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Thakurlal Shivprakash Poddar Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMisc. Civil Case No. 131 of 1976
Judge
Reported in[1979]116ITR190(MP)
ActsIncome Tax Act, 1922 - Sections 24 and 24(1); Income Tax Act, 1961 - Sections 43(5)
AppellantThakurlal Shivprakash Poddar
RespondentCommissioner of Income-tax
Appellant AdvocateK.A. Chitale, Adv.
Respondent AdvocateA.M. Mathur, Adv.
Cases ReferredUnwin v. Hanson
Excerpt:
- indian penal code, 1890.section 306 :[dalveer bhandari & harjit singh bedi,jj] abetment of suicide deceased, a married woman, committed suicide - allegation of abetment of suicide against appellant husband and in-laws - ocular evidence was sketchy - dying declaration recorded by tahsildar completely exonerated all accused in-laws of any misconduct dispelling any suspicion as to their involvement - letter of threat allegedly written by appellant to father of victim was concocted piece of evidence held, though presumption against appellant can be raised, it cannot be said that onus shifts exclusively and heavily on him to prove his innocence. conviction of appellant is liable to be set aside. - mathur, learned counsel for the cit, contending, inter alia, that the condition of actual.....kondaiah, j.1. at the instance of the applicant-assessee, the income-tax appellate tribunal, indore bench, indore, has submitted a statementof case under section 256(1) of the i.t. act, 1961, for the opinion of this court on the following question of law :'whether, on the facts and in the circumstances of the case, payment of rs. 30,000 to m/s. pitty brothers, bombay, is a speculative loss governed by expln. 2 to section 24 of the indian i.t. act, 1922, corresponding to section 43(5) of the 1961 act or is a normal trading loss ?'2. in order to understand the scope of the question it is necessary to refer briefly to the material facts either admitted or found by the tribunal that gave rise to the question. for the assessment year 1962-63, the corresponding accounting year ending with.....
Judgment:

Kondaiah, J.

1. At the instance of the applicant-assessee, the Income-tax Appellate Tribunal, Indore Bench, Indore, has submitted a statementof case under Section 256(1) of the I.T. Act, 1961, for the opinion of this court on the following question of law :

'Whether, on the facts and in the circumstances of the case, payment of Rs. 30,000 to M/s. Pitty Brothers, Bombay, is a speculative loss governed by Expln. 2 to Section 24 of the Indian I.T. Act, 1922, corresponding to Section 43(5) of the 1961 Act or is a normal trading loss ?'

2. In order to understand the scope of the question it is necessary to refer briefly to the material facts either admitted or found by the Tribunal that gave rise to the question. For the assessment year 1962-63, the corresponding accounting year ending with November 8, 1961, M/s. Thakurlal Shivprakash Poddar of Mehnagar, hereinafter called the assessee, a registered firm, deriving income from exploiting certain mines in the district of Jhabua of Madhya Pradesh, filed a return on July 31, 1962, declaring an income of Rs. 1,45,423. The assessee had agreed on February 28, 1961, to deliver in the month of April/May, 1961, 2,000 tons of manganese ore at the rate of Rs. 50 per ton to M/s. Pitty Brothers, Bombay. The quality of manganese agreed to be delivered was required manganese, 13% iron, 13% silica and alumina, 0.12% phosphorus. The assessee could not and did not deliver 2,000 tons of manganese ore of the specifications indicated in the contract. On August 25, 1961, a settlement was arrived at by the assessee and M/s. Pitty Brothers with regard to the aforesaid contract as a result of which the assessee agreed to pay a sum of Rs. 30,000 by way of compensation at the rate of Rs. 15 per ton. The amount of Rs. 30,000 was claimed to have been paid by the assessee on October 24, 1961. In the circumstances, the assessee claimed in his return the aforesaid sum of Rs. 30,000 paid by it to M/s. Pitty Brothers, for deduction on the ground that it is a normal trading loss incurred by it in respect of the contract in question. The ITO in the assessment order dated November 29, 1963, disallowed his claim on two grounds. According to him, the transaction was a bogus one and even if it be held to be a genuine transaction, it was in the nature of a speculative transaction and as such the loss claimed on this account inadmissible. The assessee's appeal to the AAC was not successful. On further appeal to the Tribunal, it was found on a consideration of the facts and circumstances that the transaction was genuine and not bogus and the amount of Rs. 30,000 was in fact paid by the assessee to M/s. Pitty Brothers. However, the Tribunal rejected the claim of the assessee on the ground that the transaction is one of speculative nature as there was a settlement of the contract without giving delivery of the goods contracted for as required by the provisions of Expln. 2 to Sub-section (1) of Section 24 of the Indian I.T. Act, 1922, and, therefore, the loss of Rs. 30,000 sustained by the assessee would be a loss of speculative transaction which the assessee would be entitled to carry forward and set off against a profit of speculative transaction in subsequent years in accordance with the provisions of the Act. Hence, this reference.

3. The sum and substance of the contentions of Shri K.A. Chitale, learned counsel for the assessee is two-fold:

(a) That this is not a case of settlement of contract periodically or ultimately within the meaning of the definition of 'speculative transaction', but one where damages are paid on account of the breach of contract subsequent to the date of delivery agreed upon.

(b) That this is not a case of two distinct contracts although parties are different, as the commodity is one and the same and the actual delivery of the same manganese ore being made by the assessee to Lakhlal Samandas will take this case out of the category of the speculative transaction contemplated by Section 24(1), Expln. 2, of the old Act corresponding to Section 43(5) of the new Act.

