Sabyasachi Mukharji, J.
1. In this reference the assessee was not represented before us. In order to determine this reference properly we requested Mr. R.N. Dutta to help us and appear as amicus curiae. Pursuant to our request he has appeared and made his submissions to this court. We express our gratitude for the help he has rendered.
2. In this reference for the assessment year 1956-57, the following two questions have been referred to us :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the loss of Rs. 80,491 was not a speculation loss and was incidental to the carrying on of the assessee's business and as such allowable as revenue expenditure ?
2. Whether, on the facts and in the circumstances of the case and in view of the fact that the assessee maintained its books on the mercantile system, the Tribunal was right in holding that the liability for Rs. 80,491 accrued and became ascertained only in 1955 when the claim was settled and the assessee's account was debited by the bank and in that view deleting the disallowance of Rs. 80,491 for the assessment year 1956-57 '
2. In order to determine these questions we might refer to the facts as appearing from the orders of the various authorities. The ITO in his assessment order dealing with this amount observed, inter alia, as follows:
'......Rs.Rs.Loss in foreign hund is claimed at Rs. 80,491. The amount had been debited by Hindusthan Mercantile Bank Ltd.
80,491 5,94,424Net loss to assessees a/c. on 13-2-56, 22,75,727It represents (1) Rs. 4,239, exchange differences, and (2) Rs. 76,252, interest charged by the bank on four contracts entered into by the assessee with the bank for arranging foreign exchange. The contracts as well as the payments of interest and exchange differences relate to the a/c. year 1951-52.
3. It has been contended by the assessee that such contracts were entered into in order to arrange for foreign exchange for importing goods in his import departments (lubricating oils & machinary). Only a part (55,000) of one of the contracts (for 1,00,000) was utilised by the assessee for importing goods. The balance of this contract and all other contracts were settled by the assessee otherwise than by actual delivery. The assessee has not been able to produce any evidence to prove that such contracts were obviously of a speculative nature. Moreover, the payments do not relate to transactions of the a/c. year and hence, cannot be charged against profits of this year. The claim is, therefore, disallowed. '
4. There was an appeal before the AAC on various points including, inter alia, this point. Dealing with this aspect of the matter, the AAC in his appellate order observed that this sum of Rs. 80,491 which has been debited by the Hindusthan Mercantile Bank Ltd. to the appellant's account on 3rd June, 1955, represented two items, viz., Rs. 4,239 as exchange difference and Rs. 76,252 as interest charged by the bank on the foreign exchange contracts entered into by the appellant with the bank for arranging foreign exchange. The contract as well as the payments of interest and the exchange difference related, according to the assessment order, to the accounting year 1951-52, The contention of the assessee was that in connection with the import and export business it was normal practice to have forward contracts of foreign exchange of 1,00,000 and the assessee had utilised only foreign exchange contracts for 55,000 and the balance was not utilised and the assessee was required to pay the difference and the interest and such payments was determined on 17th December, 1952, but the assessee disputed the payment and ultimately accepted the liability in the present accounting year. The assessee had entered into foreign exchange contracts in 1952 with Hindusthan Mercantile Bank Ltd. which in turn had entered into similar contracts with the United Commercial Bank Ltd. and the difference payable by the assessee was determined on 17th December, 1952, but the assessee had denied the liability and it was ultimately settled in the relevant accounting year. The AAC thereafter observed as follows :
' A speculative transaction has been defined in Explanation 2 to Section 24(1) of the Act and it means only 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 actual delivery or transfer of the commodity or scrips. The forward contract in foreign exchange is normal part of the export or import business and thereafter because the appellant could not utilise part of, the foreign exchange contracts the appellant was required to pay difference by way of liquidated damages and in that event it cannot be stated that there was settlement of the transactions by payment of difference. The exchange contracts do not involve any purchase or sale of any commodity or any stock or shares and, therefore, the loss claimed in this account is not loss in speculative transaction. In connection with the discussion on ground No. 2 it has been held that the profit claimed as freight difference is not speculation profit and on the same basis this loss cannot be considered as speculation loss. The loss claimed by the appellant relates to the payment of liquidated damages and the quantum of the damages is determined by the difference in the foreign exchange rate and the appellant was also -required to pay interest. Considering the normal export and import business of the appellant the amount paid can be considered as an expenditure incidental to the business of the appellant. The liability arose on December 17, 1952, when the total amount due by way of difference and interest was determined and as the appellant is maintaining its books of account on mercantile basis the appellant cannot claim this amount as deduction only when the liability is actually discharged. Therefore, the ITO was justified in disallowing this loss only on the ground that it does not relate to the accounting year under consideration.'
