Law: Income Tax Act, 1961

Section: 256

Income tax---Speculative business Assesses carrying on business of manufacture and sale of goods Assesses making forward sales Subsequent acceptance of overseas contracts for supply of goods and purchase back of forward sales Hedging contract and not a speculative transaction "Hedging Contract" meaning of. Where the assessee made a forward sale and purchased it back and the Tribunal found (i) that it was hedging transaction because: (a) the business of the assessee consisted both of manufacture and sale of jute goods; (b) the contracts were not bad; and (c) the company had got overseas orders for supply of special quality of goods where the margin of profit would be higher; (ii) that the assessee had all along the intention to supply the goods as per sale contracts but considering that if it could manufacture special quality of. goods to execute overseas orders it could earn better profits, the assessee switched over to manufacture special quality goods and settled forward contracts with the Indian buyers; (iii) that the settlement of these transactions was necessary and incidental to the very carrying on of the assessee's business of overseas supplies resulting in more profits even after setting off the loss consequent upon settling off the contract of sale with the Indian buyers; and there was no question of challenging that finding of the Tribunal. Held, that in view of the facts found by the Tribunal that the assessee was both a manufacturer and seller and desired to earn more profits by supplying goods overseas, it was justified in its conclusion. The transactions were hedging transaction and not speculative and the losses arising therefrom for the assessment years 1965 66, 1966 67 and 1967 68 should be set off against the assessee's other income of the respective years. The hedging contract is so called because it enables the persons dealing with the actual commodity to hedge themselves, i.e. to insure themselves against adverse price fluctuations. A dealer or a merchant enters into a hedging contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction in the forward market may correspond to a…

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