4. This claim of the assessee is resisted by Shri A. M. Mathur, learned counsel for the CIT, contending, inter alia, that the condition of actual delivery of goods contemplated to be sold must be satisfied in order to take out any transaction from the fold of the provisions of Section 24(1), Expln. 2, of the Indian I.T. Act, 1922, corresponding to Section 43(5) of the 1961 Act and as there is no delivery of goods in the instant case, the assessee is not entitled to claim the sum of Rs. 30,000 in question which is incurred in a speculative transaction as an ordinary trading loss.

5. The answer to the question depends upon the scope and meaning of the definition of 'speculative transaction' defined under Expln, 2 to Sub-section (1) of Section 24 of the Indian I.T. Act, 1922, corresponding to Section 43(5) of the 1961 Act and its application to the facts of the present case. Before considering the scope and ambit of the definition of 'speculative transaction', it is profitable to refer briefly to the heads of income and method provided under the Act for deducting the speculative loss from the income in a given year. Heads of income chargeable to income-tax are enumerated in Section 6 of the 1922 Act. An assessee, who sustains a loss under any one of the headsof income in any accounting year, shall be entitled under Section 24(1) of the Act to have such loss set off against his income, profits or gains under any other head in that year. But, however, the first prov. to Section 24(1) permits the set-off of a loss in speculative business only against the assessee's profits and gains, if any, in a similar business. Where the speculative transactions are of such a nature and character so as to constitute a business, the business shall be under Expln. 1 deemed to be distinct and separate from any other business. Any ordinary trading loss incurred by an assessee during a particular accounting year is ipermissible to be deducted from the profits and gains of the assessee in other heads. But the loss incurred in speculativetransaction is not deductible from the income as an ordinary trading loss. Such speculative loss can be deducted only from the income derived by the assessee during that year from his other speculative transactions or speculative business. If there is no profit or gain in any speculative transaction or business during that year the speculative loss would be carried forward to the next year where the assessee would be entitled to set off such loss or income derived during that year under any speculative transaction of business. We shall now turn to the definition of 'speculative transaction'.

6. 'Speculative transaction' is defined under the I.T. Act as a 'transaction in which a contract for the 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'. Contracts which do not come within the definition of speculative transaction have been specifically indicated in Clauses (a), (b) and (c) of the prov. The categories of contracts indicated in the prov. shall not be deemed to be speculative transactions. This prov. need not detain us any longer as admittedly the case in hand does not fall under any one of the contracts specified in Clause (a), (b) and (c) thereof. We have to, therefore, look to the very definition of speculative transaction for determining the question in hand. It is well settled that the notions of general law either under the Sale of Goods Act or the Contract Act are neither relevant nor applicable to determine a question whether a particular transaction is a speculative one or not under the I.T. Act. In other words, it is the scope and meaning of the definition of 'speculative transaction' under the Act that could really govern the ascertainment and determination of any transaction being speculative or otherwise for the purpose of income-tax. In order to bring a particular transaction within the meaning of the definition of speculative transaction, the following conditions must be satisfied :

(a) There must be a transaction under a contract for the purchase orsale of any commodity including stocks and shares, by the assessee duringthe accounting period in question.

(b) The Contract of sale or purchase must have been settled either periodically or ultimately.

(c) Such settlement of the contract must not be by the actual delivery or transfer of the commodity or scrips.

7. In the present case, there was admittedly a transaction in which the assessee has entered into a contract for the supply of 2,000 tons of manganese ore of a specified quality to M/s. Pitty Brothers on February 28, 1961. The supply of manganese ore was agreed to be made in April/May, 1961. The condition No. 3 pertaining to the absence of actual delivery of the manganese ore by the seller has also been established, and admittedly, therewas no delivery of the ore to M/s. Pitty Brothers, the purchaser under the contract. However, Shri Chitale, learned counsel for the assessee, contends that the particular manganese ore of 2,000 tons agreed by his client to be supplied to M/s. Pitty Brothers was subsequently sold at the rate of Rs. 72 per ton and actually delivered the ore to another party, viz., Lakhlal Samandas. According to the counsel, though the purchasers are different, the commodity sought to be sold and the person supplied being one and the same, it should be construed to be one distinct contract whereunder there was actual delivery of the manganese ore to one Lakhlal Samandas and, therefore, this is not a case of speculative transaction. This submission cannot be acceded to for reasons more than one. Firstly, we are concerned with the transaction entered into by the assessee with M/s. Pitty Brothers for the supply of 2,000 tons of manganese ore at Rs. 50 per ton in April/May, 1961. The agreed statement of case indicates that this contract was settled between the parties through the intervention of a broker, Sardarsingh, by payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers and in fact the aforesaid amount of Rs. 30,000 was proved to have been paid as per the settlement. We are not concerned in this reference with the transaction entered into by the assessee with Lakhlal Samandas in respect of supply of 2,000 tons of manganese ore. That is a separate and distinct transaction of contract. Even if the commodity of 2,000 tons of manganese ore which was the subject-matter of both the contracts and the seller in both the transactions are one and the same, the assessee might have earned a profit in second transaction where he sold and actually delivered 2,000 tons of manganese ore to the purchaser at the rate of Rs. 72 per ton. The income earned from that transaction would be taken into account in determining the assessee's profits in its regular business, as there was actual delivery of the manganese ore under the transaction. It was a normal trade transaction and it does not come within the definition of speculative transaction. I am, therefore, unable to agree with Shri Chitale that this is not a case of two separate and distinct contracts and transactions but in substance one and the same on the ground that it pertains to the same commodity belonging to the assessee. In my considered opinion, there are two separate and distinct contracts entered into by the assessee and the consequence of each one must be separately dealt with in accordance with law. In the circumstances, the fact that there was actual delivery of the goods to the second purchaser by the assessee would not in any way affect the nature and character of the transaction entered into between the assessee and M/s. Pitty Brothers in respect of the same 2,000 tons of manganese ore on February 28, 1961. The fact that there was actual delivery of the goods, i.e., of ore to the second purchaser under the second contract would only governand determine the nature of the second transaction between the assessee and the second purchaser and that transaction is undoubtedly an ordinary trading transaction of the assessee but does not fall within the meaning of 'speculative transaction'. The assessee, therefore, cannot take advantage of that fact in support of its plea that there was ultimately actual delivery of the manganese ore sought to be sold to M/s. Pitty Brothers in the beginning and, therefore, the transaction does not fall within the definition of the 'speculative transaction'. That apart I may add that the Tribunal which is the final fact finding authority has, on a consideration of the entire material on record, specifically found that the transaction in question with M/s. Pitty Brothers has been settled by the assessee without giving delivery of the goods contracted for. This finding of fact is binding on us in this reference. We have, therefore, to proceed to answer the reference on the basis of the finding that the assessee had settled the transaction in question with M/s. Pitty Brothers by paying Rs. 30,000 without giving actual delivery of the goods contracted for. We cannot now import any new fact not found by the Tribunal and stated in the statement of case, as it is well settled that we have no jurisdiction to traverse beyond the statement of case and the facts found therein in deciding the referred case.

