1. The question which has been referred to us for assessment year 1969-70 is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 25,000 was not a speculation loss ?'
2. The assessed is a registered firm dealing in edible oils. In the accounting year ending on March 31, 1969, the assessed had sales amounting to Rs. 84,90,390, and one of its main customers was M/S. Ganesh Flour Mills Co. Ltd., to whom a substantial portion of its goods was sold. There was a contract for supplying 50 M. Ts. of cotton seed oil dated July 30, 1968, out of which 2.9992 tons remained undelivered on August 30, 1968. There was yet another contract to sell 25 M. Ts. of oil, out of which 11.17 tonnes remained undelivered on that date. There was yet another contract for the supply of 75 M.Ts. of which 36.381 tonnes remained undelivered. Finally, there was a contract for supply for supply of 100 M. Ts. Which was also unfulfilled. On August 30, 1968, the assessed had to supply 160.544 M. Ts. of various types of oils to M/S. Ganesh Flour Mills. All these contracts were cancelled and an amount of Rs. 25,000 was debited against the assessed by M/S. Ganesh Flour Mills. The reason for his was that there was some failure on August 22, 1968, by some oil suppliers and there was difficulty for the assessed to make more supplies to M/S. Ganesh Flour Mills for some other reasons also. This led to the settlement of the outstanding contracts on payment of Rs. 25,000 as lump sum.
3. The ITO thought that as no physical delivery had been effected and this was not a hedging loss, so it was a speculative loss. The AAC also said that as there was no actual delivery, it was clearly a speculative loss.
4. On appeal to the Tribunal it was pointed out that the huge supplies of oil had been effected and at one point of time a sum of Rs. 13,00,540 was due for supplies already made. This made it difficult for the assessed to carry on the business of supplying oil. So, it was unable to comply with the outstanding orders. This led to the negotiations which led to the settlement of the account by cancelling the outstanding unfulfilled contract on payment of Rs. 25,000. This was claimed to be damages paid for breach of contract and was not a speculative loss.
5. The Department's case was that the contracts had been settled otherwise than by delivery than by delivery, so there was a 'speculative transaction' within the meaning of s. 43(5) of the I.T. Act, 1961. The question of difficulty in performance and so on, were contended to be irrelevant considerations.
6. The Tribunal accepted contentions of the assessed. It was held as follows :
'We agree the departmental representative that the loss will have to be considered as a speculative loss to it found to be a loss in a speculation business as defined in section 43(5) of the Act; we also agree that for purposes of section 43(5), a speculative transaction is a transaction in which a contract for purchase or sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of commodity. The decisions cited by the departmental representative also make it clear that what is important to be found out is what transpired ultimately and not the original intention of the parties. But the question is whether in the present case it can be said that a contract for the delivery of a commodity has been settled by the assessed. We are of opinion that this expression is very inappropriate in the context of the present case. The various facts put forward on behalf of the assessed clearly show that the assessed was regularly effecting supplies to Ganesh Flour Mills Ltd., that delivery in pursuance of certain contracts was outstanding to substantial extent on August 30, 1968, when the assessed discovered that due to the heavy outstanding remaining due from the company, it will not be possible to comply with the terms of the contract and that it must take the risk of not performing these contracts even if it meant payment of damages to the other party. With this end in view there were negotiations between the two parties, the assessed pleading the circumstances in which all the suppliers including itself were placed and the inability to shoulder any further burden. In other words, the assessed told Ganesh Flour Mills that it will not be in a position to perform the contract in full and to the extent to remained non-executory. There was a discussion between the parties as to the best course to be adopted in this circumstances and Ganesh Flour Mills was willing to settle the matter by risking a sum of Rs. 25,000 in lump sum. These fact make it clear that the sum of Rs. 25,000 was paid by the assessed by way of liquidated damages for the breach of the contract on its part. No doubt the word 'settled' is used in the latter dated October 28, 1968, but what it refers to is the settlement of the dispute between the two parties. In regard to the pending bargains, the company agreed to cancel the same. In other words, this is a case where the assessed having committed a breach of contract, had agreed to pay a lump sum to the other party by way of compensation, and this, in our opinion, is a normal loss incidental to the assessed's business. That such a transaction is not covered by the definition of speculation business in s. 43(5) is amply borne out by the two decisions of the Calcutta High Court on which the assessed has placed reliance. Respectfully following the principle of these decisions, we hold that sum of Rs. 25,000 was an ordinary commercial loss and not a speculation loss.'
7. There are two judgments of the Calcutta High Court, CIT v. Pioneer Trading Company Private Ltd. : 70ITR347(Cal) and Daulatram Rawatmull v. CIT : 78ITR503(Cal) , which are cited above,. In the former case, it was held that the meaning of a contract settled otherwise than by actual delivery or transfer of the commodity means a contract settled before a breach takes place. If there is a settlement after the breach, it is it is a case of settling the quantum of damages were settled by arbitration, i.e., without delivery. The court held that an award was not the type of 'settlement' visualised by the definition of 'speculative transaction'. These are the judgments on which the Tribunal relied.
8. Learned counsel for the Revenue urges that the meaning to be given to a speculative transaction is as given in the definition, i.e., s. 43(5), which reads :
''Speculative transaction' means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips : Provided ...'
9. He submits that admittedly the provision does not apply so we have only to see whether the contract was settled otherwise than by actual delivery or transfer, and as the answer to this query is that it was settled without delivery, so it is a speculative transaction.
