S.C. AGRAWAL, J. - (1.) : In this reference made at the instance of the Revenue, the Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as " the Tribunal ") has referred the following question for the opinion of this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in treating the loss of Rs. 13,050 in groundnut oil as a trading loss ? "
(2.) THIS reference relates to the asst. yr. 1975-76. Shri Dina Lal Gupta, respondent herein (hereinafter referred to as " the assessee,"), was carrying on the business of adat in the name of Dinalal Narendra Kumar, at Jaipur.. The assessee entered into an agreement on October 26, 1974, with R.C.S. Vanaspati Industries, Ltd., Jaipur, for the sale of 290 quintals of groundnut oil at Rs. 795 per quintal. The said goods were to be supplied on any date till November 15, 1974. On November 11, 1974, R.C.S. Vanaspati Industries Ltd. demanded the supply of the goods but by that time, the prices had gone up and the assessee expressed his inability to supply the goods and preferred to pay damages at Rs. 45 per quintal and a sum of Rs. 13,050 was paid by the assessee to R.C.S. Vanaspati Industries on November 11, 1974. The assessee claimed deduction of the aforesaid amount of Rs. 13,050 as loss suffered by him in the sale of groundnut oil. The ITO did not allow the said deduction on the ground that the said transaction was of a speculative nature and there was no delivery of goods. He added back the said amount while computing the income of the assessee from business. On appeal, the AAC upheld the order of the ITO and found that the transaction in question was a speculative transaction and the loss arising therefrom was speculative loss. On further appeal, the Tribunal, however, held that the loss of Rs. 13,050 claimed by the assessee was in the nature of a trading loss and the transaction in question could not be regarded as a speculative transaction under s. 43(5) of the IT Act, 1961 (hereinafter referred to as " the 1961 Act "). Feeling aggrieved by the aforesaid order of the Tribunal, the Revenue moved for referring the question of law arising out of the order of the Tribunal for the opinion of this Court and thereupon the Tribunal has referred the question mentioned above for the opinion of this Court. The question which has been referred by the Tribunal involves the determination of the question as to whether the transaction with regard to the sale of 290 quintals of groundnut oil entered into by the assessee with R.C.S. Vanaspati Industries Limited was in the nature of a speculative transaction. Sec. 28 of the 1961 Act prescribes the income which shall be chargeable to income-tax under the head " Profits and gains of business or profession ". Explanation 2 to s. 28 provides that where speculative transactions carried on by an assessee are of such nature as to constitute a business, the business (hereinafter referred to as " speculation business ") shall be deemed to be distinct and separate from any other business. In sub-s. (1) of s. 73 of the 1961 Act, it is provided that any loss computed in respect of a speculation business carried on by the assessee shall not be set off except against profits and gains, if any, of another speculation business. The expression "speculative transaction " has been defined in sub-s. (5) of s. 43 of the 1961 Act to mean " a transaction in which a contract for the purchase or the 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 ". There is a proviso to the said definition but the same is not relevant for the purpose of the present case. In the Indian IT Act, 1922) (hereinafter referred to as " the 1922 Act "), the definition of speculative transaction was contained in Expln. 2 to s. 24(1) of the said Act which provided that 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". In Davenport and Co. P. Ltd. vs. CIT (1975) 100 ITR 715 (SC), the Supreme Court has considered the aforesaid definition of speculative transaction contained in Expln. 2 to s. 24(1) of the 1922 Act, and it has been held that for income-tax purposes, speculative transaction means what the definition of the expression in Expln. 2 says and whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of the said Explanation. In that case, the Supreme Court has also held that the words " actual delivery " in Expln. 2 mean real as opposed to notional delivery. Although there is some difference in the language used in Expln. 2 to s. 24(1) of the 1922 Act and s. 43(5) of the 1961 Act, that is not very material and in spite of the said difference in the language, it can be said that for income-tax purposes speculative transaction means what the definition of that expression contained in s. 43(5) of the 1961 Act says and whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of s. 43(5) of the 1961 Act and the words " actual delivery " in s. 43(5) of the 1961 Act mean real delivery as opposed to notional delivery. While construing the definition of " speculative transaction " in s. 43(5) of the 1961 Act, it has to be borne in mind that the Legislature has used the words " 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 ". In other words, the Legislature speaks of the contract being settled. The question which needs to be considered is as to when a contract can be said to be settled ?
(3.) IN CIT vs. Pioneer Trading Co. P. Ltd. (1968) 70 ITR 347 (Cal), the Calcutta High Court while dealing with Expln. 2 to s. 24(1) of the 1922 Act has drawn a distinction between the settlement of a contract and settlement of a claim arising out of a breach of a contract and has observed as under : " As we read Expln. 2 to s. 24(1), we do not feel that a claim based on breach of contract comes within the meaning of contract settled as used in Expln. 2. IN our reading, the expression 'contract settled' means 'contract settled before breach'. After breach of contract, the cause of action is no longer based on the contract itself but on its breach." In that case, there was failure on the part of the assessee to perform its part of the contract as a result of which part of the goods could not be supplied on account of the fault of the foreign buyer and the claim for the breach of contract was subsequently settled by the foreign buyer by paying the difference of price. It was held that since settlement took place after the breach of the contract, the contract could not be hold to be a speculative transaction under Expln. 2 to s. 24(1) of the 1922 Act. The same view was taken by the said High Court in Daulatram Rawatmull vs. CIT (1970) 78 ITR 503 (Cal), where also the assessee was required to pay the difference between the market rate and the contract rate under the award of an arbitrator and it was held that it was not a case of settlement of the contract itself but of payment of damages for breach or non-fulfilment or non- performance of the contract. ;