8. This brings me to examine whether the condition No. 2 has or has not been satisfied. The crucial expression that requires to be construed is 'a contract is periodically or ultimately settled'. The aforesaid expression is not defined either under the Act or the Rules made thereunder. The word 'settled' also is not defined. The words 'contract settled' used in the definition of the speculative transaction under the Act must be construed reasonably and properly which will be consistent with the intendment and object of the legislature in respect of the definition of speculative transaction. We may notice the ordinary meaning attributed to the term 'settled' in the dictionaries. According to the Shorter Oxford Dictionary, Vol. II, p. 1856, 'settled'--to come to terms or agreement with a person. Oxford Dictionary, Vol. VIII, part II, p. 559, says 'to arrange matters in dispute ; to come to terms or agreement with a person'. The expression 'a contract is periodically or ultimately settled 'in my considered opinion must be construed as 'the contract is periodically or ultimately determined or concluded or disposed of'. The words 'contract settled' used in the definition of 'speculative transaction' should not be construed in the narrow sense so as to take in only such cases of settlement before the expiry of the due date for the performance of the contract. Therefore, it is not possible to give a narrow meaning or interpretation of the word 'settled' in the aforesaid definition. When claim is settled, the settlement must be construed as one in respect of the contract itself. It is notpossible to think that the settlement is only for the breach of the contract. The expression 'contract settled' must be construed liberally so as to govern all cases of settlement by the parties with respect to the contract. The restricted meaning of 'settled' cannot be applied in the present case so as to apply to only cases of settlement of the claims subsequent to the breach of the contract. It admits of no doubt that the rights and liabilities of the contracting parties flow from the very contract, which was not fulfilled but breached. The words 'contract settled' are not restricted by any conditions pertaining to the time of settlement. The contract may be settled either periodically or ultimately. It does not indicate that the proposed settlement of the contract must be before the expiry of the due date fixed for the performance of the contract. This view of mine gains support from the use of the word 'ultimately'. The contract may be subsisting at the time of the settlement or a breach of contract might have already occurred by either of the parties to the contract at the time of the settlement. It is pertinent to notice that the definition of 'speculative transaction' does not indicate the mode and manner of the date of settlement. The settlement may be periodical or ultimate. The date of settlement is not material, as no time factor has been fixed by Parliament in the definition of 'speculative transaction' for such settlement of contracts. The parties may settle the dispute relating to a contract subsequent to the date of the performance of the contract and before the filing of any suit or action in a court of law by the aggrieved party. There may also be settlement of the dispute pertaining to such contracts pending disposal of the case instituted by an aggrieved party in a court of law. It is not possible to import something into the definition relating to the time of settlement of the contract when the sovereign Parliament has designedly omitted to do so. The intendment of the legislature appears to be very clear. The stress is laid on the settlement of the contract without any actual delivery of the goods agreed upon in order to bring it within the ambit of the definition of 'speculative transaction '. The expression actual delivery employed in the definition of the 'speculative transaction' under the Act does not take in constructive or symbolic delivery. It means real delivery as opposed to notional delivery. The definition of 'delivery' in Section 2(2) of the Sale of Goods Act has been held to include both actual and constructive or symbolic delivery. It means real delivery as opposed to notional delivery. The definition of 'delivery' in Section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolic delivery has no relevance or application to construe the expression 'actual delivery' employed in the definition of speculative transaction under the Act. The use of the words 'actual delivery' in the definition of the speculative transaction would rule out the possibility of notional or constructive deli-very. The stress is laid by the legislature on the factum of actual delivery of goods contracted for to take out any transaction beyond the purview of speculative transaction defined under the Act for the income-tax purposes. Hence, settlement of any contract or dispute pertaining to a contract without actual delivery of the goods or transfer of the scrips, as the case may be, would squarely fall within the definition of 'speculative transaction' for income-tax purposes. I am, therefore, of the firm view that the definition of 'speculative transaction' alone must be applied for determining the question whether a transaction is speculative or a regular trading transaction for the purpose of income-tax. The transactions which fall within the ambit of speculative transaction for the purpose of income-tax would not ipso facto become illegal or void. Such transactions are otherwise legal and operative, although there was no actual delivery of the commodity or scrips. In other words, a transaction, which is not otherwise speculative in character under general law may still be speculative for the purpose of income-tax, if there is no actual delivery of the commodity or scrips. This view of mine gains support from a recent decision of the Supreme Court in Davenport and Co. P. Ltd. v. CIT : [1975]100ITR715(SC) . This was a case under the Indian I.T. Act, 1922. Therein the assessee had contracted to purchase 1,100 bales of 'B' Twill with M/s. Raghunath and Sons Ltd. and M/s. Mahadeo Ramkumar and 2,500 bales of corn sacks from Tulsidar Javaraj on April 17, 1958. The assessee entered into a contract on June 18, 1958 with M/s. Lachhiminarain Kanoria and Co. to sell the aforesaid goods. The assessee did not take actual delivery of the goods, as it had no godowns for keeping the goods. The goods were in the godowns of the mills and the delivery orders had changed hands. The aforesaid transactions resulted in a loss of Rs. 98,534 to the assessee, which was sought to be adjusted as a trading loss in the assessment year 1959-60. The question that fell for consideration was whether the transaction referred to above entered into by the assessee was 'speculative transaction' within the meaning of Expln. 2 to Section 24(1) of the Indian I.T. Act, 1922. After reviewing the entire case law on the subject, the earlier decision of the Supreme Court in Raghunath Prasad Poddar v. CIT : [1973]90ITR140(SC) which took the contrary view, has been overruled by the Supreme Court. The learned judge, A.C. Gupta J., who spoke for the court, ruled at pages 721 and 722 thus :

