Sabyasachi Mukharji, J.:— 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, 1964.
3. 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.
4. 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.
5. The proviso to that definition provides certain Explanations with which we need not concern ourselves in this reference. Therefore, in order to be a speculative transaction it should be a transaction under which the contract for the purchase or sale of the commodity is periodically or ultimately settled. In this case, the contract was not settled; what was settled was the claim for damages for breach of contract which is non-performance of the contract. The same being the background of the facts of this case, in our opinion, cannot be considered to be speculative transaction. In this connection, we may refer to the decision of this court in the case of Commissioner of Income-tax v. Pioneer Trading Company Private Ltd., [1968] 70 ITR 347 (Cal), where it was held that a claim based on breach of contract did not come within the meaning of “contract settled” as used in Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922. “Contract settled” meant contract settled before breach. After the breach of the contract the cause of action was no longer based on the contract itself but on its breach. Where the money which the assessee received was in settlement of the amount of damages suffered by the assessee by reason of the breach of the contract to deliver, it was held that the receipt was not a receipt from a speculative transaction as defined in Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, and the money was not liable to be set off against the speculation loss of earlier years. In the case of Daulatram Rawat-mull v. Commissioner Income-tax, [1970] 78 ITR 503 (Cal), this court held in the facts of that case that the case was not a case of settlement of the Contract itself either periodically or ultimately, but of payment of damages for breach or non-fulfilment or non-performance of the contract. That did not come within the expression “speculative transaction”. The aforesaid decisions were followed in a judgment of this court in the case of I.T Reference No. 16 of 1969: Steel Enterprises Pvt. Ltd. v. Commissioner Of Income-Tax. (infra) judgment delivered on the 24th July, 1973. Similar view has also been expressed by the Mysore High Court on the meaning of the expression “contract settled” relying on the first two decisions of the Calcutta High Court under section 43(5) of the Income-tax Act, 1961, in the case of B.R Kushalraj v. I.T Commissioner, [1974] 96 ITR 401 (Mys).
6. In the aforesaid view of the matter the question referred to this court must be answered in the affirmntive and in favour of the assessee. Each party will pay and bear its own costs.
Pyne, J.:— I agree.
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