yrs. 1961-62, 1965-66 and 1966-67, the relevant accounting years ending on the 31st March of the calendar years 1961, 1965 and 1966.

The facts as found and on record are, inter alia, that the assessee is a manufacturer of jute goods. In the assessment years involved, the assessee entered into forward contracts for sale of standard jute goods of its manufacture. Subsequently, the assessee received overseas offers for supply of special quality jute goods where the margin of profit was expected to be high. The capacity of the looms available to the assessee for production was limited and the assessee was not in a position to manufacture the special quality jute goods for the overseas purchasers and also standard jute goods to fulfil the assessee’s forward contracts of sale. To earn higher profits, the assessee decided to manufacture the special quality jute goods and reduced the manufacture of standard jute goods correspondingly. The assessee covered its forward contracts of sale by entering into forward contracts of purchases of standard jute goods or purchased back some of its forward contracts of sales.

In covering its forward contracts of sale as aforesaid, the assessee suffered losses in the relevant assessment years, respectively, of Rs. 3,95,929, Rs. 1,18,065 and Rs. 3,14,540. In its assessments to income-tax, the assessee contended that such losses were incurred on hedging transactions and not on speculation.

The ITO held that as the contracts for forward sales had been settled otherwise than by actual delivery of goods, the transactions conformed to the definition of a speculative transaction under Explanation 2 to s. 24(1) of the Indian IT Act, 1922 (“the 1922 Act “), and cl. (5) of s. 43 of the IT Act, 1961 (” the Act “). He held further that the transactions were not hedging transactions within the meaning of the said section as they were not entered into to guard against losses through future price fluctuations. The losses claimed were added back to the income of the assessee.

The assessee preferred appeals against the said assessments before the AAC who found that the assessee carried on business of manufacture of jute products and also sold the products manufactured by forward contracts. The contentions of the assessee that the purchase back of the forward contracts was a part of the business of the assessee of supply of special quality jute goods to overseas buyers by switching production of standard jute goods and that the transactions were only hedging transaction, were rejected by the AAC. It was held that the said transactions were not entered into to guard against loss on account of future price fluctuations of basic raw materials. The decisions of the ITO were upheld.

The assessee preferred further appeals against the orders of the AAC before the Tribunal. The assessee contended before the Tribunal, inter alia, that the transactions which had resulted in losses to the assessee were not speculative in nature within the meaning of the relevant provisions of the 1922 Act and the 1961 Act. At the inception of the forward contracts of sale, the assessee did not intend to settle the same otherwise than by actual delivery of goods. In the circumstances and on account of commercial considerations, it became necessary ultimately to determine the contracts by purchasing back the same.

7. It was contended in the alternative that the transactions were of the nature of hedging contracts within the meaning of proviso (a) to Explanation 2 to s. 24(1) of the 1922 Act or proviso (a) to s. 43(5) of the 1961 Act.

8. Contentions to the contrary were made on behalf of the Revenue. It was held by the Tribunal that where contracts were settled ultimately by payment of difference and not by actual delivery of goods, the question whether there was any intention not to settle such contracts in the said manner at the inception was irrelevant. The assessee knew when it switched over to the manufacture of special quality jute goods for the overseas buyers that there would not be sufficient goods available to deliver against the original forward contracts of sale of standard jute goods and that is why the purchase contracts were entered into by the assessee.

9. The Tribunal held further that the claim of the assessee that the transactions relating to its forward contracts of sale resulting in loss were hedging transactions was far-fetched. The assessee was a manufacturer of jute goods and it was held that only a contract in respect of purchase of raw materials, if made to guard against loss through future price fluctuations in respect of the said forward contracts of sale, would be a hedging transaction. The forward contracts of sale and the subsequent purchase contracts were by themselves not hedging contracts.

10. The Tribunal noted that the three sets of transactions, viz., the forward contracts of sale, transactions for sale of special quality jute goods to the overseas buyers and the forward purchase contracts of standard jute goods cannot be considered as one composite transaction. The forward purchase contracts of standard jute goods were not part of the transactions for manufacture and supply of special quality jute goods. The Tribunal affirmed the decisions of the AAC.