'Explanation 2 defines a speculative transaction as a transaction in which a contract for purchase and sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. The words 'actual delivery' in Explanation 2 mean real as opposed to notional delivery. For income-tax purposes speculative transaction means what the definition of that expression in Explanation 2 says. Whether a transaction is speculative in the general sense or under the Contract Act isnot relevant for the purpose of this Explanation. The definition of 'delivery' in Section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolical delivery has no bearing on the definition of speculative transaction in the Explanation. A transaction which is otherwise speculative would not be a speculative transaction within the meaning of Explanation 2 if actual delivery of the commodity or the scrips has taken place ; on the other hand, a transaction which is not otherwise speculative in nature may yet be speculative according to Explanation 2 if there is no actual delivery of the commodity or the scrips. The Explanation does not invalidate speculative transactions which are otherwise legal but gives a special meaning to that expression for purposes of income-tax only. D.M. Wadhwana v. CIT : [1966]61ITR154(Cal) on which the Tribunal's decision in this case is based, the Calcutta High Court observed :

'The Explanation to Section 24(1), however, does not prevent persons from entering into contracts in which the buyers and sellers may not actually hand over the goods physically. The Explanation is only designed at segregating for income-tax purposes loss sustained in transactions of a certain kind. It may be that such transactions are not speculative in the light of Section 30 of the Contract Act...In enacting the Explanation 2 of Section 24(1) of the Income-tax Act, the legislature did not intend to affect any transaction of sale wherein the goods were not physically delivered by the seller to the buyer but only laid down that if there was no actual or physical delivery, the loss, if any, would be a loss in a speculative transaction which could be allowed to be set off only against a profit in a transaction of the same nature...The object of the Explanation is not to invalidate transactions which are not completed by actual delivery of the goods but only to brand them as 'speculative transactions' so as to put them in a special category for income-tax purposes '.'

9. In the light of the aforesaid principles, I am unable to accede to the submission of Shri Chitale, that the definition of 'speculative transaction' would be attracted only to cases of settlement of contracts before the breach of the contracts. The legislative intendment as could be gathered from the definition of speculative transaction leaves no doubt in my mind that all cases of settlement without actual delivery of the goods or transfer of the scrips contracted, must fall within the definition of 'speculative transaction' for income-tax purposes. The date of settlement may, therefore, be either before the breach of the contract or subsequently thereafter. I do not find any justification for drawing a distinction between cases of settlement before the date of performance of contract and cases of settlement after breach of the contract. What the sovereign Parliament intended must prevail. The court cannot take the role of the legislature and read something into the definition, although it is not there. True, the decisionsof the Calcutta High Court in CIT v. Pioneer Trading Co. P. Ltd. [1968] 70ITR 347 (Cal) and Daulatram Rawatmull v. CIT : [1970]78ITR503(Cal) and that of the Mysore High Court in Bhandari Rajmal Kushalraj v. CIT : [1974]96ITR401(KAR) relied upon by Shri Chitale, are authorities for the proposition that the words 'contract settled' used in Explanation 2 to Section 24(1)of the Indian I.T. Act, 1922, means contract settled before breach but notafter breach of the contract, as the cause of action is no longer based on thecontract itself but on its breach and consequently the receipt of any amountby an assessee in settlement of the amount of damages suffered by him byreason of breach of the contract to deliver goods was not a receipt froma speculative transaction. The view of the learned judges in the aforesaidcases appears to be that what would be received by a party after the breachof the contract by way of settlement is the quantum of damages suffered byhim by reason of breach of the contract and, therefore, the nature of thetransaction was not speculative as defined in the I.T. Act. With greatrespect to the learned judges, I am unable to agree with their view. Noreasonable or plausible distinction between cases of settlement before andafter the due date fixed for the purpose of the contract can be made. Thedefinition does not name or indicate the nature and character of the amounteither paid or received by the assessee, as a result of the settlement of acontract either periodically or ultimately without actual delivery of thegoods or transfer of the shares. We are not concerned with the nature andcharacter of the amount either received or paid by the assessee as a resultof such settlement. We cannot, therefore, import the general law of contracts and turn the amounts paid subsequent to the breach of the contractas damages for breach of the contract and, therefore, there was no settlement of the contract. I prefer to respectfully agree with the view expressed by the Madras High Court in R. Chinnaswami Chettiar v. CIT : [1974]96ITR353(Mad) . The learned judge, Ramaswami J., who spoke for the court, afterquoting the relevant and material passage from the judgment of the CalcuttaHigh Court in CIT v. Pioneer Trading Co. P. Ltd. : [1968]70ITR347(Cal) observed at age 359 thus:

' The word ' settled ' is used in this part of the section without any restriction as to whether it was before breach or after breach. Whether the settlement was before or after breach of the contract is immaterial if actual delivery of the goods is absent. '

10. In the present case, admittedly, there was no actual delivery of the ore by the assessee.

11. For all the reasons stated my answer to the question is in the affirmative holding that the payment of Rs. 30,000 by the assessee to M/st Pitty Brothers is a specultative loss governed by Explanation 2 toSection 24(1) of the I.T. Act, 1922, and not a normal trading loss, which is a permissible deduction from the profits and gains of the assessee from his general trade. The assessee would be entitled to carry forward the speculative loss of Rs. 30,000 to the next year and have the same deducted from any income from the speculative transaction or business in that year. The assessee shall pay the costs of this reference to the CIT, M.P. Counsel's fee Rs. 250 if certified.

12. OZA J.--I had the advantage of going through the opinion expressed by my learned brother.

13. As regards the facts, they have been stated in detail and it is not in dispute that the payment made of Rs. 30,000 to Messrs. Pitty Brothers, Bombay, was in consequence of the settlement of damages in respect of the breach committed by the applicant-assessee. The question that has been referred to us is whether this loss would fall within the definition in Clause (5) of Section 43 of the I.T. Act, treating it to be a loss arising from speculative transaction. It is also not in dispute that the amount of damages for the breach of the contract was settled after the breach was committed and it is in this context that the question deserves to be considered. My learned brother Kondaiah J. has followed the decision of the Madras High Court in R. Chinnaswami Chettiar v. CIT : [1974]96ITR353(Mad) , wherein it has been held that whether the settlement was before or after breach of the contract is immaterial if actual delivery of the goods is absent. With respect I do not find myself in agreement with this view. It appears that there is a series of decisions taking the two views, one that the phrase ' contract settled ' means settlement of the contract during the subsistence of the contract and not the settlement of damages after the breach ; whereas the other view is that which has been accepted by my learned brother just quoted above. It is no doubt true that courts while interpreting statutes do not legislate but only interpret what is enacted.

14. Section 43, Clause (5) of the I.T. Act reads :

'(5) ' speculative transaction' means a transaction in which a contract for the purchaser 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 clause-

(a) a contract in respect of raw materials or merchandise enteredinto by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuation in respect of hiscontracts for actual delivery of goods manufactured by him or merchandisesold by him ; or

(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ; or

(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member ; shall not be deemed to be a specultative transaction.' This provision talks of 'settlement of a contract otherwise than by actual delivery'. This settlement may be periodical or may be ultimate; but what is contemplated is the 'settlement of contract'. The term 'contract' implies a subsisting contract and not a contract which has ended in a breach. And it is in this view that the matter will have to be considered. It is true that we are not concerned with the legality of the contract or otherwise.

15. The case Davenport and Co. P. Ltd. v. CIT : [1975]100ITR715(SC) , on which reliance has been placed by learned counsel for the department is a case not dealing with a situation of breach of contract; but in that case, the question was about the actual delivery and in that context it was held that the definition of 'delivery' in Section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolical delivery has no bearing on speculative transactions and it is in this view that their Lordships of the Supreme Court approved the decision reported in D.M. Wadhwana v. CIT : [1966]61ITR154(Cal) . In this decision, their Lordships laid emphasis on the term 'actual' used before 'delivery' to distinguish it from the definition of 'delivery' as given in the Sale of Goods Act. And, it is on this basis that it appears that it was observed that the concept of delivery under the Sale of Goods Act could not be introduced while interpreting this provision under the I.T. Act. In this decision, their Lordships did not approve of the decision of their Lordships of the Supreme Court in Raghunath Prasad Poddar v. CIT : [1973]90ITR140(SC) In this decision, their Lordships laid emphasis on the term 'actual' used before 'delivery' to distinguish it from the definition of 'delivery' as given in the Sale of Goods Act. And, it is on this basis that it appears that it was observed that the concept of delivery under the Sale of Goods Act could not be introduced while interpreting this provision under the I.T. Act. In this decision, their Lordships did not approve of the decision of their Lordships of the Supreme Court in Raghunath Prasad Poddar v. CIT : [1973]90ITR140(SC) , as in that decision while interpreting the phrase 'actual delivery' the handing over of the documents in token of the delivery was considered to be actual delivery and 'it was observed (page 145):

'The constructive delivery of possession which was obtained by the intermediate parties was thus translated into a physical or manual delivery of possession in the ultimate analysis eliminating the unnecessary process of each of the intermediate parties taking and in his turn giving actual delivery of possession of the goods in the narrow sense of physical or manual delivery thereof.'

