Basi Reddy, J.:— The following question has been referred to us by the Income-tax Appellate Tribunal, Hyderabad Bench, at the instance of the assessee, under section 66(1) of the Income-tax Act, 1922:

“Whether, on the facts and circumstances of the case, the loss of Rs. 47,250 was sustained in speculative transactions within the meaning of the first proviso to sub-section (1) of section 24, read with Explanations 1 and 2 and clause (a) of the proviso to Explanation 21”

2. The facts and circumstances which have occasioned this reference are as follows: The assessee is a Hindu undivided family and derives income from property and business. The assessee's business consists in purchasing cotton kapas (raw cotton), ginning it and them selling the lint and cotton seeds. Between 21st October, 1956, and 4th April, 1957 (the relevant accounting year was the period from 3rd November, 1956, to 23rd October, 1957), the assessee entered into fourteen forward contracts with certain Bombay parties to sell 2,200 bales of cotton lint at certain specified rates for delivery between March and May, 1957. Two out of these fourteen contracts were entered into before the commencement of the previous accounting year, on 21st October, 1956, and 22nd October, 1956, for the sale of 150 bales. There were, however, no contracts for the purchase of either lint or cotton kapas. Thirteen of the contracts were settled by the assessee, without giving actual delivery, between 30th December, 1956, and 28th February, 1957. The fourteenth contract for 300 bales was similarly settled on 5th April, 1957. These settlements were effected by showing repurchase of the stock of 2,200 bales by entering into contracts with the same parties on the dates of settlement, paying the difference between the selling rate and the purchase rate. It will thus be observed that even before the time for delivery as stipulated had arrived, the assessee had chosen to settle the contracts and had not waited to give actual delivery. By these settlements the two contracts entered into before the commencement of the accounting year resulted in a profit of Rs. 1,218 and the other twelve contracts entered into after the commencement of the accounting year resulted in a loss of Rs. 48,468. Thus, during the accounting year the assessee incurred a net loss of Rs. 47,250 in those forward transactions. For the assessment year the assessee was assessed by the Income-tax Officer at Rs. 59,644 made up of Rs. 1,304 from property and Rs. 58,304 from business. In determining the income from business, the Income-tax Officer allowed against other business income, loss arising out of the forward contracts for the sale of lint.

3. It, however, appeared to the Commissioner of Income-tax that the assessment order passed by the Income-tax Officer was erroneous and prejudicial to the interests of the revenue to the extent of an unjustifiable deduction of Rs. 47,250 (loss Rs. 48,468 minus profit Rs. 1,218), as in the Commissioner's view that amount represented a loss arising from speculative transactions within the meaning of Explanation 2 to section 24(1) of the Income-tax Act. After due notice to the assessee, the Commissioner, in exercise of his revisional power under section 33B of the Act, revised the assessment, holding that the loss in question was a loss arising from speculative transactions in the nature of a business not permissible as a deduction or a set-off under the first proviso to section 24 of the Act against income from any business, and enhanced the assessment by an amount of Rs. 47,250, but directed that the said loss from such speculative transactions be carried forward under section 24(2) of the Act for a set-off. against profits from speculative transactions in subsequent years.

4. Against that order the assessee preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal rejected all the contentions advanced on behalf of the assessee and affirmed the order of the Commissioner. There after, at the instance of the assessee the Appellate Tribunal has stated a case and referred the question, which we have set out above, for determination by this court.

5. We shall now read the relevant provisions of the Income-tax Act.

“24. (1) 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 off against 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

Explanation 1.—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.—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 ……

shall not be deemed to be a speculative transaction.”

6. The findings of the Tribunal are:

1. The impugned contracts for the sale of cotton lint were speculative transactions within the meaning of Explanation 2 to sub-section (1) of section 24 as admittedly the contracts had ultimately been settled otherwise than by actual delivery of the commodity.

This finding was not assailed before us by the learned advocate for the assessee.

2. The speculative transactions as above carried on by the assessee were of such a nature as to constitute business and accordingly the business was distinct and separate from any other business within the meaning of Explanation 1 to sub-section (1) of section 24.

This finding too was not seriously challenged.

3. The transactions were not saved from being speculative transactions under clause (a) of the proviso to Explanation 2 to sub-section (1) of section 24, which was the only proviso applicable, as the conditions of the said clause were not satisfied.

This conclusion was challenged before us.

4 ……….

5. As a result of the above finding, the loss sustained in such speculative transactions was not a permissible deduction as a set-off against income from any other business within the meaning of the proviso to sub-section (1) of section 24.

7. What was contended before us was that the transactions in question are saved from falling under the category of speculative transactions, by reason of clause (a) of the proviso to Explanation 2 to section 24(1) of the Act. It was argued that the transactions in question were hedging contracts to guard against possible loss from another set of transactions and, therefore, cannot be deemed to be speculative transactions.

