Govinda Bhat, C.J.
1. This is a reference at the instance of the assessee made under section 256(1) of the Income-tax Act, 1961, hereinafter called 'the Act'. The question of law referred for the opinion of this court is :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the loss of Rs. 11,100 was sustained by the assessee in speculative business within the meaning of Explanation 2 to section 28 read with sub-section (5 of section 43 of the Income-tax Act, 1961 ?'
2. The assessee carried on business in kapas, cotton and other sundry goods. There were purchases and sales of cotton bales and purchase of kapas and sale of cotton after ginning. The assessee returned a gross profit of Rs. 1,75,524 for the assessment year 1967-68. The assessee claimed a deduction of the sum of Rs. 11,100 which was paid as differences to M/s. Patel Volkart Pvt. Ltd., and M/s. Krishna Rajendra Mills Pvt. Ltd., Mysore, in respect of non-delivery of 200 bales of cotton to the former and 100 bales of cotton to the latter under separate contracts entered into with the parties. The Income-tax Officer disallowed the deduction on the ground that they relate to speculative transactions. That finding was affirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal on second appeal. The question is, whether the sum of Rs. 11,100 claimed as deduction by the assessee is a speculative loss or not If it is speculative loss, then it is undisputed that the assessee is not entitled to claim deduction of the said amount out of its profit under section 73 of the Act; but if on the contra the said amount is not speculative loss, then the assessee is entitled to the deduction of the same out of its business profits.
3. That the assessee is a dealer in kapas and cotton is undisputed. The main business of the assessee is not one of carrying on speculative business either in kapas or in cotton. Similarly, the business of M/s. Patel Volkart Pvt. Ltd. and M/s. Krishna Rajendra Mills Pvt. Ltd., Mysore, is also not one of carrying on speculative business as understood in common law.
4. The income-tax law by sub-section (5) of section 43 of the Act has defined the expression 'speculative transaction'. It treads thus :
''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 : Provided that....' (omitted as unnecessary)
5. Explanation 2 to section 28 states that 'where speculative transactions carried on by an assessee are of such a 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'. As already stated, it is not the case of either side that the assessee in the instant case was carrying on 'speculations business' during the assessment year. The case of the department is that the transactions relating to the contract for sale and delivery of 200 bales of cotton to M/s. Patel of Volkart Pvt. Ltd., and 100 bales to M/s. Krishna Rajendra Mills Pvt. Ltd., Mysore, were speculative transactions. In order that a transaction may fall within the scope of the expression 'speculative transaction' it must be transaction in which a contract for 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. What is important to be noticed is that the contract for purchase or sale of any commodity must be settled otherwise than by the actual delivery or transfer of the commodity or scrips. A contract can be settled only during the subsistence of the contract. If a breach occurs by the non-performance of the contract by actual delivery or transfer of the commodity or scrips and thereafter the parties to the contract settle the amount in law to settling a contract. What is settled in such a case is settling the damages consequent on the breach. That is the view taken by the two Bench decisions of the Calcutta High Court. The first decision is in Commissioner of Income-tax v. Pioneer Trading Company Private Ltd. There the court was dealing with Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, which corresponds to section 43(5) of the Act. This is what Banerjee J. stated :
'..... 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. Since the money which the assessee received in the instant case, in our reading of the facts, was the amount of damages suffered by it by reason of breach of the contract, the nature of the transaction was not speculative transaction as defined in Explanation 2.'
6. That view was affirmed by a later Bench decision of the Calcutta High Court in Daulatram Rawatmull v. Commissioner of Income-tax. The learned counsel for the department has not placed before us any decision taking a contrary view. We are in respectful agreement with the view of law as stated by Banerjee J. in Pioneer Trading Company's case. In order to decide whether the loss claimed by the assessee arose out of speculative transactions, it was incumbent on the Income-tax Officer and the appellate authorities to decide the question of fact whether the sum of Rs. 11,100 was paid or settled after the breach of contracts had occurred or before the due date for the delivery of the goods. In the absence of such a finding, the Tribunal could not have decided the question either way. On the facts found and stated in the statement of the case, this court is not in a position to answer the question. For a proper decision of the case, the Tribunal should have given the necessary finding in order to decide the issue before it. The Tribunal as also the authorities below have entirely misdirected themselves as to the question of facts to be decided. Hence, there is need for fresh enquiry. It is, therefore, necessary in the interest of the parties to remand the case to the Tribunal for a fresh enquiry in the light of this order. We order accordingly. The Tribunal may take additional evidence on the question mentioned earlier. It is ordered accordingly.
7. There will be no order as to costs.