Jeevan Reddy, J.
1. The question referred for out opinion under s. 256(1) of the I.T. Act is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the transactions in question, which resulted in payment of price differences, adid not constitute a speculation business within the meaning of section 43(5) read with Explanation 2 to section 28 of the Income-tax Act, 1961 ?'
2. We may briefly state the facts leading to this reference : The assessee is a firm carrying on business in manufacture and sale of rice bran oil and deoiled bran by a process known as 'solvent extraction' process. Its accounting year is the financial year. We are concerned her with three assessment years, viz., 1966-67, 1967-68 and 1971-72. The assessee has been entering into contracts with reputed concerns like Tata Oil Co. Ltd., Hindustan Lever Ltd., Godrej Soaps Ltd., etc., for ready delivery of rice bran oil manufactured by it over last several years, and it has been fulfilling most of the contracts entered into. However, during the accounting years relating to the aforesaid three assessment years, it could not deliver oil in pursuance of some of the contracts on account of non-availability of the wagons. The Tribunal has now found as a fact that though the assessee was possessed of sufficient quantity foil to be supplied towards the said contracts, it could not deliver the same on account of circumstances beyond its control, viz., non-availability of wagons. According to the contracts between the assessee and the said purchasers, the obligation to find or secure the requisite number of railway wagons lay upon the assessee. The following term of the contract, which has been set out in the Tribunal's order, makes the matter clear :
'when the contract is entered into on the basis of 'despatch' condition or 'tendering of R. R.' condition, the sellers shall not put forward non-availability or non-performance of the contract. The sellers must intimate the buyers, within 72 hours of the last due date of the contract the details of the despatch of oil made by them failing which the buyer shall be entitled to :
(a) grant an extension in the despatch or tendering of R.R. date as the case may be, if asked for by the sellers in writing; or
(b) chance the contract at par; or
(c) re-purchase from the open market for the entire quantity of the balance quantity yet to be delivered against the contract, as the case may be, on the third day after the due date and recover from the sellers the difference between the prices at which they cover the oil and the contract price; or
(d) settle the contract on the basis of the market price as ruling on the fifteenth day after the due date.'
3. This term shows that it was more or less buyer's contract. IT was the assessee's responsibility to find the necessary railway wagons for transporting the oil and non-availability of wagons was to be no excuse for non-performance. Further, the assessee was required to intimate the buyers within 72 hours of the last due date of the contract, the details of the despatch of the oils made by them, failing which the buyer had four options. One of which is to re-purchase the requisite quantity of oil in the open market and to recover from the assessee the difference between the price at which it had purchased oil and the contract price. In this case, on the failure of the assessee to supply the oil before the last date, agreed to under the contracts, the purchasers exercised this particular option and called upon the assessee to pay the difference in price. Accordingly, the assessee was obliged to pay a sum of Rs. 97,000 in the accounting year, relevant to the assessment year 1966-67; a sum of Rs. 4,500 for the assessment year 1967-68; and a sum of Rs. 74,860 for the assessment year 1971-72. The assessee claimed these amounts as business losses. The ITO, however, disallowed the same holding that the said contracts are speculative in nature within the meaning of s. 43(5) and hence the losses arising therefrom can be set off only against any profit arising from another speculative business, but not against the income from the regular business of the assessee.
4. On appeal, the AAC confirmed the finding of the ITO.
5. Before we refer to the finding of the Tribunal on further appeal, it is relevant to mention the following figures available from the Tribunal 's order. For the assessment year 1966-67, the assessee manufactured 652.05 metric tons of oil and sold 643 metric tons, the value thereof is about thirteen lakhs. As against this quantity, the quantity which remained undelivered to the purchasers was 233 M. tons, covered by 12 contracts. For the assessment year 1967-68, the undelivered quantity is only 19 M. tons, covered by only one contract and for the assessment year 1971-72, the undelivered quantity is 76 M. tons covered by two contracts.
6. Against the orders of the AAC, the assessee filed an appeal before the Tribunal and there it urged on the basis of the decisions of the Calcutta and Karnataka High Courts, that the contracts in question cannot be called speculative transactions (assuming that the contracts in question were of such a nature) do not constitute a business, so that under the said Explanation, it can be deemed to be a distinct and separate business. The Tribunal agreed with the assessee on both the contentions and allowed the appeal. Thereupon the Department asked for an obtained this reference.
7. Section 43(5) defines a speculative transaction. Omitting the provisos, which are not relevant for the present purpose, the definition reads 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'.
8. Explanation 2 to s. 28 may also be set out. It reads as follows :
'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 business.'
9. We may also refer to section 73(1), which says :
'Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.'