11. On an application of the assessee under s. 256(1) of the Act, the Tribunal has referred the following question as a question of law arising out of its order for the opinion of this Court : ” Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding (with reference to the provisions of Explanation 2 to s. 24(1) of the Indian IT Act, 1922, for the asst. yr. 1961-62 or s. 43(5) of the IT Act, 1961 for the asst. yrs. 1965-66 and 1966-67), that the losses in question were losses from speculative transactions ? “

12. At the hearing, learned advocate for the assessee submitted that it has been found by both the ITO and the AAC that the assessee carried on the business both of manufacture and sale of jute goods and that the Tribunal has erroneously proceeded on the basis that the assessee was only a manufacturer of jute goods and ignored the fact on record that the assessee also sells jute goods. On the facts on record which were not rejected by the Tribunal, the transactions were required to be considered as a whole and the transactions of forward purchase of standard jute goods or purchase back of its forward contracts of sale of standard jute goods were of the nature of hedging contracts. Proceeding on a misconception that the assessee was only a manufacturer, the Tribunal held that only contracts for future purchase of raw materials to guard against future price fluctuations would be hedging contracts available to the assessee. Such conclusions of the Tribunal was not a finding of fact but was arrived at by a misreading and a misapplication of proviso (a) to Explation 2 to s. 24(1) of the 1922 Act and proviso (a) to s. 43(5) of the 1961 Act. In the question which has been referred, the assessee has challenged the final conclusion of the Tribunal. It was not necessary for the assessee to challenge any finding of fact. The question referred was a mixed question of law and fact. Where on the primary facts which were not in dispute a conclusion was arrived at on a wrong or incorrect application of law, the same could be challenged in the manner it has been done.

13. In support of his contentions, the learned advocate for the assessee cited the following decisions: (a) G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 : This decision of the Supreme Court was cited for the following observations (p. 601): ” There is yet a third class of cases in which the assessee or the Revenue may seek to challenge the correctness of the conclusion reached by the Tribunal on the ground that it is a conclusion on a question of mixed law and fact. Such a conclusion is no doubt based upon the primary evidentiary facts, but its ultimate form is determined by the application of relevant legal principles. The need to apply the relevant legal principles tends to confer upon the final conclusion its character of a legal conclusion and that is why it is regarded as a conclusion on a question of mixed law and fact. In dealing with findings on questions of mixed law and fact, the High Court would no doubt have to accept the findings of the Tribunal on the primary questions of fact; but it is open to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not; and in that sense, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such points is the same as in dealing with pure points of law.”(b) Oriental Investment Co. P. Ltd. vs. CIT (1969) 72 ITR 408 : This decision of the Supreme Court was cited for the following observations (pp. 415 and 416): ” There is, however, a third class of cases in which the assessee or the Department may seek to challenge the correctness of the conclusion reached by the Tribunal on the ground that it is a conclusion on a question of mixed law and fact. Such a conclusion is no doubt based upon the primary evidentiary facts, but its ultimate form is determined by the application of relevant legal principles. To put it differently, the proper construction of statutory language is always a matter of law …… In dealing with findings on such questions of mixed law and fact, the High Court must no doubt accept the findings of the Tribunal on the primary questions of fact ; but it is open to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not in reaching its final conclusion; and, in that sense, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such points is the same as in dealing with pure points of law ……… The final conclusion of the Tribunal can, therefore, be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on the point; and such a challenge is open under s. 66(1) because it is a challenge on a ground of law.” (c) Star Co. Ltd. vs. CIT (1970) 75 ITR 179 (SC) : In the case, the assessee claimed that a loss suffered by it on account of sale of certain shares arose in its share dealing business. The ITO and the AAC rejected the claim of the assessee finding that the shares were purchased pursuant to a scheme of acquisition of the managing agency of the company involved and the loss resulting in the sale of the shares did not arise in the course of the assessee’s normal business. The Tribunal came to a contrary conclusion and held that the assessee had obtained the said shares as a part of its investment and the loss suffered by the assessee was accepted to be a loss in investment. The question referred to the High Court at the instance of the Revenue was a general question. No conclusion of fact reached by the Tribunal was specifically challenged. The High Court answered the question holding that on the facts and circumstances it would be impossible to hold that the assessee had bought the said shares in the ordinary course of its business.

