Raghunath Prasad Poddar Vs.
Commissioner of Income Tax, Calcutta  INSC 94 (25 April 1973)
KHANNA, HANS RAJ
CITATION: 1973 AIR 2061 1974 SCR (1) 91 1974
SCC (3) 205
O 1975 SC1996 (4) D 1980 SC 234 (3) O 1980 SC
Income-tax Act (1922), Sec. 24(1) Proviso,
Explanation 2 Speculative transactions-Goods sold by delivery of Pucca Delivery
Orders and not by actual delivery to the immediate buyer whether speculative.
The assessee, inter alia, deals in jute and
jute goods. For the relevant assessment years, the assessee showed certain
amounts as losses in its business In the sale and purchase of gunny bags. The
Income-tax Officer treated those losses as speculative, holding that there was
no actual delivery of the-gunny bags as the. transaction was settled only by
the delivery of Pucca Delivery Orders (P.D.0s). The principal question for
decision was, whether the transactions covered by P.D.0.s were speculative
transactions or not.
After the decisions of the various tax
authorities, the question was ultimately referred to the High Court for its
opinion. Relying on its earlier decision in Nanalal M. Varma and Co. (P) Ltd.
v. Commissioner of Income-tax, West Bengal, (73 I.T.R. 713). the High Court
answered the question in favour of the Revenue.
On appeals by special leave, allowing the
HELD : To effect a valid transfer of any
commodity, it is not necessary that the transfer in question should be followed
up by actual delivery of the goods to, the transferee. Even if the goods are
delivered to the transferees' transferee, the first transfer also will be a
valid transfer, on the principle of feeding back title[97B] Duni Chand Rataria
v. Bhuwalka Brothers Ltd.  1 S.C.R.
1071; Bayyanna Bhimayya v. Govt. of Andhra
Pradesh  3 S.C.R. 267, State of Andhra Pradesh v. Kolla Sreerama Murthy,
 1 S.C.R. 184, relied on.
Jute and Gunny Brokers Ltd. v. Union of India
 3 S.C.R. 820, distinguished.
The appeal was allowed and the answer given
by the High Court was vacated. The case was remanded to the Tribunal to decide
a fresh enquiry as to what was the trade practice in matters of sales by
delivery of P.D.Os at the relevant time and whether the last buyer in the
instant case, was given the actual possession or not.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1032 of 1970.
Appeal by special leave from the order' dated
May 30, 1969 of the Calcutta High Court in Income-tax Ref. No. 1 1 1 of 1966
and Civil' Appeal No. 1033 of 1970.
Appeal by special leave from the Judgment and
Order dated Julie5, 1969 of the Calcutta High Court in I.T.R. No. 174 of 1966.
CIVIL APPEAL No. 1034 of 1970.
Appeal by special leave from the Judgment and
order dated June & 5, 1967 of the Calcutta High Court in I.T.R, 189 of 1967
and Civil Appeal Nos. 1035 & 1036 of 1970.
92 Appeal by special leave from the judgment
and order dated June 12, 1969 of the Calcutta High Court in I.T.R. No. 162 of
1967 and Civil Appeals Nos. 1037 to 1039 of 1970.
Appeal by special leave from the judgment and
order dated June 5, 1969 of the Calcutta High Court in I.T.R. No. 181 of 1966
and Civil Appeal No. 1040 of 1970.
Appeal by special leave from the judgment and
order dated June 5, 1969 of the Calcutta High Court in I.T.R. No. 141 of 1967.
Leila Seth, U. K. Khaitan and B. P.
Maheshwari, for the appellants. (in C.A. Nos. 1032-1035, 1036 & 1040).
A. K. Sen, Leila Seth, U. K. Khaitan and B.
P. Maheshwari, for the 'appellants. (in C.A. Nos. 1037-39).
G. C. Sharma, S. P. Nayar and R. N. Sachthey,
for the respondents. (in all the appeals except C.A. Nos. 1034 & 1040).
G. C. Sharma, S. P. Nayar and B. D. Sharma,
for the respondents, (in C.As. Nos. 1032, 1033, 1035-1039).
The Judgment of the Court was delivered by
HEGDE, J. These are appeals by special leave. They raise a ,common question of
law viz. whether on the facts and in the circumstances of these cases the
amounts claimed by the appellants (assessees) as their losses in transactions
in gunny bags which were concluded by the transfer or delivery of pucca
delivery orders were speculative losses under Explanation 2 to the proviso to
section 24(1) of the Indian Income-tax Act, 1922 (to be hereinafter referred to
as the Act).
For deciding the question of law formulated
above, it will be sufficient if we set out the facts in Civil Appeal No.
1037 of. 1970. At the hearing we were
referred to the facts of that case only.
