S.C. Agrawal, J. - (1.) IN this reference made by the INcome-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), under Section 256(1) of the INcome-tax Act, 1961 (hereinafter referred to as "the Act"), the following question of law has been referred for the opinion of this court: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the loss of Rs. 9,567 claimed by the assessee was a business loss and should be allowed as a business expenditure ?"
(2.) THIS reference relates to the assessment year 1973-74. Ganesh Das Ram Swaroop Kakani (hereinafter referred to as "the assessee") is a proprietorship firm of which Shri Ram Swaroop is the proprietor. The assessee had entered into a contract on October 15, 1971, with Mewar Textile Mills Ltd., Bhilwara, for purchase of 152 bales of cloth. The said goods were to be supplied by December 21, 1971. The seller supplied one bale out of the 152 bales for which the contract was entered into and after receiving the said one bale, the assessee informed the seller that the rest of the bales of cloth should not be supplied and, therefore, the seller did not supply the remaining 151 bales of cloth to the assessee. The seller debited the account of the assessee with a sum of Rs. 9,567.36. The assessee claimed deduction of the said amount of Rs. 9,567.36 as business expenditure. The Income-tax Officer, however, disallowed the said claim of the -assessee and held that the transaction was in the nature of a speculative transaction because the contract was settled without giving actual delivery of the goods. The said order of the Income-tax Officer was affirmed, in appeal, by the Appellate Assistant Commissioner who agreed with the Income-tax Officer that the transaction was a speculative transaction and was covered by Section 43(5) of the Act because the settlement of the contract was arrived at without actual delivery. The Tribunal, on further appeal, has held that the assessee had contracted to purchase 152 bales of cloth out of which delivery of only one bale was taken by the assessee and for the remaining bales of cloth the assessee wrote to the other party not to send the contracted goods and that this position was taken by the assessee long before the date of delivery. According to the Tribunal, the assessee had broken the contract long before the date of delivery and after the breach of the contract, what can be settled is only the right to damages resulting from the breach itself and in the present case, as a result of the breach of the contract, the assessee had to pay damages to the other party to the extent of Rs. 9,567, and the payment in question was not a settlement of the contract within the terms of Section 43(5) of the Act but it was a settlement of the assessee's liability for damages for breach of that contract. The Tribunal, therefore, held that the contract itself could not, by reason of the settlement, be said to be a speculative transaction and the loss of Rs. 9,567 was not a speculative loss but was a business loss and it should be allowed as business expenditure. Feeling aggrieved by the said decision of the Tribunal, the Revenue moved an application under Section 256(1) of the Act before the Tribunal for referring the question of law arising out of the decision of the Tribunal for the opinion of this court. On the said application, the Tribunal has made this reference referring the question mentioned above for the opinion of this court. We have heard Shri V.K. Singhal, learned counsel for the Revenue. The assessee has not appeared even though he has been duly served. As noticed earlier, the question which has been referred to this court involves the interpretation of the provisions of Section 43(5) of the Act which define the expression "speculative transaction" to mean 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 scraps. By the proviso to Section 43(5), certain categories of contracts have been excluded from the ambit of the main part and it has been provided that the said contracts shall not be deemed to be speculative transactions. The proviso is not relevant for the purpose of the present case and here we are concerned only with the main part of Section 43(5) of the Act. The aforesaid provision in Clause (5) of Section 43 of the Act is in pari materia with the provisions contained in Explanation 2 to Sub-section (1) of Section 24 of the Indian Income-tax Act, 1922. The said provision came up for consideration before the Supreme Court in Davenport and Co. P. Ltd. v. CIT [1975] 100 ITR 715. In that case, the Supreme Court held that "actual delivery" means real as opposed to notional delivery. The Supreme Court has observed that, for income-tax purposes, a speculative transaction means what the definition of that expression in Explanation 2 says and that whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of the Explanation. In CIT v. Shantilal P. Ltd. [1983] 144 ITR 57, the Supreme Court, while construing the provisions of Sub-section (5) of Section 43 of the Act, has emphasised that Sub-section (5) of Section 43 speaks of a settlement of the contract and it has been pointed out that there is a distinction between settlement of a contract and settlement of a claim for damages for breach of the contract. The Supreme Court has observed that (at page 60) a contract can be said to be settled if, instead of effecting the delivery or transfer of the commodity envisaged by the contract, the promisee, in terms of Section 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit, whereas in a case where, instead of such acceptance, the parties raise a dispute and no agreement can be reached for a discharge of the contract, there is a breach of the contract and by virtue of Section 73 of the Contract Act, the party suffering by such breach becomes entitled to receive from the party who broke the contract compensation for any loss or damage caused to him thereby. The Supreme Court has laid down that the award of damages for the breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof.
(3.) THE Supreme Court has further observed as under (at page 60) : "It may be that, in a general sense, the layman would understand that the contract must be regarded as settled when damages are paid by way of compensation for its breach. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. THE law, however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promisee dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts, instead of it any satisfaction which he thinks fit." In CIT v. Dina Lal Gupta [1988] 170 ITR 583, this court has considered the aforesaid decision of the Supreme Court and has observed as under (at page 589): "From the aforesaid observations of the Supreme Court, it is clear that a distinction is to be drawn between a settlement of a contract and the settlement of a dispute arising out of the breach of a contract. A contract is said to be settled if, instead of effecting delivery or transfer of the commodity envisaged by the contract, the promisee, in terms of Section 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit In other words, the contract is said to be settled when it is either performed or the promisee dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts instead of it any satisfaction which he thinks fit. In cases where there is a breach of the contract and by virtue of Section 73 of the Contract Act, the party suffering by such breach becomes entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, the settlement of such a dispute with regard to damages for the breach of contract cannot be regarded as a settlement of the contract. What is settled by the award of damages and the acceptance of the same by the aggrieved party is the dispute arising between the parties as a result of the breach of the contract. This would mean that a contract can be said to be settled before its breach and in cases where there has been a breach of the contract and any settlement takes place between the parties to the contract with regard to compensation or damages, it cannot be regarded as a settlement of the contract but it is a settlement of the dispute with regard to damages on account of a breach of the contract. For the purpose of deciding as to whether a particular transaction is a speculative transaction under Section 43(5) of the Act, the transaction falling in the first category, namely, where there is a settlement of the contract, can be regarded as a speculative transaction and a transaction falling in the second category, namely, where there is a breach of the contract and the dispute with regard to damages or compensation for the breach of the contract is settled, it cannot be regarded as a speculative transaction." In that case, the assessee had entered into a contract for sale of 290 quintals of groundnut oil and the goods were to be supplied by the asses-see on any date till November 15, 1974. On November 11, 1974, the purchaser demanded the supply of the goods but since the prices had gone up, the assessee expressed his inability to supply the goods and preferred to pay damages at Rs. 45 per quintal. The assessee claimed deduction of the aforesaid payment as loss suffered by him in the sale of groundnut oil. This court held that the said deduction could not be allowed since the said transaction was in the nature of a speculative transaction. ;