Judgment

PATHAK, J.:- In this tax reference made under Section 257 of the Income-tax Act, 1961, we are called upon to express our opinion on the following question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the order of the Appellate Assistant Commissioner that the loss suffered by the assesses was not a loss incurred in a speculative transaction within the meaning of Section 43 (5) of the Income-tax Act, 1961?"

2. The assessee, M/s. Shantilal Pvt. Ltd., Bombay, is a private limited company. in the assessment proceedings for the assessment year 1971-72 it claimed a sum of Rs. 1,50,000/- paid by it as damages to M/s. Medical Service Centre as a business loss. During the previous year relevant to the said assessment year the assessee had contracted to sell 200 kg. of Folic acid USP at the rate of Rs. 440/- per Kilogram to M/s. Medical Service Centre and the delivery was to be effected on or before November 1, 1969, within about three months of the date of entering into the contract. The case of the assessee is that as the price of the commodity rose very sharply to as high as Rs. 2,000 per Kilogram during the period when the delivery was to be effected, the assessee was unable to fulfil the contract, giving rise to a dispute in regard to the payment of compensation between the parties. The dispute was referred to arbitration and, by an award dated August 25, 1970 the arbitrator directed the assessee to pay Rs. 1,50,000/- as compensation. to M/s. Medical Service Centre. A consent decree in terms of the award was made by the High Court.

3. In the assessment proceedings, the Income-tax Officer rejected the claim of the assessee that the payment of compensation was a business loss. He found that the transaction was a speculative transaction as defined by sub-section (5) of Section 43 Income-tax Act, 1961. The Appellate Assistant Commissioner allowed the assessees appeal on the view that the payment made by it represented a settlement of damages on breach of the contract, which was distinct from a settlement of the contract. Accordingly, he found that the loss must be regarded as a business loss and not as a speculation loss. The Income-tax Officers appeal was dismissed by the Income-tax Appellate Tribunal by its order dated February 18, 1976. The Commissioner of In-come-tax applied in reference for a decision on the question of law set out earlier, and in view of an apparent conflict between different High Courts on the point the Tribunal has made this reference.

4. There is no doubt that the arbitration award granting compensation to M/s. Medical Service Centre proceeds on the footing that there was a breach of contract. The Tribunal took the view that the award of damages for breach of a contract did not bring the transaction within the definition of "speculative transaction" set forth in sub-section (5) of Section 43, Income-tax Act, 1961. In this, the Tribunal found support in the view expressed by the Calcutta High Court in Commr. of Income-tax, West Bengal v. Pioneer Trading Company Private Ltd. (1968) 70 ITR 347, Daulatram Rawatmull. v. Commr. of Income-tax (Central), Calcutta (1970) 78 ITR 503 and by the Mysore High Court in Bhandari Rajmal Kushalraj v. Commr. of Income-tax, Mysore (1974). 96 ITR 401, which they preferred to the view expressed by the Madras High Court in R. Chinnaswami Chettiar v. Commr, of Income-tax, Madras (1974) 96 ITR 353 , P. L. K. N. Meenakshi Achi v. Commr. of Income-tax, Madras (1914) 96 ITR 375 and A. Muthukumara Pillai v. Commr. of Income-tax, Madras (1974) 96 ITR 557 (1974 Tax LR 413). On careful consideration of the matter we are of opinion that the Tribunal is right. Sub-section (5) of Section 43 defines "speculative transaction to mean :

"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