Jagannatha Shetty, J.
1. This is a reference under Section 256(2) of the Income-tax Act, 1961. The question referred by the Income-tax Appellate Tribunal, Bangalore Bench, is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the two transactions dated February 5, 1969, entered into by the assessee with M/s. B.S. Munavalli of Gokak were speculative transactions within the meaning of the expression 'Speculative transaction' in Section 43(5) of the Income-tax Act, 1961 ?'
2. For the assessment year 1970-71, the assessee, who is a merchant in groundnut, kapas, cotton and cotton-seeds claimed a deduction of Rs. 35,150 paid to M/s. B. S. Munavalli of Gokak for non-delivery of certain quantities of cotton under the agreement dated February 5, 1969. As per the terms of the agreements, delivery of the cotton was required to be effected and repeated demands by the buyers were also unheeded by the assessee. On May 23, 1969, a sum of Rs. 35,000 was paid by the assessee as per the decision of panchas. The assessee claimed deduction of that amount stating that there was a breach of the contract resulting in the payment of damages therefor. The Income-tax Officer rejected the claim and held that the loss on account of the payment was 'speculative loss' within the meaning of Section 43(5) of the Act.
3. On appeal, the Appellate Assistant Commissioner confirmed the view taken by the Income-tax Officer and that was also upheld by the Tribunal.
4. The question for consideration is, whether, having regard to the terms of the agreement dated February 5, 1969, entered into by the assessee with M/s. B.S. Munavalli and the settlement followed thereon, the payment of Rs. 35,000 made to M/s. B. S. Munavaili could be considered as speculative loss.
5. For determining the question it will be necessary first to read the terms of the agreement. Clause 2 of the contract reads :
'If I/We fail to complete the delivery of the contracted goods within the time stipulated, the company shall have the option to give me/us an extension of the delivery time or to cancel the whole or undelivered portion of this contract, and to claim and recover from me/us the difference, if any, between the contract price and the rate ruling for cotton as contracted for in the open market on the last day of the delivery time mentioned in this contract...'
6. It is also necessary to read the relevant portion of the receipt issued by M/s. B. S. Munavalli acknowledging the payment of Rs. 35,000 in the presence of the panchas :
'In spite of repeated demands for delivery of goods, you did not deliver the goods till now. We had, therefore, to come down to Bijapur and met you today. We enquired personally in the matter in the presence of some merchants here and you informed us that on account of rise in prices it is not at all possible to give delivery of the goods. Thereafter, you agreed to pay for the loss as would be decided by the undersigned four panchas and we agreed to accept the loss as would be fixed by the said panchas in cancellation of the contracts. As agreed between us, the panchas informed that you should pay today only Rs. 35,000 to us by way of loss on account of non-delivery of goods by you and that we should get the contracts satisfied fully. Accordingly, we have received from you a draft No. A 470961 for Rs. 35,000 drawn on Belgaum Bank Ltd., Bijapur, in our favour on their Gokak Branch. Nothing is outstanding due from you in respect of the said contracts ...... dated May 23, 1969.
7. Under the agreement, the buyer can extend the time for delivery of the goods. The settlement states that the assessee failed to deliver the cotton even till May 23, 1969, in spite of repeated demands, It thus clearly speaks of the state of affairs on that date. The terms of the settlement indicate that the buyer had extended the time for delivery ; but, in spite of such extension, the assessee did not deliver the goods. Thereupon, both the parties agreed to abide by the award of the panchas who, after consideration of all the terms of the agreements, said that the assessee should pay Rs. 35,000 by way of loss on account of non-delivery of the goods in full settlement of the contract. The amount was accordingly paid by the assessee.
8. This shows that the buyer had kept the contract subsisting with his right to extend the time for performance and, since there was no performance of the contract even within the extended time, the buyer accepted the amount agreed upon by the panchas in full settlement of the contract and not as damages for the breach of the contract.
9. On the date of the settlement, the contract was subsisting and the amount liable to be paid was computed by the panchas and, as per the award of the panchas, the assessee was made to part with the money. It cannot, therefore, be said that the amount paid was by way of damages for breach of the contract. The settlement clearly indicates that the contract on that day was subsisting and the amount of Rs. 35,000 paid by the assessee was under the contract. In Bhandari Rajmal Kushalraj v. CIT : 96ITR401(KAR) , this court has observed thus (at page 403) :
'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 of damages by paying the difference between the contract price and the market price on the due date of performance that would not amount in law to settling a contract....
In order that a transaction may fall within the scope of the expression 'speculative transaction', it must be a 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.'
10. The view taken by this court has been approved by the Supreme Court in CIT v. Shantilal P. Ltd. : 144ITR57(SC) , wherein it was observed that a contract can be said to be settled for the purpose of speculative transaction under Section 43(5) of the Act 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, 1872, accepts, instead of it, any satisfaction which he thinks fit and what is really settled by damages is the dispute between the parties and, therefore, it is quite different from the settlement of the contract. 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.
11. In the instant case, as we earlier observed, the buyer, instead of waiting to take actual delivery of the cotton, has accepted a total amount of Rs. 35,000 in full settlement of the contractual obligations. This case, therefore, clearly falls within Section 43(5) of the Act.
12. In the result, we answer the question in the affirmative and against the assessee.