The assessee in Civil Appeal No. 1037 of 1970
is a company dealing, inter alia in jute and jute goods. In the assessment
years 1957-58, 1958-59 and 1960-61 (corresponding accounting periods being
calendar years 1956, 1957 and 1959) the assessee, claimed Rs. 35,578/-, Rs.
20,665/' and Rs.
3,849/respectively as losses in its business
in the sale and purchase of gunny bags. The Income-tax officer treated those
losses as speculative losses. He held that the contracts in respect of the
gunny bags said to have been sold were settled only by delivery of Pucca
Delivery Orders (in short P.D.0s) and not by actual delivery of the good
covered by those documents. He accordingly refused to set off those losses
towards the profits made by the assess be in its non-speculative business. The
assessee appealed against those assessment orders. The Appellate Assistant
CommisSioner found that the assessee had purchased the P.D.0s. from various
parties after paying the full price of the goods mentioned therein and
transferred those P.D.Os to his buyers after receiving the price fixed 93 for
the sale of those goods. The A.A.C. opined that the transactions, in question
represented purchases and sales of jute goods. The A.A.C. consequently held
that the losses claimed by the assessee were losses; from the ready business in
jute goods. In pursuance of those findings, he directed the Income-tax Officer
to allow the losses claimed as business loss. The Department appealed against
the order of the A.A.C to the Income-tax Appellate Tribunal. The Tribunal
following the decision of the Calcutta High-Court in D. N.
Wadhwana v. Commissioner of Income-tax, West
Bengal(1) allowed the appeals filed by the Department. It held that the sales
in question were 'speculative' as contemplated by S. 24 of the Act.
Consequently the losses in question, cannot be set off towards the profits made
in the assessee's nonspeculative business. Similar orders were made by the
Tribunal in the case of other assessees. At the instance of the various
assessees, questions similar to the question formulated above were submitted to
the High Court to ascertain its opinion. The High Court following its decision
in Income-tax Reference No. 88 of 1967 (Nandlal M. varma and Co. (P.) Ltd. v.
Commissioner of Income-tax, West Bengal II) (2) answered those questions in
favour of the Department. We have now to see whether the Calcutta High Court's
decision in Nanalal Varma's, case (supra) and the other decisions relied on in
that case lay down the law correctly. If those cases were correctly decided,
the appeals, before us must fail. On behalf of the appellants, it was contended
that Naralal Varma's case and the decisions relied on therein were riot
correctly decided. For the reasons to be stated hereinafter we agree with that
contention of the assessee.
Section 24 of the Act deals with set off of
losses in computing the. aggregate income of an assessee. Sub-S. (1) of S. 24
"Where any assessee sustains a loss of
profits or gains in any year under any of the heads mentioned in section 6, he
shall be entitled to have the amount of the loss set offagainst his income-,
profits or gains under any other head in that year :
Provided that in computing the profits and
gains chargeable under the head 'Profits and gains of business, profession, or
vocation', any loss sustained in speculative transactions which are in the
nature of a business shall not be taken into account except to the extent of
the amount of profits and' gains, if any,.
in any other business consisting of
speculative transactions." (The second proviso is not relevant for our.
Explanation 1 to that section says
"Where the speculative transactions carried on are of such, a nature as to
constitute a business', the 'business shall be deemed to be distinct and
separate from any other business" Explanation 2 is important for our
present purpose. It says "A speculative transaction means a transaction in
which a contract for purchase and sale of any commodity including-.
(1) 61, I.T.R. 154.
(2) 73, I.R.T. 713.
94 stocks and shares is periodically or
ultimately settled otherwise than by the actual delivery or transfer of the
commodity or script." The remaining part of that section is not relevant
for our present purpose.
We have now to see whether on the facts found
by the Tribunal, it can be said that the transactions with which we are
concerned can be said to have been "periodically or ultimately settled
otherwise than by the actual delivery or transfer of the commodity"-.
The Tribunal has found that, when the
assessees transferred the P.D.0s. to their buyers they had not actually
delivered to the buyers the goods covered by the P.D.0s. That conclusion was
not challenged. But it was urged on behalf of the assessees that the Tribunal's
finding by itself is not conclusive. They complain that the Tribunal has not
gone into the question whether the last transferees of the P.D.0s. had, taken actual
delivery or not of the goods covered by the P.D.Os. It cannot be disputed that
if any of the transactions were settled by actual delivery of the goods sold or
transfer of that commodity, those transactions do not come within the scope of
Explanation 2 to the proviso to s. A4(1). In our judgment to effect a valid
transfer of any commodity, it is not necessary that the transfer in question
should be follOWing up by actual delivery of the goods to the transferee. Even
if the goods are delivered to the transferees' transferee, the first transfer
also will be a valid transfer. Therefore, we have to see whether in the cases
before us, the ultimate purchaser of the P.D.0s. has taken actual delivery of
the goods sold. The Tribunal as well as the High Court were of opinion that if
any transfer of the P.D.0s. is not followed up by actual delivery of the goods
to the transferee, that transaction has to be considered as speculative. This
is an erroneous conclusion.
