1. This is a reference at the instance of the assessee under s. 66(1) of the Indian I.T. Act, 1922. The assessee before us was at the relevant time a public limited company owning and working a sugar factory and we are concerned with the assessment year 1953-54. The assessee-company had in the said year debited Rs. 1,68,731 to sugar sales account in forward transactions in sugar. These transactions were entered into between 9th June, 1952 and 20th June, 1952, for August 1952 delivery. The ITO observed that, as the assessee was not able to fulfil its obligations on the delivery date, the contract was settled by payment of difference between the ruling rate on the settlement date and the rate at which delivery was promised. The aggregate amount came to Rs. 1,68,731. This difference was treated by the ITO as a speculation loss to be allowed against similar profits in future.
2. The assessee then appealed to the AAC. The contentions of the assessee were rejected by the AAC who confirmed the conclusion which the ITO reached earlier.
3. The assessee then appealed to the Tribunal. Before the Tribunal it was submitted on its behalf that it had adequate stocks of sugar to cover all the contracts. It was submitted further that the contracts were not carried out purely out of business considerations in the expectation that the prices would improve. Accordingly, it was contended that these were normal contracts of sale which would not come within the mischief of speculative contracts in s. 24(1). According to the assessee, therefore, the loss in question was a normal trading loss deductible under s. 10(1) itself. By its order dated 30th July, 1959, the Tribunal rejected the several contentions advanced on behalf of the assessee.
4. It appears that being aggrieved by that decision the assessee wanted the Tribunal to make a reference by an application under s. 66(1) of the Indian I.T. Act, 1922, which was rejected by the Tribunal. The assessee then moved the High Court and the High Court by its order dated 22nd August, 1961, directed the Tribunal to draw up a statement of the case under s. 66(2) and raise and refer the questions as mentioned in the said order to the High Court. In accordance with these directions, the Tribunal stated a case which was subsequently numbered as ITR No. 95 of 1962. In that reference the High Court held that the assessee had not been given an opportunity of being heard and the matter was sent back to the Tribunal for proper disposal in accordance with the directions of the High Court.
5. As per these directions the parties were given a fresh hearing. At the time of this fresh hearing an affidavit of the secretary of the assessee company, one S. S. Rohatgi, was filed by the assessee. In the submission of the assessee this affidavit dated 3rd May, 1968, was made to assist the Tribunal in arriving at a proper conclusion by collating all relevant facts pertaining to these transactions. The departmental representative appearing before the Tribunal objected to the filing of the said affidavit. The objections were met by the assessee-company contending that the affidavit was based on facts and documents already on record and consequential submissions and arguments. The Tribunal, after going through the said affidavit, observed that the affidavit did not contain any new facts not already on record and concluded that the assessee would be entitled to rely on the same. A copy of the said affidavit has been annexed as annex. 'D' to the statement of case.
6. It was the assessee's submission that during the accounting period for the assessment year under consideration, viz., November 1, 1951, to October 31, 1952, there was what is known as a policy of selective control of sugar. Under this policy 95% of the average production of each factory during the two years 1948-49 and 1949-50, was fixed as the basic quota of the factory. Half of the production of each factory in excess of its basic quota was allowed to be sold in the free market and the other half, together with the basic quota, was reserved for distribution at controlled prices. The sugar factories had to sell sugar at these controlled prices to Government nominees to whom allotment was made by the Government. The basic quota of the assessee factory had been fixed at 6,430 tonnes. In connection with this branch of the argument the assessee placed reliance on Government notifications dated October 6, 1951, and October 18, 1951, and a letter dated 20/22nd November, 1951, issued by the Joint Secretary to the Government of India to all the sugar factories together with the copies of the orders dated May 17, 1951. It was pointed out that as far as the portion of production required to be distributed at controlled prices was concerned, the Government control did not bring about the transactions between the assessee and the purchasers but only permitted the transactions. It was pointed out further that the price fixed was Rs. 31.50 per md. (i.e., Rs. 86 per bag) of sugar. It was pointed out by the assessee's case that in the relevant accounting year there was a bumper crop of sugarcane and consequently high production of sugar therefrom. The assessee-company at its factory manufactured 1,16,207 bags of sugar. The basic quota which had been fixed, viz., 6,430 tonnes, was equivalent to 63,657 bags and thus there was excess production of 52,550 bags of sugar over and above its basic quota. Under the Government policy out of this excess of 52,550 bags of sugar, 26,275 bags (being 50% of the excess) together with the basic quota making in all 89,932 bags were reserved for controlled distribution and the balance of 26,275 bags was available for sale by the assessee-company in the free market. The copy of the relevant Government notification, letter and order are collectively annexed to the affidavit of the said S. S. Rohatgi. According to the assessee, the result of this increased production of sugar was a glut in the open market with the