On further appeal to the Supreme Court, it was contended that the High Court was not entitled to reverse the findings of fact of the Tribunal as the same had not been challenged by a specific question. It was held by the Supreme Court that the question which was referred was framed in the light of the final conclusion and it was not necessary to apply for and initiate a reference on a question arising from the reasons given by the Tribunal in support of its conclusion. (d) CIT vs. S. P. Jain (1973) 87 ITR 370 (SC) : In this case the Revenue in its applications for reference under ss. 66(1) and 66(2) of the 1922 Act sought to challenge a particular finding of the Tribunal as perverse. This question was not allowed either by the Tribunal or by the High Court. On further appeal to the Supreme Court, it was observed that perhaps the High Court thought that the questions which were directed to be referred covered the question of perversity. The Supreme Court observed as follows (p. 381): ” In our view, the High Court and this Court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusions on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases, the findings arrived at are vitiated.” (e) CIT vs. Gourepore Co. Ltd. (1982) 135 ITR 606 (Cal) : The facts of this case are almost identical to the facts of the case before us. The assessee in this case also carried on the business of manufacture and sale of jute goods. This fact was accepted by the Tribunal. The assessee entered into forward contracts of sale for its jute products. Subsequently, the assessee accepted overseas orders for supply of special quality jute goods and switched over to the manufacture of the same. The forward contracts with the local buyers were settled at a loss. The Tribunal reversed the decision of the ITO and the AAC and found that the assessee had an initial intention to supply the goods under the forward contracts of sale which it could not not do by reason of its acceptance of the overseas

orders. The Tribunal held further that the settlement of the forward contracts of sale was necessary and incidental to the business of the assessee and the same resulted in more profits by fulfilling the overseas contracts even after setting off the loss resulting from the settling of the forward contracts of sale to the local buyers. It was held that the result was admittedly a hedging profit and not a speculative loss. This conclusion of the Tribunal was challenged in a reference before this Court under a general question.

It was held by a Division Bench of this Court that the categorical finding of the Tribunal was that the transactions in dispute were hedging transactions and the same was supported by a number of reasons. The Tribunal further found that the assessee had all along the intention to supply the goods in terms of the forward contracts of sale but the same were ultimately settled to enable the assessee to fulfil its overseas orders. The Tribunal found further that the settlement of the said forward transactions were necessary and incidental to the carrying on of the assessee’s business which included supplies overseas. None of the findings were challenged by the Revenue by raising appropriate questions. It was noted that the finding of the Tribunal that the transactions were hedging transactions not having been challenged by a separate question, the decision of the Tribunal was upheld.

Learned advocate for the Revenue contended on the other hand that it had been found by the Tribunal that the assessee was a manufacturing concern and not a dealer and, therefore, the only hedging transactions which were available to the assessee were in respect of forward purchase of raw materials to offset future fluctuations of price of such raw materials which might be required by the assessee to fulfil its future transactions. In the instant case, there was no transaction by the assessee in respect of raw materials and, therefore, the assessee was not entitled to claim that the transactions involved were hedging transactions.

Learned advocate for the Revenue submitted further that whether a transaction was a hedging transaction or not was a question of fact.

The Tribunal has found that the transactions resulting in a loss to the assessee were not hedging transactions. None of the findings of fact in the instant case had been challenged by the assessee by an appropriate question. Therefore, the decision in Gourepore Co. Ltd.’s case (supra), though cited on behalf of the assessee, in fact, supported the contention of the Revenue and the question should be answered in favour of the Revenue. In support of his contentions, learned advocate for the Revenue cited the following decisions: (a) Dr. K. George Thomas vs. CIT (1985) 49 CTR (SC) 204 : (1985) 156 ITR 412 : This decision of the Supreme Court was cited for the following observation (p. 420) : ” Facts must be found by the Tribunal and the High Court must proceed on the basis of the facts found by the Tribunal. The High Court cannot afresh go to the facts overruling the facts found by the Tribunal unless there is a question to that effect challenging the facts found by the Tribunal. These propositions are well settled ……..” (b) Patnaik & Co. Ltd. vs. CIT (1986) 58 CTR (SC) 92 : (1986) 161 ITR 365 : This decision of the Supreme Court was also cited for the following observations (p. 367) : “It is now well-settled that the Tribunal is the final factfinding authority under the IT Act and that the Court has no jurisdiction to go behind the statements of fact made by the Tribunal in its appellate order. The Court may do so only if there is no evidence to support them or the Tribunal has misdirected itself in law in arriving at the findings of fact. But even there, the Court cannot disturb the findings of fact given by the Tribunal unless a challenge is directed specifically by a question framed in a reference against the validity of the impugned findings of fact on the ground that there is no evidence to support them or they are the result of a misdirection in law.”