According to the appellants, the transactions
in jute or in jute gunny bags are usually conducted in Calcutta in the
following manner :
Jute Mills sell in presenti or in future jute
goods to buyers and issues P.D.0s. in their favour. If the sales are in
presenti, the buyers if they so choose can take immediate delivery of the goods
sold. If the delivery of the goods sold is to be given on a future date, the
buyers can take delivery of those goods on the date specified. But usually the
buyers of jute goods in Calcutta transfer the P.D.Os from one buyer to another
and ultimately P.D.0s. in the generality of cases, are purchased by the
Shippers who take actual delivery of the good sold. According to the appellants
every transfer of a P.D.O. result Its in a sale though at the time the
intermediate sales take place, 'he title to goods sold is defective for want of
delivery of the goods. That title gets perfected as soon as the goods sold are
In support of the trade practice pleaded, Mr.
Ashok Sen, learned Counsel for the appellants relied on the decision of this
Court in Duni Chand Rataria v. Bhuwalka Brothers Ltd.
(1) Therein Bhagwati J. speaking for the
Court quoted with approval (at p. 1078) the finding-, (1)  S.C.R. 1071 95
of the trial court as to the manner in which the goods :In that case were
transferred. The learned trial judge observed "Now visualize the long
chain of contracts in which the defendant's contract is one of the contracting
links. The defendant buys from its immediate seller and sells to its immediate
buyer. As seller it is liable to give and as buyer it is entitled to take
delivery. As seller it receives and as buyer it gives shipping instructions.
Similar shipping instruction is given by each link until it reaches the mills.
The mills deliver the goods alongside the steamer. Such delivery is in
implement of the contract between the mills and their immediate buyer.
But so instanti it is also in implement of
each of the chain contracts including the contract between the dependent and
its immediate buyer and the contract between the defendant and its immediate
seller. Not only does the mill give and its immediate buyer take actual
delivery but so instanti each middleman gives and takes actual delivery.
Simultaneously the defendant takes actual
delivery of possession of the jute goods from its immediateseller and gives
actual delivery of possession of jute goods to its immediate buyer. Prima facie
at the moment of the delivery along the steamer there is appropriation and the
passing of the property in the goods and the giving and taking of actual
delivery of possession thereof all along the chain at the same moment." On
the basis of that finding, this Court held in that case "The mate's
receipts or the delivery orders as the case may be, represented the goods. The
sellers handed over these documents to the buyers against cash payment, and the
buyers obtained these documents in token of delivery of possession of the
goods. They in turn passed these documents from hand to hand until they rested
with the ultimate buyer who took physical or manual delivery of possession of
those goods. The constructive delivery of possession which was obtained by the
intermediate parties was thus translated into a physical or manual delivery of
possession in the ultimate analysis eliminating the unnecessary process of each
of the intermediate parties taking and in his turn giving actual delivery of
possession of the goods in the "arrow sense of physical or manual delivery
thereof." A similar view was expressed by this Court in, Bayyana Bhimayya v.
The Government of Andhra Pradesh(1). Therein Hidayatullah J. (as he then was)
speaking for the Court observed (at p. 270) "A delivery order is a
document of title to goods (vide s. 2 (4) of the Sale of Goods Act), and I the
possessor of such a document has the right not only to receive the goods but
also to transfer it to another by endorsement or delivery. At the moment of
delivery by the Mills to the third parties, there were, in effect, two
deliveries, one by the Mills to the Appel(1)  3 S.C.R. 267.
96 lants, represented, in so far as the Mills
were concerned, by the appellants' agents, the third parties, and the other, by
the appellants to the third parties as buyers from the appellants. These two
deliveries might synchronise in point of time, but were separate in point of
fact and in the eye of law." Mr. Sharma, learned Counsel for the
Department contended that the property in goods represented by a P.D.O. cannot
be said-to pass until the actual delivery takes place, in view of s. 18 of the
Sale of Goods Act. Hence according to him, when the assessees old the P.D.0s.