5. It may be mentioned that the assessee is a firm consisting of several partners. It has income under various heads and is carrying on business of export and import of jute and because of this business enters into contracts for the export of jute. Being aggrieved by the aforesaid decision of the AAC both the revenue as well as the assessee preferred appeals before the Income-tax Appellate Tribunal. The Tribunal agreed with the AAC that the loss as well as interest paid were incidental to the business and, therefore, liable as revenue expenditure. So far as the question as to which year this loss related, the Tribunal observed, inter alia, as follows :
'The contention of the assessee before us is that there was some dispute about the basis of the charge which ultimately was settled in 1955 and its account was also debited by the bank on June 3, 1955. Reliance was placed by the counsel for the department on the decision of the Supreme Court in : 53ITR134(SC) (CIT v. Swadeshi Cotton and Flour Mills P. Ltd.). In our opinion, the liability accrued and became ascertained only in 1955 when the claim was settled and the assessee's account was debited by the bank. The interest of Rs. 76,252 obviously must have included the interest till the date the assessee's account was actually debited. In our opinion, our above conclusion is also fully supported by the decision cited above; therefore, do not find any justification for disallowance of Rs. 80,491 which is hereby deleted, '
6. Upon this the aforesaid two questions have been referred to us. Therefore in order to determine these two questions it is essential to bear in mind a few basic facts. The assessee used to carry on export and import of jute business. In the course of normal business it used to enter into foreign exchange contracts in order to cover up loss and difference of foreign exchange valuation ; the assessee could not utilise the full amount of foreign exchange covered by the contract and it utilised only 55,000 out of 1,00,000. Now in our opinion it cannot be disputed that it is essentially a loss as has been correctly held by the AAC as arising in the course of the normal business of the assessee; the forward contract in foreign exchange was a normal part of the export and import business of the assessee. That is a finding of fact and that finding of fact has not been challenged. If in the course of normal carrying on of business certain loss or certain obligations or interest arise these must be referable to the carrying on of the business and these must be incidental to the carrying on of business and as such allowable as deduction in considering the profits of the assessee. Learned advocate for the revenue contended before us that foreign exchange is a commodity. He relied on the observations of the Probate Division of U.K. in the case of Frederik VIII, reported in Law Reports, 1917, at p. 43, where the German Government bonds, which had been sent from a German banking company in Berlin to a firm in Copenhagen to be forwarded by registered post to a bank in Chicago, were seized, as goods or commodities of enemy origin, under the Reprisals Order in Council of March 11, 1915, from the letter main of the Danish steamship which was carrying them from Copenhagen to the United States. It was held that the bonds were 'goods' or 'commodities' within the meaning of those words in the Order. Our attention was also drawn to the observations in the case of Imperial Tobacco Co. v. IRC  25 TC 292 (CA) in aid of the proposition that dollars in certain circumstances can be treated as commodities. This position as such cannot be disputed. Undoubtedly, the contract for foreign exchange as such can be treated as a contract for commodity. But the question here essentially is that the assessee was carrying on business of export and import of jute goods. In order to carry out these transactions the assessee had to enter into foreign exchange contracts in order to cover up these transactions. In those foreign exchange contracts if any loss occurred then such loss was a loss referable to and related to the business carried on and arising out of the business of the assessee. The point upon which learned advocate for the revenue stressed was that, even there, there was a breach of contract for non-performance of the contract; as in this case, in the sense that the contract or the right to use up to 1,00,000, but the assessee had utilised only 55,000 and the assessee did not wish or did not want to utilise the remaining portion of the bargain for foreign exchange, such a loss was a speculative loss under Section 24, Expln. 2 of the Indian I.T. Act, 1922, and would be referable only to speculative transaction and cannot be treated as a loss in carrying on the assessee's business to be set off as a revenue loss. Though this Expln. 2 in Section 24 of the Indian I.T. Act, 1922, has been considered in several decisions it would be necessary to set out this Explanation. Before we do so it is necessary to bear in mind that where an assessee under Sub-section (1) of Section 24 sustains a loss of profit 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. Therefore, if the assessee carried on speculative transactions which are in the nature of the business of the assessee then such loss resulting from such speculative loss can be set off against the speculative gains but cannot be set off against other gains. In that context, Expln. 2 defines what is a speculative transaction. The said Expln. 2 is to the following effect:
'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 :
Provided that for the purposes of this section,--
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold 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 speculative transaction. '
