Payment of damages for breach of contract is not a speculative transaction within the meaning of Explanation 2 to Section 24 (1) of the Indian Income-tax Act, 1922, and is therefore an allowable expenditure under Section 10 of the Act.

SANKAR PRASAD MITRA, J.

( 1 ) THIS reference under Section 66 (1) of the Indian Income-tax Act, 1922, arises out of the assessment proceedings for the assessment year 1956-57. The relevant previous year is the Deshera year commencing on October 7, 1954, and ending on October 25, 1955. The assessee is a registered firm. Its head office is in Calcutta. It has branch in Bombay which was carrying on the business of exporting groundnut oil. The assessee had regular transactions with Messrs. N. Schrok, N. V. Rotterdam. During the relevant year the assessee fulfilled severa contracts with the Rotterdam party by making deliveries of the goods contracted for. On November 4, 1953, the assessee entered into a contract with the party at Rotterdam for delivery of 200 tons (of 2,240 lbs. each) of Indian crude groundnut oil for January and/or February, 1954, shipment at 125 per ton. But the assessee could not secure the export licence for shipping the goods. On the date of the contract the Government of India had not announced its export policy but during the first half of the year exports were normally permitted. The Tribunal observed that the assessee must have thought that by January-February, 1954, the export permit would be available and it would be able to make the supplies of the contracted goods. But the assessee's expectations were belied and it failed to supply the goods contracted for. In pursuance of the contract an arbitrator was appointed. The arbitrator gave an award on December 30, 1954, There was an appeal against this award but the award was confirmed. In the award the assessee was directed to pay the difference between the market rate of 141 per ton (less 1%) and the contract rate of 125 per ton. In Indian money the difference came to Rs. 44,226. The assessee remitted this sum of Rs. 44,226 to the foreign party with the sanction of the Reserve Bank of India.

( 2 ) THE assessee claimed deduction of the said sum of Rs. 44,226 in the assessment for the relevant year. The Income-tax Officer did not accept the claim. He held that since the contract had been settled by payment of differences, the loss was a loss in speculation falling within the scope of Explanation 2 of Section 24 (1) of the Act of 1922.

( 3 ) THE Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The assessee's contention before the Tribunal was that the aforesaid sum was paid by way of liquidated damages and could not be treated as a loss in speculation. The assessee submitted that it was, therefore, an expenditure allowable under Section 10 (1) or Section 10 (2) (xv) of the Act. The Tribunal has held that the said sum of Rs. 44,226 was rightly treated as a loss in speculation.

( 4 ) THE following question has, in the circumstances, been referred to this court :"whether, on the facts and in the circumstances of the case, the sum of Rs. 44,226 was a loss in speculation within the meaning of Explanation 2 to Section 24 (1) or an allowable expenditure under Section 10 (1) or Section 10 (2) (xv) of the Indian Income-tax Act, 1922?"

( 5 ) LET us, at the outset, set out the relevant provisions of Section 24, They are as follows:"24. Set-off of loss in computing aggregate income.-- (1) 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: 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. . . Explanation 2.--A speculative transaction means a transaction in which a contract for purchase and sale of any commodity including stock

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