10. It may be pointed out that s. 43(5) corresponds to Expln. 2 to s. 24(1) of the 1922 Act, while Expln. 2 to s. 28 corresponds to Expln. 1 (to s. 24(1) of the 1922 Act).
11. We shall first take up the question whether the transactions concerned herein can be said to be speculative transactions as defined. Both the counsel referred to a number of decision rendered by several High Courts of this country on the interpretation of this definition, which disclose a clear divergence of opinion. A majority of the High Courts have held that settling a contract means settling the contract before the occurrence of the breach by payment of difference and that where the breach occurs and thereafter claims arising from the breach are settled between the parties to the contract, it cannot be called that such settlement amounts to settling of contract. In other words a distinction has been drawn between settling the contract and settling the claims arising from the breach of the contract. It is held that only the former situation is covered by the definition but not the later. While the other view is that the definition does not recognise any such distinction and that even where a breach occurs and thereafter a claim arising from the breach is settled between the parties by payment of money, such a case will equally fall within the definition.
12. We will now refer to some of the decisions, taking the majority view. The first amount them is in CIT v. Pioneer Trading Co. P. Ltd. : 70ITR347(Cal) . That was case where the assessee, a private limited company, entered into a contract dated July 6, 1953, with a Japanese part to supply 52,000 long tons of Indian iron ore, to be delivered in three consignments of 24,000, 8,000 and 20,000 tons. The agreed basis of payment was by irrevocable letter of credit in pound sterling at the rate of 71 shillings per each dry long ton, to be provided by the Japaneses party. The assessee supplied the first two consignments, but not the whole of the third consignment. Only 12,010 tons were supplied towards the third consignment leaving a balance of 7,990 tons. This quantity could not be supplied because the Japanese party defaulted in the performance of their part of the contract and did not open the letter of credit as agreed upon. On this breach of contract, the assessee-company claimed and obtained an amount of Rs. 22,627 towards the difference in amount. For the relevant assessment year the assessee sought to set off this amount against certain unabsorbed speculative losses brought forward from earlier years, on the theory, that the amount of difference obtained from the Japanese party was a speculative profit. That was disallowed by the ITO as well as by the AAC. On further appeal, however, the Tribunal took the view, that since the contract was settled otherwise than by delivery of goods, it was a speculative transaction within the meaning of Expln. 2. s. 24(1) of the Indian I.T. Act, 1922 and, therefore, must be set off against the unabsorbed speculative losses brought forward from the previous years. When the matter came up before the Calcutta High Court, it was contended for the Department that what was settled in that case was not the contract, but a claim for damages arising format breach of a contract and that such a settlement did not fall within the language of Expln. 2. This contention was accepted by the court, which held (p. 352) :
'As we read Explanation 2 to section 24(1) we do not feel that a claim based on breach of contract comes within the meaning of 'contract settled' as used in Explanation 2. 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. The nature of the contract, which we have recited hereinbefore, give no implication that the contract was of speculative nature. If that contract had been settled, we do not know whether it would have fallen with the meaning of Explanation. 2. We have held that the contract was not settled, but damages for breach of the contract was not settled, but damages for breach of the contract were realised. That makes all the difference and the transaction cannot be characterised as speculative transaction within the meaning of Explanation 2.'
13. The same view was adopted by the same High Court in Daulatram Rawatmull v. CIT : 78ITR503(Cal) , CIT v. Ramjeewanb Sarawgee & Sons : 107ITR845(Cal) , CIT v. Arun General Industries Ltd. : 110ITR286(Cal) and Steel Enterprises Pvt. Ltd. v. CIT : 110ITR288(Cal) . We do not think it necessary to refer to the facts of each case in detail. We must, however, think it relevant to refer to the facts of another decision of the Calcutta High Court in CIT v. Anglo-Indian Jute Mills Co. Ltd. : 124ITR384(Cal) , because one of the clauses concerned therein is identical to the clause in the present contract, which we have referred to hereinabove. In this case the assessee claimed and set-off of Rs. 11,50,000 received by it from one M/s. Tolaram Prakash Chand on Settlement of its claim for damages for breach of certain transferable specific delivery contracts, against speculative losses suffered by the assessee on settlement of certain other transferable specific contracts. Clause 3 of the bye-laws governing the contracts between the assessee and M/s. Tolaram Prakash Chand provided that in case of nondelivery the buyer has the option to cancel the contract and charge the seller with the difference between the contract and the market price prevailing on the date on which the option is exercised. On the basis of the said clause, it was contended by the Department that the amount received by the assessee was not on account of the breach but under the contract itself and, therefore, it cannot be said that it is not a speculative transaction. In other words the arrangement was that the amount was received in settlement of the contract. The court, however, held that clause 3 of the bye-laws merely restated the law with respect to the consequences flowing from breach of contract, viz., for non-delivery of goods the other party to the contract was entitle to damages calculated with reference to the difference between the contract price and the market price and held on that basis that the amount received by the assessee in that case cannot be said to be one received by settling a contract. The amount was accordingly allowed to be set off against the speculative losses suffered by the assessee. In CIT v. Soorajmull Nagarmull : 129ITR169(Cal) , the same court has again affirmed the correctness of its view taken in CIT v. Pioneer Trading Co. P. Ltd. : 70ITR347(Cal) .