7. Here there is no finding that entering into foreign exchange contract was the nature of the business of the assessee. This was only an incidental part of the business operation for the export and import of the goods by the assessee. The assessee was not a dealer in foreign exchange contracts as such. Foreign exchange contracts were only incidental to the assessee's regular course of business. Therefore, all the arguments regarding whether it conies within the Expln. 2, in our opinion, is not quite relevant because the loss was not sustained in speculative transactions which are in the nature of the business of the assessee. The AAC had made a categorical finding to this effect in his order which has been upheld by the Appellate Tribunal and that finding of fact has not been in any way challenged in the question referred before us. Learned advocate for the revenue drew our attention to Section 56 of the Contract Act and submitted in aid of his submission that there was an implied term that the assessee might not be able to perform the full extent of the amount covered by the foreign exchange contract. Here, in this case, the contract was for 1,00,000 and what the assessee paid in fulfilment of that obligation which was an implied term at the time of entering into the contract' did not amount to a breach of the contract. He referred us to Section 56 of the Contract Act and the decision of the Supreme Court in the case of Naihati Jute Mills Ltd. v. Khyaliram Jagannath : 1SCR821 . He specially drew our attention to the observations appearing at p. 825 (of SCR) onwards where undoubtedly the question of liquidated damages arose in the case of non-performance of a breach of contract. Section 56 of the Contract Act itself provides that for bargain and in certain contingencies of non-performance liquidated damages might be provided for in the contract, but the liquidated damages proceed on the basis that the contract has been breached by the conduct of the parties, i. e., the rights of the parties are adjusted in the manner contemplated by the parties at the time of bargain. After considering several other decisions this view was expressed by this court in the case of CIT v. Pioneer Trading Co. P. Ltd. : 70ITR347(Cal) , where this court held that a claim based on breach of contract did not come within the meaning of ' contract settled ' as used in Expln. 2 of s, 24(1) of the Indian I.T. Act, 1922. 'Contract settled' meant contract settled before breach. After breach of contract, the cause of action was no longer based on the contract itself but on its breach. Where the money which the assessee received was in settlement of the amount of damages suffered by the assessee by reason of breach of the contract to deliver, it was held that the receipt was not a receipt from a speculative transaction as defined in Expln. 2 and the money received was not liable to be set off against speculation loss of earlier years. This view has been consistently followed by this court. Reference may be made to the decision in the case of C1T v. Ramjeevan Sarawgee & Sons : 107ITR845(Cal) , where this court also considered the decision of the Supreme Court in the case of Davenport & Co. P. Ltd. v. CIT : 100ITR715(SC) , on which reliance was placed on behalf of the revenue and it was distinguished. We are in respectful agreement with the observations of Mr. Justice Sen in that case at p. 849 of the report in so far as it distinguished the decision of the Supreme Court in the case of Davenport & Co. P. Ltd. : 100ITR715(SC) . We may also refer to the decision of this court in the case of CIT v. Arun General Industries Ltd. : 110ITR286(Cal) , where all these previous decisions of this court have been noted. Except the Madras High Court in the case of R. Chinnaswami Chettiar v. CIT : 96ITR353(Mad) , all other High Courts have taken a similar view. The decision of the Supreme Court in the case of Davenport & Co. P. Ltd. : 100ITR715(SC) upon which reliance was placed by learned advocate for the revenue is in our opinion not relevant in view of the nature of the transaction with which we are dealing. Furthermore, in view of the clear finding of the AAC and the Tribunal, we are of the opinion that question No. 1 must be answered in the affirmative and in favour of the assessee.
8. So far as question No. 2 is concerned, this relates to the year to which this loss would be attributable. It is true as was noted by the Tribunal that the claim arose in 1952 and the same amount which has been claimed had been paid by the assessee. But the claim was disputed and the contention was that the moment the damages arose, the principle of accrual of claim in the mercantile system of accounting must be applied appropriately. The liability to pay this claim was disputed. This could be adjusted either by settlement or by adjudication. It was done by settlement in the year of account. Therefore, though the claim related to the breach alleged to have occurred in the year 1952, the settlement of liability was done by agreement between the parties in the year of account. Therefore, in our opinion, this loss was referable to the instant year. Learned advocate for the revenue drew our attention to the observations of the Supreme Court in the case of CIT v. Swadeshi Cotton and Flour Mills P. Ltd. : 53ITR134(SC) . But there the facts were entirely different. Where the claim for damages is the liability to pay damages under dispute unless the dispute is adjudicated or settled between the parties, the claim could not be said to have arisen. This view is in consonance with the view of this court in the case of CIT v. Shewbux Jahurilal : 46ITR688(Cal) , as well as the observations of the Supreme Court in the case of Karam Ckand Thapar and Bros. P. Ltd. v. CIT : 74ITR26(SC) .
9. In the aforesaid view of the matter, we are of the opinion that in view of the nature of the claim, the Tribunal was correct in coming to the conclusion on this aspect. Therefore, we must also answer the question No. 2 in the affirmative and in favour of the assessee.
10. In the facts and circumstances of the case, each party will pay and bear its own costs.
Sudhindra Mohan Guha, J.
11. I agree.