K.L. Roy, J.
1. In this reference under Section 66 (1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act, the following question of law has been referred to this Court by the Income-tax Appellate Tribunal:
Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the passing of Pucca Delivery Orders did not amount to actual delivery of goods and the loss incurred in the transactions of purchase and sale was speculative loss within the meaning of Explanation 2 to Section 24 (1) of the Income-tax Act 1922?
2. The facts as stated in the Statement of the case are as follows. The assessee, Murlidhar Jhunjhunwalla, is an individual who deals, inter alia, in hessian and B Twill. During the previous year for the assessment year 1955-56, being 2011 Ratha Jatra ending on the 1st of July, 1954, the assessee contracted to sell 2700 bales of B. Twill to one Subhkaran Jhunjhunwalla under contract dated the 24th November 1953, delivery to be given in May, 1954, at the rate of Rs. 100/10/- per 100 bags and on the 5th May, 1954 the assessee contracted to purchase the same quantity of B Twill, namely, 2700 bales from Subhkaran Jhunjhunwalla at the rate of Rs. 112/14/- per 100 bags. The delivery under the last contract was also to be made in May, 1954. On the 31st of May, 1954 Subhkaran Jhunjhunwalla delivered to the assessee Pucca Delivery Orders in respect of 2700 bales of B. Twill in fulfillment of his contract for sale and the assessee paid the contract price in full by cheque. The assessee. in his turn, handed back the said delivery orders to Subhkaran Jhunjhunwalla in fulfillment of his own contract for sale and Subhakaran paid to the assessee the contracted price in full by cheque. The Income-tax Officer, in the course of the assessment proceedings. found that at the time of entering into the contract or at the time of settlement of delivery, that is, the 31st May, 1954. the assessee did not have delivery Orders which covered the goods contracted for. namely. 2700 bales of B. Twill. The assessee claimed the difference of Rs. 99,225/- as business loss and also claimed to set this amount off against his other business income. Before the Income-tax Officer the assessee contended that the Delivery Orders were received from Subhkaran Jhunjhunwalla in settlement of the contract for purchase entered into on the 5th of May, 1954 and that the contract for sale by the assesses was fulfilled by handing back these Delivery Orders to Shri Subhkaran Jhunjhunwalla. Subhkaran Jhunjhunwalla was examined by the Income-tax Officer under Section 37 of the Act and the Income-tax officer found that on the 31st of May, 1954 the same Delivery Orders, which were given to the assessee and returned by him to Subhkaran Jhunjhunwalla, were also used by Subhkaran for effecting delivery to other parties, e.g., Messrs. Bensal Bap and Company etc.
3. The assessee claimed before the Income-tax Officer that the aforesaid transactions could not be speculative transactions within the meaning of Explanation 2 of Section 24 (1) inasmuch as the price for the goods as per contract had been paid in full from both sides and Delivery Orders had passed between the parties signifying the delivery of the goods themselves. The Income-tax Officer was of the opinion that while delivery of Pucca Delivery Orders might constitute delivery of the goods, when the same Delivery Orders are handed over to one seller and received back from him on the same date and then handed over to another seller and received back from him again, there could be no intention of passing the title to the goods covered by the Delivery Orders. Though the Income-tax Officer found that the assessee's dealings in gunnies, hessian and B Twills have in most cases been completed without actual delivery of the goods as the delivery Orders were received from and delivered to different persons, the Income-tax Officer accepted the assessee's profit and loss from such dealings as profit or loss of the assessee's business. But in the case of the two transactions with Subhkaran Jhunjhunwalla the Income-tax Officer was of the opinion that as the Delivery Orders had been received from and handed back to the same person on the same date there could be no passing of goods covered by the Delivery Orders. He, therefore, treated the loss of Rs. 99,225/- as the assessee's loss from speculation This sum together with other admitted speculative losses of the assessee totalling Rs. 1,07,864/- was directed to be carried forward to be set off against speculative profits in future years.
4. The assessee's appeal against the disallowance of his claim if Rs 99,225/- as business loss by the Income-tax Officer was dismissed by the Appellate Assistant Commissioner, who purported to follow some earlier decisions of the Income-tax Appellate Tribunal which had held that delivery of Pucca Delivery Orders did not constitute actual delivery of the goods so as to take the transactions out of the mischief of the definition of speculation given in the aforesaid explanation.
