Ramanujam, J.:— The assessee in the first case is a registered firm carrying on business in camphor, cassia, etc. It carried on its business not only on ready basis but also on forward basis. In respect of its forward contracts, it incurred a loss of Rs. 39,540 for the year 1959-60 and Rs. 7,942 for the year 1960-61. It contended before the Income-tax Officer that the losses were incurred in hedging transactions which fell outside the pale of Explanation 2 to sub-section (1) of section 24 of the Indian Income-tax Act, 1922, that all the forward dealings were hedging in nature as???hey had been entered into with a view to guard against any loss that might arise due to future price fluctuations. The Income-tax Officer rejected these contentions. He took the view that all the forward transactions were ultimately settled not by actual delivery of the goods but by payment of difference, that the losses have not been incurred in relation to hedging transactions, that the forward sales which were covered by physical stock with the assessee on all settlement dates could alone be hedged by forward purchases and that any forward sale in excess of the quantity of the goods on hand, could not in the nature of things, be considered as a hedging transaction. The Income-tax Officer actually found that the difference paid and received by the assessee in forward contracts is Rs. 2,02,298 and Rs. 1,64,706 and the difference paid and received proportionate to the forward sales not covered by ready stock on a pro rata basis was found to be Rs. 24,165. Similarly, there were transactions in camphor at Calcutta and Bombay which were settled by paying the difference of Rs. 15,375 to various parties. These two sums which aggregate to Rs. 39,540 were disallowed as loss in speculative transactions in the year 1959-60. Likewise, a sum of Rs. 7,942 was disallowed as a loss in speculative transactions in the year 1960-61. The matter was taken in appeals to the Appellate Assistant Commissioner but without success. There were further appeals to the Income-tax Appellate Tribunal. The Tribunal also upheld the disallowance of the said claim for losses. At the instance of the assessee, the following question has been referred to this court in T.C No. 90 of 1968:

“Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the losses of Rs. 39,540 for the assessment year 1959-60 and Rs. 7,942 for the assessment year 1960-61 or any part thereof were losses sustained in speculative transactions under Explanation 2 to section 24(1) and could not be set off against other profit?”

2. In the second case also the assessee is a dealer in camphor and he entered into forward transactions in camphor and for the assessment years 1959-60 and 1960-61, the loss claimed was Rs. 668 and Rs. 5,278, respectively. The assessing authority, the Appellate Assistant Commissioner and the Appellate Tribunal having rejected the assessee's contention that all the forward transactions which were concluded by payment or receipt of the difference and in respect of which the losses had occurred are hedging transactions, and hence outside the pale of speculative business;. the assessee sought a reference to this court and the following question has been referred in T.C No. 91 of 1968:

“Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the losses of Rs. 668 for the assessment year 1959-60 and Rs. 5,278 for the assessment year 1960-61 or any part thereof are losses sustained in speculative transactions under Explanation 2 to section 24(1) and cannot be set off against other profits?”

3. As the facts and circumstances of the above two cases and the contention put forward by the assessees are also the same, both the references have been dealt with together.

4. The assessees have admittedly carried on business both in ready stock of camphor and also in forward contracts for sale or purchase of camphor. Some of the forward contracts entered into by the assessees were settled by payment or receipt of the price difference and the assessees claimed the difference between such payments and receipts as a trading or business loss. The taxing authorities have held that the forward sales so far as they are covered by ready stock could alone be treated as normal transactions of a dealer and that loss in relation to such forward sales could alone be taken as business loss and that the rest of the losses can only be treated as loss in speculative business. The assessee's contention that all their forward purchases should also be taken into account for finding out the stock available at the time of entering into the forward sale and if so taken all the forward sales would either be covered by the actual stock or the forward purchases was, however, rejected on the ground that all the forward purchases have been settled by paying the difference and not by taking delivery of the goods contemplated by such purchases, that if actual delivery was taken in pursuance of the forward purchases, the ready stock position of the assessees would have gone up to the extent of the delivery taken, in which case, there would have been sufficient cover for the forward sales, that the stock on hand on any settlement date cannot include the quantity covered by a forward purchase in respect of which no delivery has taken place. The assessee's further contention that the forward contracts entered into by them were hedging transactions intended to guard against loss through future price fluctuations in respect of the forward contracts entered into earlier, and that, therefore, they should be deemed not to be speculative transactions had also been rejected on the ground that it has not been established that the forward purchases were with reference to any forward sales or that the forward sales were with reference to any forward purchase and that, therefore, the proviso (a) to Explanation 2 of section 24(1) cannot be applied. The question, therefore, arises as to whether the assessees' forward purchases or sales were speculative transactions under Explanation 2 to section 24(1). If those forward transactions are found to be speculative, then any loss incurred in relation to such transactions cannot be allowed as a trading loss in view of the proviso to section 24(1). To find out whether the forward transactions were speculative, we have to see whether the facts as found by the Tribunal attract the Explanation 2 to section 24(1), which is as follows:

“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.”

5. In the first instance, the learned counsel for the assessees contends that all the forward transactions cannot be treated as speculative transactions as defined in Explanation 2 as all of them have ultimately ended in actual delivery of the goods, and, therefore, they should be taken to be the normal trading activity and the loss resulting in such transactions will clearly be trading or business loss. In elaboration of his submission the learned counsel refers to the rules and bye-laws of the Madras Kirana Merchant's Association, Madras, of which the assessee is a member, and states that all the forward transactions entered into by the members of the association are to be completed by actual delivery and that in fact all the contracts between the members are ultimately settled by delivery of the goods. Reference is made to rules 16, 18, 19 and 20 which relate to forward transactions. Rule 16 provides that all vaida transactions shall be carried on only between the members of the association under general supervision of its committee and subject to its rules and regulations and that vaida transactions mean any sale or purchase in any of the notified commodities between members of the association, delivery in respect of which has to be effected on every punam subject to the rules. Rule 18 enjoins the seller in every vaida transaction to issue a delivery order in the prescribed form with the seal of the association and initials of the officer concerned and to have it registered by the association before passing it on to his buyer after making the necessary endorsements thereon. Rule 19 specifically states that for all forward business, it is clearly understood between the seller and the buyer that deliveries are intended for and can be insisted upon. Rule 20 states that the buyer as soon as he gets a delivery order should get a declaration certificate from the association if he intends to take actual delivery unless he holds such a certificate granted by the association, and that a member who gets such a declaration certificate in respect of any delivery order is prohibited from endorsing and passing on the same to others, that the ultimate purchaser who has come into possession of the delivery order in accordance with the rules and who has obtained a declaration certificate in respect of such delivery order shall pay for the goods and take delivery thereof from the first seller and that if the first seller fails to give delivery to such ultimate purchaser, then the purchaser is entitled to insist upon actual delivery or claim damages for breach of contract. From the said rules the learned counsel for the assessees wants to build up an argument that all the forward transactions in this case ultimately ended in actual delivery and will be outside Explanation 2 of section 24(1). It is stated that in these cases the assessees' forward transactions of sale as well as purchase have ultimately ended in the delivery of the goods as per the rules of the association and that though there have been settlement of the forward transactions between the intermediate parties on the vaida dates, they should be taken to be contracts in respect of which goods have ultimately been delivered.

6. Reliance is placed on a decision of the Supreme Court in Raghunath Prasad Poddar v. Commissioner of Income-tax [1973] 90 ITR 140, 143 SC. in support of the said, contention. In that case an assessee, a dealer in jute goods, purchased pucca delivery orders relating to gunny bags from various parties after paying the full price of the goods covered by such delivery orders and transferred those orders to buyers after receiving the price fixed for the sale of those goods. The Tribunal held that since the goods covered by the delivery orders were not actually delivered to the buyers, the loss incurred in those transactions was speculative as contemplated by section 24(1), and, therefore, could not be set off against the assessee's profits in its non-speculative business. The High Court affirmed the said decision of the Tribunal. The Supreme Court, however, took a contrary view. According to the Supreme Court, if the sales effected by the assessee has resulted in the delivery of the goods to the ultimate buyer, such sales will fall outside the scope of the Explanation. The Supreme Court observed:

“In our judgment 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 transferee's 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 Os., 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 Os. is not followed up by the actual delivery of the goods to the transferee, that transaction has to be considered as speculative. This is an erroneous conclusion.”