result that sugar prices in the open market slumped down in May, 1952. The consequence of this slump was that even the controlled sugar was not taken up by the Government allottees. The assessee was not very successful in its efforts to sell its production of sugar and at the end of May, 1952, according to the affidavit, the assessee had in stock 68,066 bags of sugar, out of which 25,039 bags had remained undisposed of, though released. By this time the price of sugar in the free market which was as high as Rs. 50 per maund (i.e., Rs. 137-8-0 per bag) in the beginning of the season ex-factory as against the price for Government allotments which was Rs. 31-8-0 per maund (i.e., Rs. 86-10-0 per bag), had fallen to Rs. 35 per maund. This was by the middle of March, 1952. Up to this time, the allottees were interested in taking delivery of their allocations since the controlled price was lower then the open market price. However, when the same trend continued further in the open market, the allottees became reluctant to fulfil their obligations. In these circumstances, in May, 1952, the sale price of sugar in the open market came down to Rs. 29 per maund (i.e., Rs. 79-12-0 per bag) ex-factory and in view of the aforesaid conditions the allottees ceased taking delivery of their allotted quota totally despite repeated reminders by the assessee. Thus, the assessee had on hand sufficient stock unsold out of free sugar and its position was complicated by the fact that the allottees were not taking their quota of controlled sugar also. The said Shri Rohatgi has also relied on a letter dated 9th June, 1952, addressed by the Government to all sugar factories which bears out the critical position regarding lifting of stocks of sugar. According to the assessee, the sales made by it to Bombay parties under the 19 Bombay contracts were required to be appreciated against the above background. It was the time when the sale price of sugar in the open market had dropped from, Rs. 50 per maund to Rs. 29 per maund. The assessee was carrying large stocks left unsold and not lifted by the allottees. The controlled price was higher than the open market price. There were reports of huge stocks lying with the Government and it was apprehended that these stocks would also come in the market. It was in these circumstances that the assessee, after considering the gravity of the situation, deemed it prudent to enter into the twelve Bombay contracts which were entered through brokers, M/s. Shamji Premji & Co. for 20,700 bags of sugar to five parties whose names would be found in Ex. 'G' to the affidavit annex. 'D' to the statement of case. A specimen of one of such contracts is to be found in annex. 'F' to the said affidavit and this would show that quality of D-27 sugar (or higher quality in dry condition) had to be delivered in Bombay and the delivery date is mentioned as Shawn Sud 15. We have ascertained that the equivalent date by the Gregorian calendar comes to 5th August, 1952. It is the assessee's case that all the contracts entered into through these brokers were not transferable and were arrive at for specific quality, condition and definite delivery of the quantities and qualities of sugar indicated therein ex-godown, Bombay. According to the assessee in entering into the 12 Bombay contracts it was not indulging in any kind of speculation at all and it intended to perform the contract by actual delivery of goods at agreed destination. In para. 16 of the said affidavit the assessee had pointed out various difficulties it would have to encounter in making the deliveries under these contracts at Bombay, but according to the assessee despite such difficulties the sales were required to be effected as in the opinion of the assessee the local market at Kanpur, at the time when these contracts were entered into, did not appear to be one which could have absorbed the 20,700 bags of sugar. However, as indicated earlier, the date of delivery mentioned in the contracts was the equivalent of 5th August, 1952. Thus, there was an interregnum in which period according to the assessee the assessee stepped up its efforts to find local buyers for the goods at Kanpur at a higher net price than the one which would be available to the assessee under these twelve contracts in Bombay. According to the assessee, it was by reason of vigorous efforts and by reason of the fact that the apprehended release by the Government of further stocks did not come about, it was able to dispose of a part of those quantities at better prices with the result that there was a significant reduction in the released stocks held by the assessee. It was in these circumstances, according to the assessee, that it ultimately arrived at a business decision that the Bombay contracts be cancelled. This cancellation of its liability to deliver the goods under the Bombay contracts appears to have been done by the assessee in three stages. The first stage pertains to 9,700 bags and in respect thereof the cancellation took place between the 2nd and 14th of July, 1952. According to the affidavit of Shri Rohatgi, the cancellation was effected by buying 9,700 bags of sugar for ready delivery from the concerned buyers at the prevailing rates in Bombay during this period. As this rate was higher than the rate at which the assessee had earlier sold its goods, differences had to be paid. The second stage was the cancellation of two of the Bombay contracts for the aggregate quantity of 10,000 bags. This was done on 1st August, 1952, and finally the balance of the commitment, i.e., for 1,000 bags was cancelled on 12th August, 1952. According to the assessee, it was a manufacturer of sugar and at the relevant time it held with itself more than the quantity which had been sold to the five Bombay dealers under the twelsve contracts. According to the assessee, it does not do any speculative business in sugar and in fact no speculation business in sugar was at all possible.