16. It is, therefore, clear that the question which was before their Lordships of the Supreme Court in this decision as well as in the decision in Davenport & Co. P. Ltd. v. CIT : [1975]100ITR715(SC) was not a question about damages for breach of contract.

17. Section of the Contract Act defines 'contract' :

'2. In this Act the following words and expressions are used in the following senses, unless a contrary intention appears from the context:--

(h) an agreement enforceable by law is a contract:......'

18. It is, therefore, clear that 'contract settled' would presuppose an enforceable contract and admittedly, when a breach has been committed there is no enforceable contract at all and in this view of the matter the settlement of the damages as a result of breach of contract would not be interpreted to mean that the contract is settled otherwise than by actual delivery of goods.

19. The word 'contract' has been given a meaning by Section 2, Clause (h) of the Contract Act--and it could not be doubted that when the legislature used this word in a subsequent legislation in the same context it was used to convey the same meaning unless there is anything indicated to the contrary. The well-known rule of interpretation as stated by Craies in his work on Statute Law (fifteenth edn., p. 133) is :

'It has been held that, where the legislature has given to words a statutory definition in one statute, and has used the same words in a similar connection in a later statute dealing with the same subject-matter, it may be presumed, in the absence of any context indicating a contrary intention, that the same meaning attaches to the words in the later as is given to them in the earlier statute.'

20. It is, therefore, clear that as there is nothing to indicate a contrary intention we will have to give, the same meaning to the term 'contract' as has been indicated in the Contract Act itself.

21. In CIT v. Pioneer Trading Co. P. Ltd. : [1968]70ITR347(Cal) ), this question came up for consideration and it was observed (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, thecause 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.'

22. Similarly, in Daulatram Rawatmull v. CIT : [1970]78ITR503(Cal) , following the decision in CIT v. Pioneer Trading, Co. P. Ltd. : [1968]70ITR347(Cal) their Lordships observed (p. 507):

'In the light of the principles decided in this case we find in the present reference that the arbitrators were appointed in terms of the contract between the parties on the basis that the assessee committed default in fulfilment or performance of the contract; the arbitrators made an award; there was an appeal against the award; but the award was confirmed and the assessee had to pay the damages which the arbitrators had determined. It also appears that there was no challenge to these facts before the fact finding authorities below. This is, therefore, a case not 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 being the case, we are of opinion, that this is not a 'speculative transaction' within the meaning of Explanation 2 to Section 24(1) of the Indian Income-tax Act, 1922.'

23. In Bhandari Rajmal Kushalraj v. CIT : [1974]96ITR401(KAR) also a Division Bench of the Mysore High Court, while examining the question of damages for breach of the contract followed the decisions in CIT v. Pioneer Trading Co. P. Ltd. : [1968]70ITR347(Cal) and Daulatram Rawatmull v. CIT : [1970]78ITR503(Cal) , and observed (p. 403):

'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 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. What is settled in such a case is settling the damages consequent on the 'breach.'

24. It is not very material to go into the meaning of the word 'settled', but in order to interpret the term 'contract settled' we will have to go to the meaning of the term 'contract' itself, and it must be stated with respect that 'contract' will have to be understood in the same manner as is understood under the Contract Act itself. And if we interpret 'contract settled' to mean even the settlement of the question of damages afterbreach, it will only mean that we read something more than what is stated in the provision itself. Much emphasis has been laid on 'ultimately settled otherwise than by actual delivery' but it must be stated that what is settled is the contract, as enacted in Clause (5) of Section 43 of the I.T. Act and nothing more. This provision talks of settlement of a contract either periodically or ultimately without the actual delivery. But it nowhere talks of settlement of damages on account of breach.

25. In the decision on which reliance has been placed by my learned brother, i.e., R. Chinnaswami Chettiar v. CIT : [1974]96ITR353(Mad) emphasis has been laid on the word 'settled', and it has been observed (p. 359):

'With great respect to the learned judges, we are of the view that this is a narrow construction of the word ' settled ' in the definition of the expression 'speculative transactions'. It is true that on breach of a contract the cause of action for the claim of damages is based on its breach. But that, in our opinion, does not mean that when the claim is settled, the settlement is not of the contract itself but of the breach alone. The rights and liabilities of the parties flow from the contract which was broken. The emphasis in Section 43(5) of the Act is on the words 'periodically or ultimately settled otherwise than by actual delivery'. The word 'settled' is used in this part of the section without any restriction as to whether it was before breach or after breach. Whether the settlement was before or after breach of the contract is immaterial if actual delivery of the goods is absent. In fact, even in cases where the contract is highly speculative and amounts to a wagering contract, if it was settled by actual delivery, for the purpose of Section 43(5), it is not a speculative transaction. Thus the section dispenses with all other formalities except that there must be actual delivery or transfer of the commodity when the contract is settled.'

26. With respect, I do not find myself in agreement with this view. It appears that the meaning of the word 'contract' was not considered but the emphasis was laid on the word 'settled' and it is on this basis that it was held that if the settlement is without actual delivery, then it will fall within the mischief of 'speculative transactions' as is defined under Section 43(5) of the I.T. Act.

