A contract settled after breach does not fall within the scope of speculative transaction.

( 1 ) THIS is a reference at the instance of the Assessee made under S. 256, (1) of the Income-tax Act, 1961, hereinafter called the Act. The question of law referred for the opinion of this Court is :" Whether on the facts and in the circumstances of the case, the appellate Tribunal was justified in holding that the loss of Rs. 11,100 was sustained by the Assessee in 'speculative business within the meaning of Explanation 2 to S. 28 read with sub-sec. (5) of S. 43 of the Income-Tax Act, 1961?"

( 2 ) THE Assessee carried on business in Kapas, Cotton and other sundry goods. There were purchases and sales of cotton bales and purchase of Kapas and sale of cotton after ginning. The Assessee returned a gross profit of Rs. 1,75,524 for the assessment year 1967-68. The Assessee claimed a deduction of the sum of Rs. 11,100 which was paid as difference to m/s. Patel Volkart Pvt. Ltd. , and M|s. Krishna Rajendra Mills Pvt. Ltd , Mysore in respect of non-delivery of 200 bales of cotton to the former and 100 bales of cotton to the latter under separate contracts entered with the parties. The Income-tax Officer disallowed the deduction on the ground that they relate to speculative transactions. That finding was affirmed by the Appellate Assistant Commissioner and the Income-tax appellate Tribunal on second appeal. The question is, whether the sum of Rs. 11,100 claimed as deduction by the Assessee is a speculative loss or not? If it is speculative loss, then it is undisputed that the Assessee is not entitled to claim deduction of the said amount out of its profit under s. 73 of the Act; but if on the contra the said amount is not speculative loss, then the Assessee is entitled' to the deduction of the same out of its business profits.

( 3 ) THAT the Assessee is a dealer in Kapas and Cotton is undisputed. The main business of the Assessee is not one of carrying on speculative business either in Kapas or in cotton. Similarly, the business of M|s. Patel Volkart Pvt. Ltd. , and M/s. Krishna Rajendra Mills Pvt. Ltd. , mysore is also not one of carrying on speculative business as understood in common law.

( 4 ) THE Income Tax law by sub-sec. (5) of S. 43 of the Act has defined the expression ' speculative transaction'. It reads thus :" '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 scripts. Provided that. . . . . . . . " (Omitted as unnecessary ). Explanation 2 to S. 28 states that 'where speculative transactions carried on by an Assessee are of such a nature as to constitute a business, the business (hereinafter referred ot as ' speculation business ') shall be deemed to be distinct and separate from any other business'. As already stated, it is not the case of either side that the Assessee in the instant case was carrying on 'speculation business' during the assessment year. The case of the Department is that the transactions relating to the contract for sale and delivery of 200 bales' of cotton to M|s. Patel Volkart pvt. Ltd. , and 100 bales to M/s. Krishna Rajendra Mills Pvt. Ltd. , mysore were speculative transactions. In order that a transaction may fall within the scope of the expression 'speculative transaction' it must be a, transaction in which a contract for 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 scripts. What is important to be noticed is that the contract for purchase or sale of any commodity must be settled otherwise than by the actual delivery or transfer of the commodity or scripts. A contract can be settled only during the subsistence of the contract. If and breach occurs by the non-performance of the contract by actual delivery or transfer of the commodity or scripts and thereafter the