7. According to the assessee, further as mentioned in the said affidavit, these were genuine and bona fide transactions under which the assessee had entered into contracts to supply and deliver sugar in Bombay because of the circumstances already adverted to, and subsequently, these contracts were cancelled from time to time because the assessee found that course more advantageous in the changing circumstances. The assessee submitted, therefore, that the transactions ought to be viewed in the light of commercial principles, the circumstances prevailing at the relevant time, the intentions in entering into such transactions and the trade practice in the sugar market. According to the assessee, after the transactions are properly appreciated they could not be regarded as speculation or business of speculation and the loss suffered by the assessee must properly be considered to be a business loss which could be set off against the profits earned by it.
8. The arguments before the Tribunal have been summarised by the Tribunal in para. 22 of its order dated 7th January, 1969, from which this second reference to us is made. The first submission was that the transactions were purely business transactions and not speculative transactions. The alternative submission which is also found in the affidavit of Shri Rohatgi was that even if the transactions may be regarded as speculative transactions, they partook of the nature of hedging transactions and, therefore, should not be deemed to be speculative transactions within the meaning of prov. (a) to Expln. 2 to s. 24(1) of the Indian I.T. Act, 1922. The Tribunal rejected both the contentions of the assessee. In the view of the Tribunal the contracts which the assessee had entered into and which were ultimately cancelled in the circumstances mentioned above, were covered by the definition of 'speculative transactions' to be found in Expln. 2 to s. 24(1) of the Indian I.T. Act, 1922.
9. As far as the alternative contention of hedging was concerned, the Tribunal applied its mind to the phraseology in prov. (a). It observed, after considering this phraseology, that prov. (a) did not protect all transactions which are known in the commercial world as hedging transactions but only the limited types of hedging transactions as were specifically covered by the said proviso. In the view of the Tribunal, the transactions entered into by the assessee did not fall within the limited language employed by the said proviso. On both the aspects, therefore, the Tribunal ruled against the assessee and upheld the decision of the ITO which had been subsequently confirmed by the AAC. It is in these circumstances that the aggrieved assessee has come by way of reference to the High Court.
10. The question which the Tribunal has referred to us, reads as follows :
'Whether, on the facts and in the circumstances of the case, it was rightly held that the contracts for sale and delivery of sugar entered into by the assessee from 9th June, 1952, up to 20th June, 1952, did not constitute regular business transactions of the assessee but fell within the definition of speculative transactions and in any case were not saved by the proviso (a) to Explanation 2 to section 24(1) for claiming loss of Rs. 1,68,731 ?'
11. The proper determination of the question turns upon the proper interpretation or construction to be placed upon the statutory provision which may be fully set out. Section 24 of the Indian I.T. Act, 1922, makes provision for setting off of losses under one head of the income against profit or gains made by the assessee under any other head in that year. This enabling provision, however, is subject to a restrictive proviso which provides that any loss sustained in speculative transactions which are in the nature of business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions. It is in this connection that we have Explns. 1 and 2 and prov. (a) to Expln. 2 which assume considerable importance and significance.
