1. This appeal by the revenue is against the order of the AAC in its Appeal No. 42-C-Wd of 1980-81 dated 31-12-1982 holding, that the loss of Rs. 22,656 actually represents damages for breach of contract and not loss arising in a transaction of a speculative nature as held by the ITO and, therefore, directing him to allow the loss as ordinary business loss. The facts in this regard, the rival submissions and our conclusion thereon are briefly as follows 2. The assessee, a oil miller, entered into a contract through Its commission agent Hukumatrai Assudomal Bros., Bombay, to supply 9 1/2/10 tons of linseed oil at the rate of Rs. 46.50 per 10 kgs. to Godrej Soaps (P.) Ltd., Bombay. As per the contract, the goods were to be tendered between 1-4-1977 to 15-4-1977. The goods were, however, not delivered by the assessee to the purchaser. As per the instructions of the assessee the commission agent paid a sum of Rs. 21,937.50 as damages to the buyer and debited the assessee's account in their books on 19-4-1977 with this amount as also the expenses incurred in this behalf amounting to Rs. 717.82. These details were made available to the assessee by the commission agent as per the debit note No. 5 dated 22-4-1977. This amount was claimed as a business loss in the course of the assessment proceedings for this year. The ITO disallowed the claim holding the same to be a loss arising from out of a transaction of a speculative nature. While disallowing the claim the ITO referred to the definition of a speculative transaction contained in Clause (5) of Section 43 of the Income-tax Act, 1961 ('the Act') which states that a 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 a commodity or scrips. According to the ITO, in the present case, the contract for the delivery of the linseed oil was ultimately settled without actual delivery of the goods and, therefore, the difference paid to the party, though called damages, actually amounted to a speculative loss arising as a result of the settlement of a forward contract and, therefore, squarely covered by Section 43(5).
He, therefore, applying the provisions of Section 73 of the Act, did not set off the loss against the other profits and gains of the business.
3. Aggrieved with the treatment meted out to the loss by the ITO, the assessee filed an appeal to the AAC, who in his above mentioned order, held that the transaction in question was not speculative in nature, as the assessee had 'never intended to enter into a forward transaction not involving actual delivery of the goods' and in fact, he had in his possession ready goods, which could be supplied at the time of the settlement of the transaction if he had so intended and, therefore, the difference paid actually represented damages for breach of contract and accordingly allowed the appeal of the assessee. He came to this conclusion after taking into account the fact, that, during the period from 1-4-1977 to 15-4-1977, when the linseed oil as per the contract was to be supplied to the buyer, the assessee had actually in its possession manufactured linseed oil to the extent of 10,595 kgs. and, therefore, the settlement of the contract by payment of difference between the ruling price and the contracted price amounted to a hedging transaction, inasmuch as, the assessee desired to save itself from a huge loss of approximately Rs. 27,000 if it had proceeded through with the transaction. The AAC noticed that the price of linseed oil had steeply increased as compared to the contract price and by complying with the contract, the assessee would have to incur a loss of Rs. 27,000. He also noticed, that during the same period the assessee sold the same quantity of linseed oil for a total consideration of Rs. 72,957 as against Rs. 46,500 being the contract price. Even after the payment of damages amounting to Rs. 21,937, the assessee was left with a profit margin of Rs. 4,520 which would not have been the position, had the assessee complied with the contract.
4. Aggrieved with the decision of the AAC, in this behalf, the department is in appeal before us. Apart from questioning the correctness of the decision of the AAC in this behalf, objection has also been taken to the admission of fresh evidence by the AAC relating to the claim of hedging transaction. The departmental representative relied on the following Income-tax Reports in support of the department's stand, that the loss arising in this transaction should be treated as a speculative loss-Sind National Sugar Mills (P.) Ltd. v.CIT  121 ITR 742 (Bom.), CIT v. Dalhousie Jute Co. Ltd.  128 ITR 322 (Cal.), P.L.KN. Meenakshi Achi v. CIT  96 ITR 375 (Mad.) and A. Muthukumara Pillai v. CIT  96 ITR 557 (Mad.). On behalf of the assessee, reliance was placed on Gomraj Fatehchand v. CIT  102 ITR 131 (Mad.) and Bhandari Rajmal Kushalraj v. CIT  96 ITR 401 (Mys.).
