Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, the following question has been referred to this court: "Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the loss incurred by the assessee by payment of Rs. 14,001 as compensation or damages for non-delivery of the part of the goods under the various contracts by way of difference on the basis of prevailing market price was deductible or allowable in computing the income of the assessee from business other than speculation ?"
(2.) We are concerned in this case with the assessment year 1964-65, the relevant previous year ending on 31st March, 19,64. The assessee during the relevant year claimed as deduction the total payment of Rs. 14,001 ,to various parties in respect of contracts for delivery of jute twine. It was claimed that on account of inability of the assessee to make full delivery of the goods in terms of the contract, the amounts were paid by way of penalty or damages for breach of contract and this payment was incidental to and in the course of the business and as such the same constituted an expenditure or loss deductible in computing its income. The claim was disallowed by the Income-tax Officer. The claim was, however, allowed by the Appellate Assistant Commissioner. The revenue preferred an appeal before the Tribunal. The Tribunal found that in most of the contracts substantial delivery of jute goods during the various periods had been effected and only in the case of one or two contracts the goods had not been delivered in lieu of which payment on the basis of difference had been made. It was found by the Tribunal that the assessee was carrying on business of manufacture of jute twine and ropes and entered into contracts for delivery of the same which constituted a business. In the premises payment of differences in such cases under the various contracts, according to the Tribunal, could not be held to be settlement of differences in the course of speculative transactions carried on which were in the nature of business. The Tribunal found that payment of differences on account of damages in the case of non-fulfilment of contract could not be considered as settlement of contract.
(3.) In this connection, we may refer to the meaning of "speculative transaction" under Section 43(5) of the Income-tax Act, 1961, which provides that speculative transaction means a transaction in which 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.;