'Explanation 1. - Where the speculative transactions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business.
Explanation 2. - 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 :
Provided that for the purposes of this section, -
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandise business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or' Explanation 2 to s. 24(1) came to be considered by the Supreme Court in Davenport & Co. P. Ltd. v. CIT : 100ITR715(SC) . The transactions which were being considered by the Supreme Court were for the purchase of certain jute goods and their subsequent sale. These were made by a private company which carried on business in tea garden tools and requisites and also acted as agents for selling tea. Right up from the stage of the ITO to the High Court it had been held that they were transactions of speculative character within the meaning of Expln. 2 to s. 24(1) and that the loss incurred could be set off only against speculation profits and, since there were no such profits in the year under consideration the loss was required to be carried forward to be set off against future speculation profits. In an earlier decision of the Supreme Court, viz., Raghunath Prasad Poddar v. CIT : 90ITR140(SC) , it had been held that such transactions could not be regarded as speculative transactions and the assessee placed reliance on the said decision. In Davenport & Company's case : 100ITR715(SC) , Poddar's case was overruled and it was observed that for income-tax purposes speculative transaction means what the definition of the expression in Expln. 2 says. Further, according to the Supreme Court, whether a transaction was speculative in the general sense or under the Contract Act was not relevant for the purpose of the Explanation. Thus, a transaction which is otherwise speculative, would not be a speculative transaction within the meaning of Expln. 2 if actual delivery of the commodity or the scrips takes place; on the other hand, a transaction which is not otherwise speculative in nature may be required to be considered speculative according to Expln. 2 if there is no actual delivery of the commodity or the scrips. Thus, according to the Supreme Court, Expln. 2 gives a special meaning to the expression 'speculative transaction' for income-tax purposes only. The larger Bench of the Supreme Court in Davenport & Company's case : 100ITR715(SC) extracted with approval a passage from D. M. Wadhwana v. CIT : 61ITR154(Cal) , where the Calcutta High Court had dealt with the Explanation. According to the Supreme Court, the extracted passage represented the correct statement of the law. It was further pointed out that such transactions were not invalidated by the Explanation but only branded as 'speculative transactions' to be put in a special category for income-tax purposes.
12. The aforesaid decision of the Supreme Court was considered by a Division Bench of this court (to which I was a party) in CIT v. Indian Commercial Co. P. Ltd. : 106ITR465(Bom) . On facts it had been found in Indian Commercial Company's case that the assessee-company had committed a breach of contract and it thereafter paid liquidated damages for such breach to Messrs. Hindustan Steel Ltd. It was held in the above case that once the contract was broken, there could be no cause of action founded on the contract which can be said to be capable of settlement. What had been settled was only the rate of damages resulting from the breach of the contract. Accordingly, it was held that since there was no settlement of the contract, s. 43(5) of the I.T. Act, 1961, had no application. The observations of the Supreme Court in Davenport & Company's case : 100ITR715(SC) have been considered by the Division Bench of this court at page 470 of the decision in Indian Commercial Company's case : 106ITR465(Bom) .
13. There is one further aspect which may now be considered. In connection with the application of Expln. 2 to s. 24(1), counsel for the assessee has drawn our attention to a change in language as between the said provision and the phraseology employed in the comparable section of the I.T. Act, 1961. 'Speculative transaction' is defined under s. 43 of the later Act for purposes of ss. 28 to 41 of the said Act as follows :
'(5) 'Speculative transaction' means 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.'
14. He drew our attention to the fact that the words 'for purchase and sale of any commodity' occurring in Expln. 2 to s. 24(1) have been substituted by the words 'contract for the purchase or sale of any commodity' in s. 43(5).
15. It was submitted by Mr. Trivedi that the conjunctive 'and' occurring in the Act of 1922 must connote that the contract in question was of a bilateral nature, consisting of an initial transaction as purchase of an article followed by a reverse transaction of sale of the self-same article between one and the same parties. In any case, according to counsel whether the initial transaction be one of purchase or of sale, it was required to be followed by a reverse transaction of the converse character with the same party in order to fall within the mischief of Expln. 2 to s. 24(1). In his submission this connotation has been removed by the Act of 1961 by replacement of the word 'or' in the place of 'and' with the consequential result that the contract for purchase alone from any third person or a contract of sale alone to any third person could fall within the category of speculative transaction without there being an obligatory requirement of a further reverse transaction with that party which was, in the submission of counsel, necessary under Expln. 2 of s. 24(1).