27. In this view of the matter, in my opinion, the question cannot be answered in the affirmative. It has to be stated that payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers is not a speculative loss governed by Explanation 2 to Section 24(1) of the Indian I.T. Act, 1922 (section 43(5) of the 1961 Act). In view of this, in my opinion, the assessee shall be entitled to costs of this reference. Counsel fee Rs. 250 (two hundred and fifty) ifcertified.

[On a difference of opinion between C. Kondaiah and G.L. Oza JJ.]

G.G. Sohani, J.

28. As there was a difference of opinion between Kondaiah J. and Oza J., who heard this reference, on the question of law referred to this court by the Income-tax Appellate Tribunal, the case came up before me for consideration. The question of law that has been referred to this court for its opinion is as follows ;

'Whether, on the facts and in the circumstances of the case, payment of Rs. 30,000 to M/s. Pitty Brothers, Bombay, is a speculative loss governed by Expln. 2 to Section 24 of the Indian I.T. Act, 1922, corresponding to Section 43(5) of the 1961 Act, or is a normal trading loss ?'

29. The material facts giving rise to this reference, and which have been found by the Tribunal, briefly are as follows. The assessee is a registered partnership firm carrying on the business of exploiting certain mines in District Jhabua in Madhya Pradesh. The assessment year is 1962-63 for which the accounting period ended on 8th November, 1961. For the assessment year 1962-63, the assessee filed a return declaring an income of Rs. 1,45,423. In this return, the assessee made a claim that it should be allowed to set off a loss of Rs. 30,000 paid by it by way of compensation to M/s. Pitty Brothers, Bombay, on account of the failure of the assessee to deliver 2,000 tons of manganese as agreed to be delivered to M/s. Pitty Brothers by the assessee in the month of April/May, 1961, in pursuance of a contract dated 28th February, 1961, entered into between the assessee and M/s. Pitty Brothers. The payment of Rs. 30,000 was made by the assessee on 24th October, 1961, in accordance with a settlement arrived at between the parties on 24th August, 1961, resolving their dispute arising out of the breach of contract committed by the assessee. The assessee contended before the ITO that the sum of Rs. 30,000 paid by the assessee represented a normal trading loss incurred by it in respect of the business carried on by it. The ITO disallowed the claim made by the assessee on two grounds. Firstly, it was held that the transaction involving payment of Rs. 30,000 to M/s. Pitty Brothers was not a genuine transaction. Secondly, it was held that the said transaction was in the nature of a speculative transaction and, as such, the loss claimed by the assessee was not admissible as a normal trading loss. Against the order passed by the ITO, the assessee went up in appeal before the AAC, who upheld the findings given by the ITO and dismissed the appeal. The assessee, thereafter, filed an appeal before the Tribunal. The Tribunal found, on a consideration of the facts and circumstances of the case, that the assessee was not in a position to supply manganese ore of the specifications stipulated by the contract and, therefore, through the intervention of broker, Sardarsingh, a settlement was arrived at between the assessee and M/s. Pitty Brothers with regard to the amount of compensation and that the amount of Rs. 30,000 was in fact paid by the assessee to M/s. Pitty Brothers. The Tribunal thusfound that the payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers on account of compensation for breach of contract was not a bogus transaction but was a genuine one. The Tribunal, however, rejected the claim of the assessee to set off that amount as a normal trading loss on the ground that the transaction in question was a speculative transaction and by virtue of the provisions of Expln. 2 to Section 24(1) of the Indian I.T. Act, 1922, hereinafter called the Act, the assessee was not entitled to set off that loss as a normal trading loss. At the instance of the assessee, the Tribunal referred the aforesaid question of law to this court for its opinion.

30. When the matter came up for consideration before this court before a Division Bench consisting of Kondaiah and Oza JJ., my learned brother, Kondaiah J., answered the question in the affirmative holding that the payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers was a speculative loss and not a normal trading loss. My learned brother, Oza J., however, held that the question of law referred to this court for its opinion could not be answered in the affirmative and the payment of Rs. 30,000 by the assessee to M/s. Pitty Brothers was not a speculative loss.

31. Having given my anxious consideration to the contention advanced by learned counsel for the assessee and the department, and to the opinions given by my learned brothers, Kondaiah and Oza JJ., I have come to the conclusion that the question must be answered in the negative and in favour of the assessee. I, therefore, agree with the conclusion arrived at by my learned brother, Oza J. I would, however, like to state my own reasons in that behalf.

32. Section 24(1) of the Act reads as under :

'24. Set-off of loss in computing aggregate income.--(1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 6, he shall be entitled to have the amount of the loss set-off against his income, profits or gains under any other head in that year :

Provided that in computing the profits and gains chargeable under the head ' Profits and gains of business, profession or vocation ', any loss sustained in speculative transactions which are in the nature of a 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:

Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of Clause (b) of Sub-section (5) of Section 23, any such loss shall be set off only against the income, profits and gains of the firm and not against the income, profits and gains of any of the partners of the firm ; and where the assessee is a registered firm, any loss which cannot be set off against other income, profits and gains of the firmshall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under this section.

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 :......'