10. Some other judgments were referred to during the course of arguments. In Raghunarayan Rice Mills v. CIT : 75ITR682(Orissa) , there was a frustration of the contract on account of restrictions imposed by the Government of Orissa, but the assessed made a settlement by paying differences. It was held that this was a speculative transaction. In Davenport & Co. P. Ltd. v. CIT : 100ITR715(SC) , it was held by the Supreme Court that the mere transfer of delivery notes was not actual delivery and, hence, the transaction was speculative. In Hoosen Kasam Dada (India) Ltd. v. CIT : 52ITR171(Cal) , the Calcutta High Court held that there were several transactions which were settled by delivery and some were not. It was held, that where delivery was not given, the transaction were speculative.
11. In R. Chinnaswami Chettiar v. CIT : 96ITR353(Mad) , the Madras High Court considered whether the terms 'settled' used in s. 43(5) meant settlement of a contract before its breach. It was held that if no goods were delivered it was immaterial if actual delivery of the goods was absent. In CIT v. Andhra Oil and Fertilisers Company : 143ITR661(AP) , it was held by the Andhra Pradesh High Court that mere failure to supply the goods did not make a transaction speculative. In CIT v. Bhikamchand Jankilal : 131ITR554(MP) , it was held that even single transaction may show the existence of a speculative business. Other case referred to were M. R. Dhawan v. CIT : 119ITR412(Delhi) and CIT v. Indian Commercial Co. P. Ltd. : 106ITR465(Bom) .
12. The judgments indicate various aspects of the application of the definition. From these, no principles emerge. The definition in s. 43(5) shows that a transaction is considered to be speculative if it is settled without actual delivery. It does not follow that all contracts which are settled or adjusted without delivery are speculative.
13. Learned counsel for the Revenues submits that we should take the view that a contract settled without delivery is a speculative transaction. We can visualise a number of situations in which there may be no. delivery for various reasons, i.e., because of failure of the party i.e., insolvency or on account of frustration, for example, banning of the business or, mere breach, that is to say, non-supply. We do not think that all these can be classified as speculative within the meaning of s. 43(5). What the section visualises is contract which is settled by means of a cross-contract, i.e., there is purchase contract which is settled by a sale contract. If the contract is settled, for some other reasons, by payment of damages, or even without payment of damages, it may or may not be a speculative transaction dependent on the circumstances of the case.
14. There is difference of opinion between the Calcutta High Court and the Madras High Court. According to the Madras view contained in R. Chinnaswami Chettiar's case : 96ITR353(Mad) , it is immaterial whether there is a claim for damages on account of a breach, or the contract is settled without any breach. The view of the Calcutta High Court was rejected but, we think that the Calcutta view is to be preferred.
15. A contract is speculative if it is settled without actual delivery. If the contract is broken, i. e., for any reason one party is unable to give delivery or the other party is unable to take delivery, it is a case of breach of contract. It depends, thereforee, on the facts and circumstances of the case as to whether there has actually been a 'breach' of the contract or a 'settlement' of the contract. A breach takes place on account of repudiation of the contract or failure to perform it or contract may be terminated through frustration, impossibility or through any other cause which ends the contract under the Contract Act or the Sale of Goods Act. When the obligation to supply or take delivery, as the case may be, comes to an end by operation of law, it does not make the transaction speculative. However, if the parties mutually settle the contract without any intervening circumstances, then it may be a speculative transaction if all the other conditions of s. 43(5) are satisfied. The material question in this case is : why was the contract settled If it was settled by mutual consent to avoid delivery, then it would be speculative. It is was settled because of inability of the assessed to supply or on account of the fact that it did not have the necessary resources to give the delivery, then it would be a breach of contract.
16. On the facts, we find that there is a letter showing the reason for the settlement between the parties. This letter states as follows :
'With reference to your letter dated the 22nd August, 1968, informing us the market settlement due to failure of some oil suppliers in Delhi, as oil rates fluctuated abruptly causing breakdown in oil supplies and refusal of three major oil suppliers directly affecting you, we, after scrutinizing all the effect and after prolonged discussion with your Shri Karshanbhai Patel with the undersigned, have agreed to cancel or settle all the pending bargains as on date with you. Keeping in view your representation dated 11th September, 1968, showing inability to shoulder any further burden due to blockage of money, we have decided to debit Rs. 25,000 as a lump sum to your account. Please note no bargains outstanding with you now.'
17. This shows that there was a failure in the market causing a breakdown in oil supplies due to fluctuation in oil prices and also, that the assessed had represented its inability to shoulder any further burden due to blockage of money. We note that a huge amount was due to the assessed from M/S. Ganesh Flour Mills which made it difficult for the assessed to manage its resources as observed by the Tribunal. (This is borne out from later developments which led to the eventual taking over of the Ganesh Flour Mills by the Government of which we take notice for the purpose of record). These two facts, i.e., the blockage of funds by M/S. Ganesh Flour Mills and the breakdown of oil supplies in the market, are facts which showed that there was a breach of the contract by the assessed which was settled by M/S. Ganesh Mills debiting the assessed with a sum of Rs. 25,000. This was, thereforee, a settlement of damages on account of non-supply and not a settlement of the contract without delivery.
18. In view of our conclusion that s. 43(5) only covets cases where a contract is settled without breach, and not cases where there is a breach followed by a settlement of the quantum of the damages, we answer the question referred to us in the affirmative and against the Department. As there is no appearance for the assessed, we leave the parties to bear their own costs.