5. Before the Tribunal, on further appeal by the assessee against the order of the Appellate Assistant Commissioner, it was contended that the passing of Pucca Delivery Orders and full payment of the price of the commodity covered by the same amounted to a transaction of sale and purchase, as the Pucca Delivery Orders represented the goods themselves. The transactions had no element of speculation. The Tribunal rejected this contention with the following observations:
'In the instant case we find that the contract was for delivery of B. Twill. There was no stipulation that the contract for delivery of B. Twill would be held as fulfilled if in lieu thereof each party delivered to the other only P. D. Os And the again as the Income Tax Officer rightly found, the chain of purchasers and sellers only meant that the delivery of the commodity from the one to the other was not intended. Moreover, we have not been shown any evidence of the fact that the P D. Os. were actually backed by the commodity it was alleged to represent. Now since the Explanation 2 to Section 24 (1) treats all transactions which are settled otherwise than by actual delivery of the commodity as a speculative transaction, we are of the view that the transaction in question between the assessee and Subhkaran Jhunjhunwalla was hit by the said provision of the Income Tax Act 1922, and has been rightly treated as a speculation loss.'
6. At the instance of the assessee the abovementioned question has been referred to this court by the Tribunal
7. Mr. Bhabra, the learned counsel for the assessee, has advanced three arguments in support of his contention that the loss incurred by the assessee in the aforesaid transactions was not a speculative loss within Explanation 2 to Section 24 (1), namely:
(i) That the delivery of the Pucca Delivery Orders amounted to the delivery of the goods themselves and as such the contracts were fulfilled by the actual delivery of the goods.
(ii) That the loss arising to the assessee from the said two transactions was not a loss arising from the settlement of any contract and as such it did not fall within the mischief of the aforesaid explanation
(iii) That, there being only a single transaction of sale and a single transaction of purchase with Subhkaran Jhunjhunwalla, these transactions could not be said to be in the nature of a business within the meaning of the first proviso to Section 24 (1).
8. In order to appreciate the contentions raised and the arguments advanced by the learned counsel it is necessary to set out the material provisions of Section 24 (11 of the Act as applicable to the assessment year concerned in this reference. The sub-section provides that 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. Under the first proviso to that sub-section any loss sustained in speculative transactions which were in the nature of a business were, however, not to be allowed to be set off against the income of the assessee from any source other than business consisting of speculative transactions. Explanation 2 to the above sub-section is as follows:
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:'
9. It would be convenient to dispose of the first and the third grounds of Mr. Bhabra before dealing with the second, as Mr. Bhabra laid more stress on the second ground than on the other two. Mr. Bhabra submitted that, the contracts themselves provided that the price for the goods would have to be paid in full on the tender and delivery of the Pucca Delivery Orders. Unfortunately, copies of the contracts had not been made annexures to the Statements of the Case and neither the Tribunal nor the authorities below had described the terms and conditions of the two contracts in their respective orders. An adjournment was granted to enable the assessee to ascertain whether the contracts or their certified copies were available in the records of the Tribunal so that the Tribunal might be directed to submit a supplementary statement including copies of the contracts We have since been informed by Mr. Bhabra that neither the contracts nor any copies thereof could be traced in the Tribunal's records. In its order the Tribunal has observed that there was no stipulation that the contract for delivery of B Twill would be held as fulfilled if in lieu thereof each party delivered to the other Pucca Delivery Orders. We must therefore reject the submission of Mr. Bhabra that the delivery of the Pucca Delivery Orders amounted to the delivery of the goods themselves A similar contention was raised before this Court in D. M Wadhwana v. Commissioner of Income-tax West Bengal : 61ITR154(Cal) . The facts in that case, as appearing from the judgment, were as follows: The assessee was a member of the Gunny Traders' Association and was a registered dealer in jute and hessian. The assessee entered into the following agreements for the purchase and sale of hessian bags with Kedar Nath Hariram . Under the first contract the assessee agreed to sell 500 bales at the rate of Rs. 180/- per 100 bags on September 1. 1951 delivery to be made on April 30, 1952. On October 13, 1951 the assessee entered into a second contract with the same party agreeing to purchase 500 bales of the same quality of goods at Rs. 216/8/- per 100 bags. The deliveries under the second contract were to be made as under the first contract The assessee incurred a total loss of Rupees 81,072/- on the two contracts. The assessee entered into an agreement to purchase 300 bales of hessian from the said firm on August 20, 1951 deliverable on November 15, 1951. On September 22, 1951 the assessee entered into another agreement to sell 300 bales of the same commodity to the same party deliverable on the same date. As a result of the last two mentioned contracts, the assessee made a profit of Rs. 40,500: as a result of these series of transactions the assessee suffered a net loss of Rs. 40,570/-. The parties to the contract exchanged Pucca Delivery Orders which authorised the purchaser to take delivery of the stipulated number of bales from the mills concerned but the goods were not actually sent to the other. The payments were made in full for each transaction by cheque. Inter alia, the following contentions were raised before the Court on behalf of the assessee:
'It was strenuously contended before the Appellate Tribunal and before this Court that the said transactions could not be speculative transactions. Special reference was made to the words 'periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips' It was said that there was actual delivery or transfer of the goods inasmuch as there was no settlement contract or dealing in differences only: the parties actually sent Pucca Delivery Orders of the mills along with their bills. These Pucca Delivery Orders according to the Learned Advocate for the assessee, represented the goods and as such the transactions never had any speculative element in them.'