7. The Supreme Court reiterated the view it has expressed earlier in Dunichand Rataria v. Bhuwalka Brothers Ltd. AIR 1955 SC 182., Bayyana Bhimayya v. Government of Andhra Pradesh [1961] 12 STC 147 SC. and State of Andhra Pradesh v. Kolla Sree Ramamurthy [1962] 13 STC 522 SC. that a forward delivery of goods may amount to two deliveries in point of fact and, in the eye of law, if in the course of a transaction of sale the buyer takes delivery of the documents of title to the goods and transfers them to another by endorsement or delivery and such transferee takes delivery of the goods from the original seller. The purport of the decision of the Supreme Court in the said case appears to be that where a sel???r enters into a sale and issues a delivery order and the delivery order is transferred successively and the ultimate transferee takes delivery of the goods from the original seller, then the first sale as well as the subsequent sales cannot be said to be speculative transactions as contemplated by section 24, for the sale has resulted in the ultimate delivery of the goods. This position appears to be obvious for the reason that the Explanation 2 to section 24(1) does not contemplate the actual delivery being taken by the buyer in the first sale. The Explanation only contemplates a sale in respect of which the goods have not ultimately been delivered either to the buyer or to his transferees.

8. However, we are not in a position to invoke the principle of that decision to the facts of the cases on hand. In these cases, admittedly, the assessees have settled their contracts of sale or purchase by payment or receipt of the difference in price and not by the issue of delivery orders to their purchasers or by receiving delivery orders from their sellers. It is only sales which have been completed or fulfilled by issuing the delivery orders in relation to the goods sold on receipt of the price which would attract the principle laid down by the Supreme Court in the above cases. Likewise, it is those purchases where delivery orders are received on payment of the price from the seller that would attract the principle of the decision. Where a buyer or seller in a forward transaction receives or pays the difference in price without giving or taking actual delivery of the goods or of the documents of title to the goods contracted for, the forward transaction does not involve any actual delivery. If a contract of sale or purchase has not been followed up by a delivery order or by actual delivery of the goods but has been settled by payment or receipt of the difference in price it will clearly come within Explanation 2. We cannot, therefore, agree with the learned counsel for the assessee that the transactions in question are not speculative as contemplated by Explanation 2.

9. The learned counsel for the assessees then contends that even if the transactions are taken to be speculative as falling within Explanation 2, still they have to be taken out of the purview of the said Explanation as the transactions amount to hedging transactions falling within proviso (a) thereto. It is stated that the assessees entered into forward sales in the course of their merchanting business and with a view to guard against future price fluctuations they entered into the forward purchases. But the Tribunal specifically finds that the assessees have not correlated the forward purchases with any of the forward sale or sales which they had already entered into. In a recent decision in T.C No. 278 of 1967 (Commissioner of Income-tax v. SK. AR.K AR. Somasundaram Chettiar & Co.) this court has expressed that only purchase transactions which were entered into for the purpose of guarding against future loss through price fluctuations in respect of contracts of sale for actual delivery of the goods, would be covered by clause (a) of the proviso and that clause (a) of the proviso cannot be availed of in the case of forward sales. It was also held that the contract or contracts contemplated by clause (a) has or have to be proved to have been entered into with a view to guard against loss through future price fluctuations in respect of contract or contracts of sale entered into earlier. The relevant observations in that case are these:

“But we are inclined to think that we will be doing considerable violence to the language used in clause (a) if it is understood to cover all cases of purchases and sales entered into by an assessee with a view to guard against his future loss in general in that line of business.

It is true, a correlation, contract to contract, may not be necessary. But the contract or contracts contemplated by clause (a) has or have to be proved to have been entered into with a view to guard against loss through future price fluctuations in respect of contract or contracts of sale entered into by him of the same goods.”

10. As already stated, the assessees in these cases have not shown that the forward contracts of purchase entered into by them which were ultimately settled by payment of the difference in price were to guard against loss through future price fluctuations in respect of any specified contract or contracts of sale for actual delivery. In view of this fact we are not able to hold that the transactions of forward purchases in both the cases will come under proviso (a).

11. The result is that we have to agree with the view taken by the Tribunal that the losses in question have to be taken as losses sustained in speculative transactions under Explanation 2 to section 24(1). The questions referred in both the cases are, therefore, answered in the affirmative and against the assessees. The revenue will have its costs in both the cases. Counsel's fee Rs. 250 in each case.

12. Questions answered in the affirmative.