In this case, the Supreme Court considered its earlier decision in S.P. Jain’s case (1972) CTR (SC) 443 : (1973) 87 ITR 370 (SC). It was noted that the questions were raised in the reference before the High Court specifically challenging the findings of fact by the Tribunal as being invalid. To appreciate the controversy involved in this reference, it will be convenient to note the relevant provisions of the two Acts. Explanation 2 to s. 24(1) of the 1922 Act provides as follows: ”

24. Set off of loss in computing aggregate income.—(1) …… Explanation 2.—A speculative transaction means a transaction in which a contract for 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 scrips: Provided that for the purposes of this section— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ; or (c) a contract 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 ; shall not be deemed to be a speculative transaction.”

20. Sec. 43(5) of the 1961 Act provides as follows: “43. Definitions of certain terms relevant to income from profits and gains of business or profession—…….. (5) ‘speculative transaction’ means a transaction in which a contract for the purchase or 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 scrips : Provided that for the purposes of this clause— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ; or (c) a contract entered into by a member of a forward market or 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; shall not be deemed to be a speculative transaction.” It is to be noted that in the instant case, the future contracts of sale of standard jute goods, contracts (sic) were ultimately settled by the assessee otherwise than by actual delivery or transfer of the contracted goods. Therefore, the transactions prima facie come within the mischief of Explanation 2 to s. 24(1) of the 1922 Act and under s. 43(5) of the 1961 Act.

It is next to be examined whether the said transactions come within the exception laid down by proviso (a) to the said Explanation 2 or proviso (a) to the said s. 43(5). It is not the case of the assessee that it entered into future contracts of sale or future contracts of purchase for settlement of the future contracts of sale with the object of guarding against any loss through price fluctuations. The assessee entered into the said future contracts of purchase as it knew that it would not be able to fulfil its future contracts of sale having switched over to the manufacture of special jute goods for the foreign market.

On these facts, the Tribunal has come to the conclusion that the transactions of the assessee were not in the nature of hedging. This is a conclusion of fact which has not been challenged by the assessee as perverse or contrary to the evidence on record. No doubt on almost identical facts, the Tribunal in Gourepore Co. Ltd.’s case (supra) came to a different conclusion and held that the settlement of forward contracts of sale was necessary and incidental to the business of the assessee and resulted in hedging profit and not a speculative loss. But the same conclusion has not been drawn by the Tribunal in the instant case and the same as a conclusion or finding of fact has become final. We note that the Tribunal in the instant case has taken into account only the fact that the assessee was a manufacturer of jute goods and that the assessee could enter into hedging transactions to guard against future price fluctuations of raw materials. This finding has also not been challenged as perverse. It has also not been alleged that the Tribunal has failed to take note of the evidence on record that the assessee was also a seller of jute goods. Law stands settled that the Tribunal is the final fact-finding authority and the High Court cannot take a different view of facts or find new facts different from those found by the Tribunal. It is for this reason that in Gourepore Co. Ltd.’s case (supra), this Court refused to interfere with the finding of the Tribunal that the transactions in dispute were hedging transactions and other alleged facts on the basis of which the finding of the Tribunal was arrived at. This Court held that none of the findings of the Tribunal was challenged by an appropriate question. For the same reason, in this case, it has to be held that the finding of the Tribunal that the transactions involved are not hedging transactions which has not been challenged by an appropriate question cannot be assailed. In Gourepore Co. Ltd.’s case (supra), it has not been laid down by this Court that the question whether a transaction is a hedging transaction or not is a mixed question of fact and law. On the contrary, it has been held that the question was primarily one of fact which had to be determined on the basis of other facts relating to the said transactions. The decisions in the cases of G. Venkataswami Naidu and Co. (supra), Oriental Investment Co. (P.) Ltd. (supra), Star Co. Ltd. (supra) and S. P. Jain (supra) do not help the assessee. The conclusion that a transaction is a hedging transaction can be arrived at on the basis of primary and relevant facts and not by mere application of a principle of law. This is not a case where the assessee has challenged the final conclusion of fact but has failed to challenge separately the evidentiary facts leading up to the conclusion. In S. P. Jain’s case (supra), the Revenue had challenged a particular finding of the Tribunal as perverse which was not allowed either by the Tribunal or by the High Court. The Supreme Court proceeded on the basis that the question which was allowed by the High Court to be raised might have covered the question of perversity.

25. For the reasons as aforesaid, we are unable to accept the contentions of the assessee and we answer the question referred in the affirmative and in favour of the Revenue. There will be no order as to costs.

SHYAMAL KUMAR SEN, J.:

I agree.

[Citation : 171 ITR 169]