5. After careful consideration of the facts and circumstances of the case, we are of the opinion, that the sum of Rs. 21,937 paid to the buyer as a result of the failure of the assessee to deliver the goods as per the contract actually represents liquidated damages and, therefore, the same cannot be treated as a loss arising in a speculative transaction as defined in Section 43(5). The assessee, no doubt entered into a forward contract for supply of 10 tons of linseed oil at Rs. 46.50 per 10 kgs. During the period 1-4-1977 to 15-4-1977, when the contract was to be performed, the assessee had also in its possession 10,595 kgs. of linseed oil and if it had so desired, it could have performed the contract to the satisfaction of the other party. However, the assessee noticed that during this period, the price of linseed oil had shot up in the market, and, therefore, even after payment of damages for breach of contract, it could still make a profit of approximately Rs. 5,000 by selling the goods in the open market. In fact, this is exactly what happened as the assessee sold the same goods between 1-4-1977 to 15-4-1977 at Rs. 72,957, as against Rs. 46,500 at which they were contracted to be sold to Godrej Soaps (P.) Ltd. By not performing the contract, the assessee realised a profit margin of Rs. 27,000 by selling the goods in the open market during the same period and even after payment of damages amounting to Rs. 21,937, the assessee was still left with a profit margin of Rs. 4,520. Even after adjustment of expenses amounting to Rs. 718, the assessee was still left with a margin of approximately Rs. 4,800, whereas the assessee would have suffered a loss of Rs. 27,000 had it performed the contract. In the light of these circumstances and particularly in view of the fact, that the assessee had sufficient goods in its possession on the date of settlement, the sum of Rs. 21,937.50 plus Rs. 717 represents only damages and it does not amount to loss in a speculative transaction as defined in Section 43(5).
6. In this case, the transaction is nothing but a hedging transaction inasmuch as the assessee had sufficient stock in existence at the time of settlement and it had full capacity to fulfil the contract if it had so intended. In CIT v. Pioneer Trading Co. (P.) Ltd.  70 ITR 347, the Calcutta High Court held that a claim based on breach of contract does not come within the meaning of Explanation 2 to Section 24(1) of the Indian Income-tax Act, 1922 corresponding to Section 43(5) of the 1961 Act. They held that a contract settled means a contract settled before breach. According to them, after breach of contract, a cause of action is no longer based on the contract itself but on its breach. In this light, the Hon'ble High Court proceeded to hold that the damages received for breach of contract would not amount to a speculation profit. The Mysore High Court also held likewise in Bhandari Rajtnal Kushalrafs case (supra). There is ample evidence in this case to hold that the assessee had sufficient stocks on the date of settlement and deliberately committed a breach of contract preferring to pay damages and thereby saving itself from a large amount of loss. In this case, as things actually happened, the assessee made in the final bargain, a profit approximately of Rs. 5,000 as against a loss of Rs. 27,000 which it would have suffered had it delivered the goods according to the contract. So the requirement of proviso (a) to Clause (5) of Section 43 is fully met in this case and, therefore, at the worst, the transaction could be treated only as a hedging transaction and the amount paid as damages. The decisions relied upon by the learned departmental representative are not apposite to the facts of this case. In fact, in Gomraj Fatehchand's case (supra) the department itself had conceded that forward sales so far as they were covered by ready stocks should be treated as a normal transaction and any loss in relation to such sales should be allowed as a business loss. We, accordingly, uphold the action of the AAC in this behalf in treating the sum of Rs. 21,937 plus expenses incurred thereagainst as damages admissible in computing the income of the assessee.