8. On the established facts of this case and having regard to the nature of the business done by the assessee, this contention has not a leg to stand on. The nature of the business conducted by the assessee was buying kapas (raw cotton), ginning it and selling lint and cotton seed. In respect of the impugned transactions there are only one set of contracts and not two sets as required by clause (a) of the proviso to Explanation 2. That proviso contemplates two contracts : (i) a contract for actual delivery of goods manufactured by the assessee or merchandise sold by him, and (2) a contract in respect of raw materials or merchandise entered into in the course of the assessee's manufacturing or merchanting business to guard against loss through future price fluctuations. In the present case there were no contracts in respect of raw materials or merchandise. There were only one set of contracts for the delivery of the manufactured product, namely, lint at a future date, and even these contracts were settled without making an actual delivery and even before the time fixed for completion of the contract. So, as found by the Appellate Tribunal in agreement with the Commissioner, there are no such contracts here as are contemplated by clause (a) of the proviso to Explanation 2 of section 24(1). It follows that these transactions are indubitably of a speculative nature as envisaged by Explanation 2 to section 24(1). The loss sustained by the assessee in respect of these transactions cannot be set off against the profits earned by him in any other business. The Appellate Tribunal, in our opinion, is therefore, perfectly right in its view that the speculative transactions in question are not saved by clause (a) of the proviso to Explanation 2 of section 24(1).

9. It was then contended on behalf of the assessee that the business carried on by the assessee was not a manufacturing business. We find it difficult to accept this contention. What the assessee was doing was to buy kapas, gin it, convert it into lint in a factory with the aid of machinery and then sell it. That this is a manufacturing process has been held by a Division Bench of this court consisting of Satyanarayana Raju and Venkatesam JJ. in Kolak & Co. v. State of Andhra Pradesh [1962] 13 S.T.C 709., and we are in respectful agreement with that view. Our attention has been drawn to a decision of a Division Bench of the Puujab High Court in Patel Cotton Co. Private Ltd. v. State of Punjab, in which the learned judges took the view that no manufacturing process is involved in ginning cotton because the process of ginning does not create anything new or distinctive. In taking this view, the learned judges expressly disagreed with the view of the High Court of Andhra Pradesh in Kotak & Co. v. State of Andhra Pradesh [1962] 13 S.T.C 709.. With all respect to those learned judges, we are unable to agree with their reasoning and conclusion, and we would prefer to follow the decision of our own court. We are fortified in our view by another decision of a Bench of this court consisting of Seshachala-pati and Venkatesam JJ. in Juvvi Subbaramaiah & Co. v. Commissioner of Income-tax [1964] 51 I.T.R 742., where, on facts which were exactly similar to the facts of the present case, the learned judges took the same view as we have done.

10. The learned advocate for the assessee has further raised before us a new point which was not raised before the Income-tax Appellate Tribunal and was not included in the question referred to us by the Tribunal. The learned advocate, however, contended that this point arises out of the order of the Tribunal, though not dealt with expressly or implicitly. The point taken was that section 24 of the Act does not at all apply to the facts of this case, but the relevant section applicable is section 10 read with section 6 of the Income-tax Act. The argument was that section 24 deals with a case in which an assessee sustains loss under one of the heads mentioned in section 6 of the Act and seeks to set off the loss against his income, profits or gains from another head, but section 24 does not apply to a case where an assessee seeks to set off the loss from one source as against another source under the same head. In other words, section 24 applies to a plurality of heads and not to a single head. The next step in the argument was that in cases of that nature, section 10 is the appropriate section and section 10 makes no distinction between speculative and non-speculative transactions.

11. In the first place, we are of the view that this question is not one which has been referred to us under section 66 of the Act and we find it difficult to agree with the learned advocate for the assessee that this question arises out of the order of the Tribunal. Before all the authorities below, the case proceeded on the footing that the section applicable to the facts of the case was section 24. There was not a whisper anywhere in the course of those proceedings that the appropriate section was section 10 and not section 24. Even assuming for.the sake of argument that this point may be permitted to be raised before us, that is of little help to the assessee because it has been held by two Bench decisions of this court in Jummarlal Surajkaran v. Commissioner of Income-tax [1963] 47 I.T.R 809. and Commissioner of Income-tax v. Ramlal & Sons [1965] 57 I.T.R 742 F.B., that the proviso to section 24(1) enacts a substantive rule of law and its operation is not confined to cases falling within the main provision of section 24(1), i.e, to cases where loss under one head of income is sought to be set off against profits under another head. It was further laid down that the effect of the proviso is that it is not open to an assessee to adjust the loss sustained in speculative business against his income derived from other business which are not of a speculative character, but he could lay claim to a set-off only against profits got from a business of a speculative nature. We are in respectful agreement with the view expressed in the above two cases. We may also mention that a Full Bench of the Punjab High Court has taken the same view in Commissioner of Income-tax v. Ram Sarup, where the reason of the rule is fully explained.

12. It follows that the transactions in question are speculative transactions within the meaning of Explanation 2 to section 24(1) and are not saved by clause (a) of the proviso to Explanation 2.

13. In the result, we answer the question referred to us in the affirmative and against the assessee. The assessee must pay the costs of the respondent. We fix the advocate's fee at Rs. 250.

Question answered in the affirmative.