10. G. K. Mitter, J. with whom Masud. J. concurred, after referring to the decision of the Supreme Court in Duni Chand Rataria's case, : 1SCR1071 , repelled the contention in the following words:
'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. It is well settled that to make a contract wagering within the meaning of Section 30 of the Contract Act. there must be a common intention of both the parties to the contract not to give or take delivery but only to deal in difference The Explanation to Section 24 (1) goes a step further and takes the transactions out of the domain of intention altogether in that there must be actual delivery or transfer no the commodity. The word 'actual' means 'real' as opposed to 'theoretical or probable.''
His Lordship concluded his judgment with the following words:
'The object of the Explanation is not to invalidate transactions which are not completed by actual delivery of the Roods but only to brand them as 'speculative transactions' so as to put them in a special category for income-tax purposes.'
11. With respect, we are in entire agreement with the aforesaid observations. There must be actual delivery or transfer of the commodity itself in order to take the transaction out of the definition of speculative transactions in the aforesaid explanation. The first ground of Mr. Bhabra must, therefore, be rejected.
12. As to the third ground of Mr. Bhabra, the Income-tax Officer in the assessment order has observed that in the case of the assessee's deals in gunnies and B. Twills there appeared to be no actual delivery of goods in most cases. The assessee claimed before him that the delivery of Pucca Delivery Orders to the persons concerned amounted to the actual delivery of the goods. The Income-tax Officer seems to have accepted this contention in respect of the assessee's other deals but in the case of the two transactions with Subhkaran Jhunjhunwalla, he held that the transactions came within the mischief of Explanation 2. It could not, therefore, be said that the aforesaid two transactions were the only transactions of purchase and sale which were fulfilled by the transfer of Pucca Delivery Orders. Further, as Mr. Mukherjee, the learned counsel for the Revenue, pointed out, the assessee was claiming the loss as business loss. So, the loss arose from the assessee's carrying on his business but was treated as loss from speculation. This argument of Mr. Bhabra must also be rejected.
13. We now turn to the second ground urged by Mr. Bhabra which, more or less, formed the main prop for his contention that Explanation 2 was not attracted in the assessee's case. Mr. Bhabra submitted that Explanation 2 contemplated a contract for the purchase and sale of a commodity being periodically or ultimately settled otherwise than by actual delivery of the commodity. Therefore, unless there was a settlement of the contract, Explanation 2 was not attracted. Mr. Bhabra contended that in this case the Tribunal found that the contracts were fulfilled by passing Pucca Delivery Orders on receiving in full the price of the commodity. There was no finding that the contracts were settled. According to Mr. Bhabra, a contract could be settled only with the consent of the parties to it under Section 62 of the Contract Act. In this case there is no finding that there were any settlement contracts or that the parties agreed to substitute the original contracts by new contracts. Mr. Bhabra further submitted that the dictionary meaning of the word fulfil' is 'to carry out perform, execute, do (something enjoined)'. (Oxford Dictionary, Volume IV, pace 587). When the Tribunal found that the contracts had been fulfilled by the transfer of the Pucca Delivery Orders and the payment of the full price, it must be held that the contracts had been performed and not settled. The word settled could not be equated with performed or fulfilled. Mr. Bhabra strongly relied on an un-reported decision of this Court in Commissioner of Income-tax v. Ram Chandra Gupta and Co., IT Ref. No. 87 of 1962 (Cal). In that case the facts as stated in the judgment of this Court were as follows: During the relevant previous year the assessee firm had entered into transactions in gunny bags entailing purchase and sale of Delivery Orders. This was done according to the prevailing practice in the Calcutta jute trade where formal transactions in gunny, hessian etc. are carried on by the transfer of the relative delivery orders only on full payment of the purchase or sale prices. It was admitted that no delivery of goods was either given or taken by the assessee who suffered a loss of Rs. 33,736/- out of such transactions. It was in the above context that this Court observed as follows:
'In the present case there is no material to hold that there was in fact any settlement. On the contrary the finding is that the prevailing practice in the Calcutta Jute trade is that the formal transactions are carried on by transfer of relative delivery orders on full payment of the purchase and sale prices and that the assessee sold and purchased the delivery orders on payment of full price.'
The Court finally concluded with the following observations:--
'In other words, the basic ingredients of speculative transactions are first, that the contracts are to be periodically or ultimately settled and secondly, the settlement would be otherwise than by actual delivery or transfer of the commodity. In the present case there is no finding that there was any settlement of the contracts of purchase and sale and, therefore, one of the vital limbs of Explanation 2 to Section 24(1) of the Indian Income-tax Act is not found as a fact in order to bring the transaction within the mischief of a speculative transaction.'