to their buyers, the property in goods did not pass. In support of that
contention, he relied on the decision of this Court in Jute and Gunny Brokers
Ltd. and anr. v. The Union of India and ors.(1). That was a case of acquisition
of property under rule 75A read with rule 119 of the Defence of India-Rules,
1939. Therein the Government served an order of requisition on the mills which
was in possession of the goods. sought to be acquired. The validity of that
order was challenged by the purchaser of the goods through a P.D.O. He claimed
that he was the owner of those goods and as no notice of acquisition had been
served on him, the order acquiring the property was invalid. This Court upheld
the validity of the order of acquisition. It held that as the goods were in the
possession of the mills at the time the acquisition order was served, the title
in those goods had not passed to the holder of the P.D.O. The rule laid down in
that decision has no relevance for deciding the question of law that arises for
decision in these cases. Herein we are concerned with the question whether the
assessees have transferred the commodity covered by the P.D.0s. to their
buyers. For answering that question, we have to see whether the goods purported
to have been sold under the P.D.O. were actually delivered to the last buyer of
those P.D.0s. This position in law is made clear by the decision of this Court
in State of Andhra Pradesh v. Kolla Sreerama Murthy(2). It was a case arising
under the Madras General Sales Tax Act, 1939.
Therein the respondent was a dealer in gunny
bags. He purchased gunnies from the mills on terms of a written contract which
was on a printed form. The mills after receiving the part of the purchase price
issued "delivery orders" directing the delivery of the goods as per
the contract. Instead of taking delivery himself, the respondent endorsed the
delivery orders to another person for consideration and those delivery orders
passed through several hands before the ultimate holder of the delivery orders
presented it to the mills and obtained delivery of the gunnies from the mills.
At the date of the contract for purchases the goods which were the subject
matter of the purchase were not appropriated to the contract so that there was
no completed sale since no property in the goods sold passed. There was only an
agreement of sale. The Sales-tax Officer assessed the respondent and collected
soles tax on the said transactions. The question was whether the transactions
were or were not "sales of goods" within s. 3 of the Madras Sales Tax
Act, 1939, so as to enable the turnover represented by those sales to be
brought to tax under the Act, or were mere sales or transfers of delivery orders
: and further what was the effect of the property in the goods passing to the
ultimate endorse& of the delivery orders. The Court held that the principle
laid (1) 3,S.C.R.820. (2)  1 S.C.R. 184.
97 down in Butterworth v. Kingway Motors
Ltd.(1) which was the basis of the decision of this Court in Bayyanna
Bhimayya's case (supra) would equally apply to the facts of that case.
This Court upheld the levy, of sales tax on
the ground that though the title to the goods sold did not pass when the
delivery order passed from one intermediate dealer to another intermediate
dealer but yet those transactions became sales of goods as.-soon as the goods
were actually delivered to the last buyer of the "delivery order" on
the principle of feeding back the title. The Court held that the title acquired
by the last purchaser went to feed the previous defective titles obtained by
the previous buyers.
Consequently every transfer of the
"delivery orders" became a "sale" within the meaning of s.
3 of the Madras Sales Tax Act, 1939.
Neither the I.T.O. nor the A.A.C. and nor
even the Tribunal has gone into the questions firstly as to what was trade
practice at the relevant time and whether, the last buyers of t he P.D.0s. have
taken actual delivery of the goods covered by those P.D.Os They concentrated
their attention solely. on the question whether the assessees had given
delivery of the goods covered by the P.D.0s. to their transferees. That was not
the relevant issue. The crucial question of fact to be decided was whether the last
buyers of the P.D.0s. had taken actual delivery of the goods covered by the
P.D.Os. Mr. Sen relying on the decision of this Court in Duni Chand Bataria's
case (supra) urged that we should accept the trade practice pleaded by him and
straightaway allow the appeals. But no such trade practice appears to have been
put forward before the authorities under the Act. That apart, the. transactions
effected by the assessees cannot be considered as a valid 'transfer of the
commodity' within the meaning of Explanation 2 to the proviso to s. 24(1) of
the Act until the actual delivery of the commodity in question takes place.
Under the circumstances, it is not possible to answer the questions referred to
the High Court. All that we can do is either to call for a supplementary
Statement from the Tribunal or to remand these cases to the Tribunal for a
fresh hearing. As seen earlier, the authorities under the Act have completely
misdirected themselves as to the questions of fact to be decided. Hence there
is need for a fresh enquiry.
Therefore it will be in the interest of the
parties to remand the cases to the Tribunal for a fresh enquiry on the lines
suggested earlier. We order accordingly. The Tribunal may take additional
evidence on the questions mentioned earlier The parties may be given reasonable
opportunity to adduce additional evidence both documentary as well as oral. The
Tribunal may also take into consideration the bye-laws of the East India Jute
and Hessian Exchange Ltd., Calcutta which bye-laws, We were told, were in force
during the calendar year 1959. We ,sure the Tribunal will deal with these cases
expeditiously as they are very old cases.
In the result we allow these appeals, vacate
the answers given by the High Court and remand the, cases to the Tribunal for
disposal according to law. The costs in this Court as well as in the High Court
will be costs in the cause.
S.B.W. Appeals allowed.
(7)  2, All E.R. 694;