16. Our attention was also drawn to the commentary in A. C. Sampath Iyengar's Law of Income tax, 6th edn., where the learned author has made observations in a similar vein. Based on this argument, it was submitted that in any case as far as 11,000 bags in respect of which contracts were cancelled in August, 1952, are concerned, there was no finding of any reverse transactions between the same parties although it may be possible to hold that as far as 9,700 bags were concerned, in para. 19 of the affidavit of Shri Rohatgi it had been stated that these were bought for ready delivery from the concerned buyers between 2nd July, 1952, and 14th July, 1952. It was accordingly submitted that as far as the loss of 11,000 bags were concerned, such loss could not be considered to be losses arising from speculative transactions as the express phraseology of Expln. 2 was not satisfied.
17. More fundamental, however, was the contention of counsel for the assessee based upon a very recent decision of the Madhya Pradesh High Court, Indore Bench in Thakurlal Shivprakash Poddar v. CIT : 116ITR190(MP) . There, on a difference between Kondaiah J. and Oza J. the reference was referred to Sohani J., who has, at page 210 of the report, made the following observations :
'Is it not then reasonable to assume that the legislature, while defining a 'speculative transaction' in Expln. 2 to s. 24(1) of the Act, used words which people conversant with speculative transactions and stock exchange employ In a stock exchange, there are certain days marked out for settlement, called clearing days. On the clearing date, the settlement is effected with reference to the price fixed by the stock exchange. That is why the expression 'settling day' is understood to mean the day on which transactions for the account are made up on the stock exchange (See the Dictionary of English Law by Earl Jowitt, 1959 edn., p. 1626). By the use of the expression 'settled' in the definition of a speculative transaction, it is thus clear that the legislature meant to deal with the performance of a contract by the parties and not with its non-performance. If the contract is performed by actual delivery of the contracted commodity, such a transaction falls outside the purview of a 'speculative transaction' as defined by Expln. 2 to s. 24(1) of the Act. If the contract is, however, performed otherwise than by actual delivery or transfer of the contracted commodity, than the contract is so settled as to constitute it a 'speculative transaction' as defined by the aforesaid provision. In my opinion, therefore, the expression 'contract...settled', occurring in Expln. 2 to s. 24(1) of the Act, has to be understood as 'contract performed'. It cannot be held to cover a case where, in consequence of non-performance of a contract, parties resolve their disputes arising out of a breach of contract. Such a settlement in the sense of arranging matters in dispute as ordinarily understood by the expression 'settlementi', cannot, as rightly urged by learned counsel for the assessee, make it a 'settlement of the contact' in the sense in which the expression 'contract...settled' is used in Expln. 2 to s. 24(1) of the Act. Now, in the instant case, it has been found that the assessee had committed a breach of the contract entered into by it with M/s. Pitty Brothers. It has also been found by the Tribunal that the assessee entered into a genuine transaction with the purchaser determining the dispute arising out of non-performance of the contract by the assessee. In these circumstances, it cannot be held that the assessee settled the contract otherwise than by actual delivery of the contracted commodity so as to render the transaction a 'speculative transaction' within the meaning of that term as defined by Expln. 2 to s. 24(1) of the Act.'
18. Accordingly, Sohani J. agreed with Oza J. and held that in the facts and circumstances of the case the sum of Rs. 30,000 which had been paid by the assessee in the case before the Madhya Pradesh High Court to Messrs. Pitty Brothers, Bombay, was not a speculative loss covered by Expln. 2 to s. 24(1) corresponding to s. 43(5) of the 1961 Act. It was held to be a trading loss which could be set off against other profits and gains of the assessee.