14. In our opinion that decision is clearly distinguishable on the facts of the case before us. The finding in Ram Chandra Gupta's case, IT Ref. No. 87 of 1962 (Cal) (Supra) was that the assessee sold and purchased the delivery orders on full payment of the price and the contracts were fulfilled according to their terms and conditions and not settled. In the case before us the Tribunal has found that the contracts were for the sale and purchase of B. Twill and that there was no stipulation in the contracts that delivery of the goods would be held as fulfilled if in lieu thereof each party delivered to the other only Pucca Delivery Orders. Mr. Mukherjee also pointed out that in the assessment order the Income-tax Officer had recorded a statement by the assessee that the Delivery Orders were received from Subhkaran Jhunjhunwalla for settlement of the contract for purchase entered into on the 5th May, 1954. He submitted that it was the assessee's case that the contracts were settled by the delivery of the delivery orders. As in this case the contracts could not have been said to have been performed by the delivery of the Pucca Delivery Orders, the ratio of the decision in Ram Chandra Gupta's case. I. T Ref. No. 87 of 1962 (Cal) (supra) was not applicable.
15. Mr. Bhabra further submitted that this aspect of the matter was not considered by this Court in Wadhwana's case : 61ITR154(Cal) (supra). This also does not appear to be quite accurate. As has already been pointed out, one of the contentions raised on behalf of the assessee in that case was that there was no settlement contract or dealing in differences only. The words 'periodically of ultimately settled' in the Explanation were brought to' the notice of the Court. G. K. Mitter, J. held that transactions which were not completed by actual delivery of the goods would fall within 'speculative transactions' as defined in Explanation 2. Apparently His Lordship had taken the word 'settled' to mean completed. In fairness to Mr. Bhabra, it must be pointed out that in Wadhwana's case : 61ITR154(Cal) (supra) the Court had not specifically referred to or dealt with the contention as raised before us namely, that in order to attract the operation of Explanation 2 the contracts must be periodically or ultimately settled otherwise than by the actual deli-very of the commodity
16. Shorn of all trimmings the assessee's transactions with Subhkaran Jhunjhunwalla amounts to this: On the 24th November 1953 the assessee contracted to Bell 2700 bales of B Twill at the rate of Rs. 100/10/- per 100 bags delivery in May, 1954. On May 5. 1954 the assessee contracted to purchase the same goods from his purchaser at the rate of Rs. 112/14/- per 100 baus, delivery also in May, 1954. On May 31, 1954, the last date for fulfilment of either contract, the respective contracts were discharged by the assessee in effect paying the difference of Rs 99,225/- to Subhkaran. In Pollock and Mulla's Commentaries on the Indian Contract Act, the following illustration is given of a speculative transaction: the modus operandi of the defendant in this class of cases is when he enters into a contract of purchase, to sell again the same quantity deliverable at the same time in one or more contracts, either to the original vendor or to some one else, so as either to secure the profit or to ascertain the loss, before the vaida day : and when he enters into a contract of sale, to purchase the same quantity before the vaida day. This mode of dealing, when the sale and purchase are to and from the same person, has the effect, of course of cancelling the contracts, leaving only the differences to be paid. We feel that there is sufficient justification for Mr. Mukherjee's contention that the contracts of sale and purchase entered into by the assessee with Subhkaran Jhunjhunwalla were not performed by the delivery of Pucca Delivery Orders but were settled by the payment of differences.
17. The words 'settled' or 'settlement' in connection with contracts have not been defined in the Act, or in the Contract Act or in the Sale of Goods Act and, so far as we are aware, these words are not defined in any other Indian statute. The following are some of the meanings attributed to the word 'settled' in dictionaries:
'Determined; deal effectively with; dispose of; conclude money or other transactions'.
Concise Oxford Dictionary).
To come to terms or agreement with a person'. (Shorter Oxford Dictionary, second volume, page 1856).
'To arrange matters in disputes; to come to terms or agreement with a person (Oxford Dictionary, volume VIII, part II, page 559).
18. In our opinion the proper meaning to be Riven to the words 'a contract. ..... settled' in Explanation 2 to Section 24 (1) would be 'a contract determined or concluded or disposed of' The words do not mean that the contract is to be substituted by a fresh agreement between the parties. In the instant case, as the assessee's contracts with Subhkaran for the sale and purchase of B. Twill were concluded and/or determined without the actual delivery of the commodity, the contracts were 'speculative transactions' within the meaning of Explanation 2 to Section 24(1) The second ground of Mr. Bhabra must also be rejected.
19. As all the contentions raised by Mr. Bhabra have failed the question referred to this Court must be answered in the affirmative and against the assessee.
20. The assessee will pay the costs of this Reference.
21. I agree.