33. I have not reproduced the other provisions as it is common ground that we are here only concerned with the definition of a 'speculative transaction',' as contained in Expl. 2 to Section 24(1) of the Act. Shri Chitale, learned counsel for the assessee, tried to urge that the transaction in question was not of such a speculative nature as is generally understood by that expression. In the absence of a definition of a 'speculative transaction' provided by Expln. 2 to Section 24(1) of the Act, an enquiry into the question as to whether the transaction in question is or is not of a speculative nature, as generally understood, might have been relevant. Learned counsel for the assessee, however, contended that the definition of 'speculative transaction'' contained in Expln. 2 to Section 24(1) of the Act, should be so interpreted as not to destroy the essential nattlre of a speculative transaction. Reliance was placed on a decision of the Supreme Court in Hariprasad Shiv Shankar Shukla v. A.D. Divikar : [1957]1SCR121 . The facts of that case are, however, distinguishable. In that case, the Supreme Court was considering the scope of the expression 'retrenchment' and the meaning of the word 'retrenchment' had to be ascertained in the light of the definition contained in Section 2(oo) of the Industrial Disputes Act, 1947, unless there was anything repugnant in the subject or context, as laid down by Section 2 of the Act. The Supreme Court held that to include a bona fide closure of the whole business, in the expression 'retrenchment', as defined by that Act, would be divorcing the expression altogether from its context. It was in this background that the Supreme Court observed that where within the framework of the ordinary acceptance of the word every single requirement of the definition clause was fulfilled, it would be wrong to take the definition as destroying the essential meaning of the word defined. The principle enunciated in Hariprasad v. A.D. Divikar : [1957]1SCR121 , cannot be made applicable in the instant case where the context is that Expln. 2 to Section 24(1) of the Act is only designed at segregating, for income-tax purposes, loss sustained in transactions of a certain kind. The following observations of the Supreme Courtin Davenport & Co. P. Ltd. v. CIT : [1975]100ITR715(SC) , are pertinent (page 721):

'For income-tax purposes speculative transaction means what the definition of that expression in Explanation 2 says. Whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of this Explanation.'

34. In view of the aforesaid observations of the Supreme Court, it is no longer permissible for me, as urged by learned counsel for the assessee, to hold that a particular transaction is not a speculative transaction on the ground that it is not of a speculative nature, even though it fulfils the requirements of a 'specultative transaction', as defined by Expln. 2 to Section 24(1) of the Act.

35. The real question for consideration, therefore, is whether the transaction in the instant case is a 'speculative transaction' as defined by Expln. 2 to Section 24(1) of the Act. Now, the admitted facts are that the assessee had entered into a contract of sale of manganese ore with M/s. Pitty Brothers and that the goods contracted to be sold were not actually delivered to the purchaser within the time stipulated therefor. After the breach of the contract had taken place, a sum of Rs. 30,000 was paid by the assessee to the purchaser by way of compensation, in pursuance of an agreement arrived at between the parties resolving their dispute arising out of breach of contract committed by the assessee. Can it be said, in these circumstances, that the contract for the sale of manganese ore was settled by the parties The answer to this question depends, in my opinion, upon the meaning to be given to the expression 'settled', occurring in Expln. 2 to Section 24(1) of the Act. This expression has not been defined by the Act. Shri Mathur, learned counsel for the department, contended that the dictionary meaning of that term, which is 'to arrange matters in dispute', 'to come to terms or agreement with a person ', should be given to it. But, as pointed out by Lord Esher M.R., in Unwin v. Hanson [1891] 2 QB 115(CA):

'If the Act is one passed with reference to a particular trade, business, or transaction, and words are used which everybody conversant with that trade, business or transaction, knows and understands to have a particular meaning in it, then the words are to be construed as having that particular meaning, though it may differ from the common or ordinary meaning of the words.'

36. Is it not then reasonable to assume that the legislature, while defining a 'speculative transaction' in Expln. 2 to Section 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 iswhy 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 Section 24(1) of the Act. If the contract is, however, performed otherwise than by actual delivery or transfer of the contracted commodity, then 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 Section 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 'settlement', cannot, as rightly urged by learned counsel for the assessee, make it a 'settlement of the contract' in the sense in which the expression 'contract...settled' is used in Expln. 2 to Section 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 Section 24(1) of the Act. The decision in R. Chinnaswami Chettiar v. CIT : [1974]96ITR353(Mad) and relied upon by Kondaiah J. does not, in my opinion, if I may say so with respect, take into account the significance of the language employed by the legislature by the use of 'the expression 'contract...settled' in defining a 'speculative transaction' in Expln. 2 to Section 24(1) of the Act. Payment of compensation on account of a breach of contract has not been held to be a 'speculative transaction' in CIT v. Pioneer Trading Co. P. Ltd. : [1968]70ITR347(Cal) , Daulatram Rawatmull v. CIT : [1970]78ITR503(Cal) , Bhandari Rajmal Kushalraj v. CIT : [1974]96ITR401(KAR) , CIT v. Ramjeewan Sarawgee & Sons : [1977]107ITR845(Cal) and CIT v. Arun General Industries Ltd. [1977]10 ITR 286 . I respectfully agree with the conclusions arrived at in these decisions.

37. Thus, agreeing with the opinion of Oza J., my answer to the question of law referred to this court for its opinion is that, upon the facts and inthe circumstances of the case, payment of Rs. 30,000 to M/s. Pitty Brothers, Bombay, is not a speculative loss by virtue of Expln. 2 to Section 24(1) of the I.T. Act, 1922, corresponding to Section 43(5) of the 1961 Act, but is a normal trading loss.


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