19. It was then submitted by the learned counsel for the assessee in the alternative that the amounts paid to the Bombay parties for cancelling the twelve contracts were or must be regarded as payments occasioned by breach of the contracts which breach the assessee was required to commit on account of business exigencies earlier referred to and which have been extensively set out in Rohatgi's affidavit. The Tribunal has substantially accepted the factual background in which the assessee took the decision to cancel the twelve contracts with the Bombay parties. As far as the submission that the payments of differences to these parties were in the nature of damages arising from breach of contract, Mr. Trivedi relied on what was stated in para. 19 of Mr. Rohatgi's affidavit where it has been stated that a decision was taken by the assessee based on the overall release of the sugar stock and price position that the Bombay contracts or a part thereof be cancelled by paying damages. It was submitted that the aggregate payment of differences at all the three stages of the cancellation earlier indicated must be attributed to a breach of contract which would have been committed by the assessee since obviously the assessee had taken a decision not to deliver the goods in Bombay at the rates earlier agreed to when the twelve contracts were entered into. In any case, it was submitted as and by way of a further alternative that the cancellation in respect of the 11,000 bags which cancellation took place in August, 1952, must be regarded as equivalent to amounts paid as damages arising on a breach of the contract bearing in mind the date of performance of the contract, which was 5th August, 1952.
20. In connection with this branch of the argument Mr. Trivedi relied on three judgments of the Calcutta and Karnataka High Courts which have been referred to in Indian Commercial Company's case : 106ITR465(Bom) , viz., CIT v. Pioneer Trading Co. P. Ltd. : 70ITR347(Cal) , Daulatram Rawatmull v. CIT : 78ITR503(Cal) and Bhandari Rajmal Khushalraj v. CIT : 96ITR401(KAR) . According to him, the position had been further crystallised by two subsequent decisions of the Calcutta High Court, viz., CIT v. Ramjeewan Sarawgee & Sons : 107ITR845(Cal) , and CIT v. Arun General Industries Ltd. : 110ITR286(Cal) .
21. Now, as stated earlier, in Indian Commercial Company's case : 106ITR465(Bom) , a Division Bench of the Bombay High Court had very clearly found from the correspondence exchanged between the assessee and M/s. Hindustan Steel Ltd. that the amount which was being considered in the assessment proceeding was payment by the assessee towards the loss claimed by M/s. Hindustan Steel Ltd. as occasioned by breach of contract committed by the assessee.
22. A very similar situation existed in Pioneer Trading Company's case : 70ITR347(Cal) where an amount had been received by the Indian assessee from the Japanese contracting parties as damages for breach of contract committed by the Japanese parties. In Daulatram Rawatmull's case : 78ITR503(Cal) the assessee had failed to supply the contracted goods and the dispute was referred to arbitration in which arbitration there was an award directing the assessee to pay the difference between the market rate and the contract rate. This was clearly in the nature of payment of damages for breach or non-performance of the contract. These two earlier decisions of the Calcutta High Court have been followed by the subsequent decision to which our attention was drawn at the Bar.
23. In Ramjeewan Sarawgee's case : 107ITR845(Cal) , there was a clear failure by the assessee to deliver the contracted goods on the due dates resulting in a breach of contract. Pursuant to such breach the assessee had become liable to pay Rs. 1,79,200 as damages to the other party to the contract. There was a clear finding of the Tribunal to that effect which is extracted in the judgment. A similar position exists in Arun General Industries' case : 110ITR286(Cal) . In this case, the Tribunal had found that the differences had been paid on account of damages for non-fulfilment of contract.
24. In this connection, it has to be noted in the matter being considered by us that there is no finding of the Tribunal that the amount had been paid by the assessee as damages arising from breach of contract. It is also apparent that when the assessee cancelled its outstanding contracts for 9,700 bags between 2nd July, 1952, and 14th July, 1952, the due date of performance of its contractual obligation, viz., 5th August, 1952, had not yet arisen. Thus the payment of the amount to the buyers whose outstanding contracts were cancelled could by no stretch of imagination be accepted as equivalent to payment of damages although so described in para. 19 of Rohatgi's affidavit. Our attention was drawn to Ex. G to the affidavit of Mr. Rohatgi's in which also there is similar usage of the words 'damages paid on default' and according to the assessee the entire amount paid, viz., Rs. 1,68,731-4-0 was in the nature of damages occasioned by the assessee's default. Although there is no express finding of the Tribunal, it is clear that there was no question of paying any damages for breach of contract in respect of 9,700 bags as the contracts were cancelled much prior to the date of performance in the manner indicated in para. 19 of the said affidavit and it would appear to us that the proper view to be taken is that the assessee got rid of the liability to effect delivery under the contract by entering into cross contracts which were entered into at three stages earlier indicated. As the prices under these cross contracts for purchase were higher than the prices at which the assessee had agreed earlier to sell the goods to the five Bombay parties, the assessee was required to pay the difference and the aggregate amount paid by the assessee came to Rs. 1,68,731-4-0. In all these four cases and in particular in Indian Commercial Company's case : 106ITR465(Bom) there was clear and cogent evidence indicating that the payment was in respect of a claim for damages for breach of contract. On facts and on correspondence the breach as well as the nature of the claim were clearly established. The position before us today is totally different.
