ORDER
Hari Om Maratha, J.M.
1. This appeal by the Department for asst. yr. 1991-92 has been filed against the order of the CIT(A), dt. 16th March, 1995.
2. The assessee-firm is a “Pacca Aarathia”, who is dealing on wholesale basis in Binola, Sarson, Tarmira, wheat, etc. In addition to the transactions in the above merchandised goods, it has also entered into a “forward contract”, which according to the assessee is as per the custom and practice prevalent in the line of business, to ward off great fluctuation in the prices of these items. The assessee-firm suffered a loss of Rs. 40,936 in such forward contracts. The AO treated this loss as speculative loss and made the addition.
3. In appeal, this addition was deleted. The Department has challenged this deletion.
4. The learned Departmental Representative, Shri R.I Patel, has submitted that the loss in this case can be taken to a speculative loss only as without the goods, the purchase is done in advance, even prior to the production of the goods.
5. The submission of the learned Authorised Representative, Shri Suresh Ojha, is that the Cotton Corporation of India Ltd. (in short CCI), sold Binola in the open auction, in advance, even before the production of the same. The delivery by CCI to the buyer is given later on, when the goods are procured by CCI. The highest bidder sells the purchased goods to the successor buyers before taking actual delivery from CCI in order to safeguard the buyer from future price fluctuations. The successor buyer also buys in the same fashion.
6. I have circumspected the facts and provisions of the law and the precedents. Section 43(5) with proviso (a), reads as under :
(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;
The proviso (a) to Section 43(5) clearly saves the transactions of contract entered into, to ward off loss through future price fluctuations in respect of his contracts for actual delivery of merchandised goods sold by him, shall not be deemed to be a speculative transaction.
7. This provision is further interpreted in the same manner by the Hon’ble Supreme Court in the case of Raghunath Prasad Poddar v. CIT , wherein it has been held that to effect a valid transfer of any commodity, it is not necessary that actual delivery of goods should follow. In case the goods were directly transferred to the transferee, the first transfer would also be a valid transfer and would not be an speculative transaction.
8. In the case of CIT v. Ramchandra Shiv Narain it has been held by Hon’ble Bombay High Court that the loss incurred in forward contract, entered into by the assessee in the course of its merchandise business to guard against loss by future fluctuations in the prices, is covered by proviso (a) to Section 43(5) of the Act and, therefore, in such forward contract is a business loss and not a speculative loss. This view is also supported by the decisions of the Hon’ble Rajasthan High Court in the cases of CIT v. Rajasthan Wool Agencies and CIT v. Sohan Lal Kanwar & Sons .
9. The findings of the AO whereby he treated the loss on account of three transactions in cotton seeds as a speculative loss, have been correctly set aside by the learned CIT(A) and there is no infirmity in the same. This ground of appeal is dismissed.
10. The second issue is raised in relation to deletion of an addition of Rs. 1,98,247 made for the suppression of the closing stock.
11. The assessee-firm had shown the closing stock of Binola (cotton seeds) in weight at 142 quintals and in value at Rs. 81,550 @ 575 per quintal. The learned AO took the closing stock in weight at 300 quintals and in value at Rs. 1,98,247 @ Rs. 660.80 per quintal and made the additions. The CIT(A) hence deleted this addition.
12. The learned Departmental Representative has contested this addition by referring to page No. 4, para No. 7, of the assessment order. The relevant portion of para 7 at p. 4 is extracted hereunder :
“The assessee has shown the closing stock of cotton seed in weight at 142 quintal and in value at Rs. 81,650. On detailed examination of the account, books with reference to the purchase and sale vouchers, it was discovered that the assessee purchased cotton seeds weighing 300 quintals for Rs. 1,98,247 from M/s Nav Bharat Krishi Udhyog (P) Ltd., Hanumangarh (Jn.) vide its bill No. 2911 (plot No. 57), dt. 30th March, 1991, As per narrations given by the assessee in detailed copy of this account and as per sale bills issued by the CCI, to M/s Nav Bharat Krishi Udhyog (P) Ltd., to whom the CCI entered into an agreement for sale of its cotton seeds, it is clearly established that the cotton seed were taken out from the ginning factory on 20th March, 1991, vide gate pass Nos. 40/82 and 40/83 and as per the detailed copy of this account filed by the assessee, the last sale was made by it on 15th March, 1991, vide bill No. 158 to M/s Visha Traders, Hanumangarh, and there is no such sale after 15th March, 1991. In view of the above facts as revealed from the books of the assessee itself, the purchases made by it from M/s Nav Bharat Krishi Udhyog (P) Ltd. vide its bills dt. 30th March, 1991 and the delivery of the goods was taken on 20th March, 1991, on making payment to the CCI on 16th March, 1991, remained in the stock of the assessee. The assessee has accordingly suppressed the stock in its books of account to the extent of Rs. 1,98,247.”
13. The learned Authorised Reprensentative has relied on the CIT(A)’s findings in addition to oral submission. The relevant portions of the CIT(A)’s order at page Nos. 10 and 11 are extracted hereunder :
“It shows the transaction with Garg & Company and with M/s Prakash Chand Padam Chand. The goods were taken out from the godown of M/s J.B. Cotton Industries by car drivers, Pooran and Mali Ram, which is also confirmed by the affidavit of M/s Ramchandra Banarsi Das Industries. The same outward register shows that delivery against gate pass Nos. 40/82 and 40/83 had been taken by the persons of M/s Nav Bharat Krishi Udhyog (P) Ltd. and not by the appellant as held by the AO in his order. In these two bid Nos. JB/43 and JB/44 issued against gate pass Nos. 40/82 and 40/83, the payments of Rs. 3,25,000 are made by D.D. on 16th March, 1991. This D.D. was not purchased by the appellant nor has it been shown anywhere in the books of account of the appellant. Further, the copies of accounts of the appellant with M/s Nav Bharat Krishi Udhyog (P) Ltd. are also filed. It shows the full copy of account of the company with the appellant-company. There is no mention of payment of Rs. 3,25,000 by the appellant in those accounts. It is thus contended by the appellant that carrying outward commodities vide gate pass Nos. 40/82 and 40/83 have not been taken by the appellant but by the partners of M/s Nav Bharat Krishi Udhyog (P) Ltd. Owing to this error, the AO came to the conclusion that the commodities were taken out by the appellant, which were not reflected in the stock register. The appellant further contents that if the delivery of the said quantity of Binola had been taken by the appellant from CCI for Rs. 4,98,100, why should it make payment of Rs. 3,25,000 to CCI for this purpose. It seems that there were some auditing errors in the accounts furnished before the ITO by M/s Nav Bharat Krishi Udyog (P) Ltd. Inaccuracy in the accounts of that company should not be held against the genuine transactions of the appellant. In view of this, the addition is made on account of suppression of stock amounting to Rs. 1,98,247 due to erroneous appreciation of facts and is accordingly deleted.
14. The controversy has been clearly set at rest by the learned CIT(A). The learned Departmental Representative could not convince the Bench otherwise. In the result, the findings of the learned CIT(A) are upheld. Of course, any inaccuracy existing in the accounts of M/s Nav Bharat Krishi Udyog (P) Ltd. should not be held against the genuine transactions of the assessee. This addition has been correctly deleted. This ground of appeal is also dismissed.
15. The next issue is taken by the Department against the deletion of the addition made for fictitious of loss of Rs. 33,199. This issue is related to the issue of suppression of stock. When the suppression of stock has been held to be not correct, this addition is a natural consequence thereof. Hence, this ground does not survive in the light of above finding. This ground is also dismissed.
16. In the result, this appeal is dismissed.