14. The Karnataka High Court too has taken the same view in Bhandari Rajmal Kushalraj v. CIT : 96ITR401(KAR) . It was observed by the Mysore High Court that a contract can be settled only during the subsistence of the contract, but not after its breach. It was held that when once a breach occurs by the non-performance of the contract and the parties settle the matter by paying damages corresponding to the difference between the contract price and the market price on the date of the default, it would not amount to settling the contract. What is settled in such a case are the damages consequent on the breach.
15. The Bombay High Court too has taken the same view in CIT v. Indian Commercial Co. P. Ltd. : 106ITR465(Bom) observing that once a contract is broken, there can be no cause of action founded on the contract itself, which can be said to be capable of settlement and that after the breach of contract, what can be settled is only the right to damages resulting from the breach itself. The Delhi High Court too has taken the same view in Addl. CIT v. R. D. Ram Nath & Co. : 141ITR897(Delhi) .
16. As against this view the Madras High Court held in R. Chinnaswami Chettiar v. CIT : 96ITR353(Mad) , that the definition in s. 45(3) does not recognise any distinction between a settlement before the breach and a settlement after the breach and that so long as the contract is settled otherwise than by the actual delivery so long as the contract is settled otherwise than by the actual delivery or transfer of the commodity or scrips, it is a speculative transaction. It was further observed that the word 'settled' is used in s. 43(5) without any restriction as to whether it was arrived at before or after the breach of contract and observed that where actual delivery of the goods is absent it is immaterial whether the settlement is arrived at before the breach or after the breach, It was observed that the Act has provided an artificial definition of speculative transaction and that in construing the same the concepts obtaining under the Indian Contract Act and the Sale of Goods Act are not relevant. It was further observed that even where the contract is highly speculative and amounts to a wagering contract, it will not be a speculative transaction within the meaning of s. 43(5), if it is settled by actual delivery; on the same party of reasoning, even if a transaction is entered into bona fide with the intention of delivering the goods or commodities or scrips, as the case may be, agreed to thereunder, but if for some reason goods etc., are not delivered, but the contract is settled otherwise, it will be a speculative transaction.
17. The same view has been taken by a learned single judge, Kondaiah J. (as he then was), of the Madhya Pradesh High Court in Thakurlal shivprakash Poddar v. CIT : 116ITR190(MP) . However, in that case there was a difference of opinion between Kondaiah J., and another learned judge of that court, Oza J., and on the matter being referred to a third judge, Sohani J., the learned judge agreed with Oza J., which view is consistent with the majority view taken by the Calcutta, Karnataka and Bombay High 'Courts. No decision of this court has been brought to our notice on this point.
18. On a consideration of the rival points of view, we are of the view that the construction placed upon the definition by the majority of the courts ought to be accepted. Taxing law, it is well settled, has to be construed literally. Laterally speaking, there is a distinction between settling the contract and settling the claim for damages arising from the breach of a contract. Both are not synonymous. Where there is a breach of contract, what is settled is the claim arising from the breach of the contract and not the contract, since it already stands breached.
19. We, therefore, agree with the construction placed upon s. 43(5) by the majority of the High Courts, which is also the view adopted by the Tribunal. In view of our opinion on the first question, it is not necessary for us to express any opinion on the interpretation of Expln. 2 to s. 28. Even on the interpretation of this Explanation, there is a divergence of opinion between several High Courts. But in the view which we have taken on the first aspect, it is not necessary for us to express any opinion on the interpretation of Expln. 2 to s. 28. Once we hold that the transactions in question are not speculative transactions; no further question arises and the assessee is entitled to succeed.
20. For the above reasons we answer the question referred to us in the affirmative and hold that the transactions in question do not amount to speculative transactions and, therefore, the assessee was entitled to treat the amounts paid by it to the purchasers in respect of the three assessment years as business losses. The reference is answered accordingly in favour of the assessee and against the department. In the circumstances, there shall be no order as to costs.