25. Mr. Trivedi strongly relied on Bhandari Rajmal's case : 96ITR401(KAR) , where there are observations which may suggest that any payment made after the date of delivery cannot be regarded as a settlement of the contract, but must be accepted as a settlement of the amount of damages. With respect, it would appear to us that the phraseology employed in the said decision has too wide an import with which without the necessary background of supporting facts we may not be able to agree. In any case, the cancellation of contracts effected in July, 1952, and on 1st August, 1952, which pertained to 19,700 bags out of the total quantity of 20,700 bags of sugar are settlements before the date of delivery and must be regarded as made at the time when the contract was subsisting. Thus, in this manner the assessee had got rid of his liability to deliver the bags of sugar under the contracts and the ultimate method whereby this was effected was by entering into cross contracts for purchase which resulted in a financial or monetary liability. The facts of the present case are totally different from the facts in Indian Commercial Companys case : 106ITR465(Bom) and that decision, nor the other Calcutta decisions brought to our notice help Mr. Trivedi's contention.
26. As far as the earlier contention, viz., that the language of Expln. 2 to s. 24(1) requires an initial transaction followed by a reverse transaction, it appears to us that rather too much has been read in the word 'and'. If Expln. 2 is properly considered it would appear that it was intended that both types of contracts, viz., contracts of purchase as well as contracts of sale were intended to be covered by the definition of 'speculative transaction' if the other requirements of the section were met and with that object in view the word 'and' was used by the legislature and not with the objective of requiring an initial transaction or contract for purchase to be followed by a subsequent or consequential transaction for sale of commodity between the same parties to have the transaction brought within the meaning of 'speculative transaction'. Further, if the word 'settled' is given its proper effect, it is clear that it is the initial contract alone which is being referred to which may either be a contract of purchase or one of sale and for that purpose the legislature has used the word 'and'. We are unable to agree with the views expressed by the learned author A. C. Sampath Iyengar on the purported change introduced by the changed language of s. 43(5) of the I.T. Act, 1961. On the facts of the case before us also it would seem that the mode of cancellation employed by the assessee was the same with regard to the entire lot of 20,700 bags. It may be conceded, however, that there is a clear indication of this as far as the initial transaction of 9,700 bags is concerned, where in para. 19 of Rohatgi's affidavit it is stated that cancellation was effected in respect of this part of the contractual obligation by buying equivalent bags of sugar from the concerned buyers for ready delivery and paying differences. This is not so clearly stated with regard to the remaining quantity of 11,000 bags. The liability of the assessee in respect of these bags came to be cancelled in August, 1952, but there is no reason to suspect that any different mode was adopted. In any view of the matter, it appears to us unnecessary to go further into this factual aspect by reason of the view that we have taken of Mr. Trivedi's contention as to the language employed by Explanation. 2 to s. 24(1).
27. To recapitulate, Mr. Trivedi's contentions on Explanation. 2 to s. 24(1) were : (1) that by this definition the legislature did not intend to designate as speculative transactions genuine business transactions, not considered as speculative by the trade, which were entered into bona fide with a bona fide intention of giving delivery but where delivery could not be or was not given on account of commercial exigencies. This appears to us to be contrary to the plain reading of the Explanation as indicated in Davenport & Company's case : 100ITR715(SC) and we are unable to agree with the majority view of the Madhya Pradesh High Court in Thakurlal Poddar's case : 116ITR190(MP) that at least as far as 11,000 bags of sugar were concerned, there was no finding that the assessee repurchased these bags at the time when the earlier contracts were cancelled or that the earlier contractual obligation to deliver was got cancelled. This argument was based on the affidavit of Mr. Rohatgi as well as Mr. Trivedi's reading of the phraseology employed by the legislature in Explanation. 2 to s. 24(1). Both on the facts and on the question of interpretation we are unable to accept Mr. Trivedi's submission for the reasons earlier noted; (3) it must be held on the facts of the instant case that the amount of Rs. 1,68,731 is required to be regarded as having been paid by the assessee as settlement of damages as a consequence of breach of its contractual obligation and, therefore, cannot be regarded as a loss occasioned by speculative transaction. We have already earlier stated as to how we are unable to accept this position also and how the facts of the present case are totally different from the facts before the Division Bench in Indian Commercial Company's case : 106ITR465(Bom) .
28. There remains for consideration the contention that the transaction is saved by reason of prov. (a) which we have earlier extracted. It appears to us that the Tribunal is perfectly right in observing that all genuine hedging transactions are not saved by prov. (a) but only certain hedging transactions. The Tribunal has dealt with this argument in para. 25 of its appellate order dated 7th January, 1969. The Tribunal has analysed this proviso and has in para. 25 of its judgment indicated what the requirements are which are required to be satisfied before the assessee could claim the benefit of the same. It would appear to us that we are not concerned here with what an ordinary businessman may or may not consider to be a hedging transaction. The short question is : Has the assessee satisfied the requirements of prov. (a) to Explanation. 2 The proviso would seem to envisage the existence of two contracts, viz., a contract for actual delivery of goods and another contract which may be called the hedging contract to guard against loss through future price fluctuations in respect of the first contract. The facts before us do not reveal such duality of contractual obligations entered into by the assessee and hence prov. (a) is obviously not satisfied.
29. Realising that it was difficult for the assessee to satisfy the court that there was compliance with the requirements prescribed by the proviso, Mr. Trivedi referred us to a circular of the Central Board of Revenue being Circular No. 13(102) - I.T./53 dated 8th September, 1954, in which the Board has directed the ITO, inter alia, not to be too particular about the qualities and timing as far as genuine hedging transactions in raw materials are concerned. Subsequently, further relaxation was effected in favour of the assessee by Circular No. 23 (xxxix-4) D of 1960 dated 12th September, 1960, which later circular the Division Benches of this court had occasion to consider in a number of cases. It is difficult to consider the application of this 1960 circular to the assessment year 1953-54. The circular of 1954 which perhaps can be relied on by the assessee, does not further the case of the assessee at all. The transaction of the assessee is not a transaction of hedging in raw material. The assessee has rather entered into contracts with respect to sugar manufactured by it which is totally different from the situation contemplated by the circular of 1954. As at present advised, we are of opinion that the circular of 1960 cannot be pressed into service by the assessee. It is clear to us that the circular of 1954 does not assist the assessee at all. The assessee has, therefore, to fall back upon the phraseology of prov. (a) to Explanation. 2 and in the view we take of the facts found by the Tribunal, the transaction entered into by the assessee does not constitute a hedging transaction as contemplated by the said prov. (a) and hence the same is not protected thereby.
30. The result of the foregoing discussion then is that in our opinion the amount of Rs. 1,68,731 paid by the assessee must be regarded as a loss arising to the assessee from speculative transactions as artificially defined by Explanation. 2 to s. 24(1) of the Indian I.T. Act, 1922, and these transactions cannot be regarded as hedging transactions within the meaning of prov. (a) to the said Explanation 2. This would be so, although from the point of view of business and trade they may be regarded as regular business transactions of the assessee and may be further considered to be in the nature of hedging transactions as commercially understood. We find there is a little lack of clarity in the question submitted to us which we propose to reframe. The reframed question will read as under :
'Whether, on the facts and in the circumstances of the case, it was rightly held that the contracts for sale and delivery of sugar entered into by the assessee from 9th June, 1952, up to 20th June, 1952, fell within the definition of speculative transactions and were not saved by the proviso (a) to Explanation 2 to section 24(1) for claiming loss of Rs. 1,68,731 ?'
31. The question reframed is answered in the affirmative on both the points and against the assessee.
32. The assessee will pay to the revenue the costs of the reference.