TMI Blog1984 (10) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions, being transactions of a speculative nature within the terms of s. 43(5) of the Act, cannot be set off against the assessee's income from business in view of the provisions contained in s. 73(1) of the Act. The assessee resisted the above view of the Department and contended that the impugned transactions were not speculative in character and, in any event, the transactions do not constitute " speculation business " within the meaning of Explanation 2 to s. 28 of the Act. The facts concerning the assessment year 1969-70 were slightly different from the facts relating to the other assessment years 1970-71 to 1974-75. So far as the assessment year 1969-70 is concerned, the assessee entered into two contracts for the supply of groundnut kernel at agreed rates. In pursuance of the contracts, the assessee carrying on business in the manufacture and sale of groundnut oil at Anantapur despatched the goods contracted to M/s. Ravindra Oil Mills, Hyderabad.. On receipt of the goods at Hyderabad, M/s. Ravindra Oil Mills refused to take delivery on the plea that the goods supplied were sub-standard and were not in accordance with the specifications agreed under the contract. Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------------------------------------------------------------------ " Asst. Total number Number of Amount of net Year of transactions transactions difference settled without paid delivery --------------------------------------------------------------------------------------------------------------------------------------------------- Rs. 1970-71 124 6 28,513 1971-72 192 19 7,091 1972-73 136 10 3,892 1973-74 163 8 4,467 1974-75 23 1 3,600 " --------------------------------------------------------------------------------------------------------------------------------------------------- The assessee explained before the income-tax authorities that the above contracts for the supply of commodities were entered into in the normal course of the assessee's ready business and that, owing to nonavailability of railway wagons at the appropriate time, the assessee could not deliver the commodities in respect of a few contracts. It was claimed that the assessee has not been carrying on any " speculation business " as such and that the mere omission to give delivery in respect of a small number of contracts in each year for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ch. Sreerama Rao, learned counsel for the assessee, reiterated the pleas urged before the lower authorities. He firstly contended that the transactions in question are not " speculative transactions " within the meaning of s. 43(5) of the Act and, in any event, the so-called speculative transactions do not constitute " speculation business " within the meaning of Explanation 2 to s. 28 of the Act. According to the learned counsel, the payments in question represented damages paid pursuant to a breach committed by the assessee. The amounts paid by way of damages following a breach committed, learned counsel contends, cannot be treated as losses arising in the course of speculative transactions. Reliance was placed by him on a decision of the Division Bench of this court in CIT v. Andhra Oil and Fertilisers Company [1983] 143 ITR 661 and also on the decision of the Supreme Court in CIT v. Shantilal P. Ltd. [1983] 144 ITR 57 (SC), in support of the proposition that, even if the transactions were to be regarded as " speculative transactions " within the meaning of s. 43(5) of the Act, they still do not constitute " speculation business " within the meaning of Explanation 2 to s. 28 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be possible to deliver goods on the due date as per the contract, a person can always inform the other contracting party that he is not in a position to fulfil the obligations arising under the contract. As soon as the contracting party is informed that delivery will not be made according to the contract, the breach is committed unilaterally and the contract between the parties is put to an end to. Thereafter, it is merely a question of settling the mutual claims of the parties following the breach. The claims may be settled either before or after the due date. In our opinion, the date of actual settlement makes little difference. What is crucial is to find out when a breach had occurred, whether such breach occurred on the due date or well before the due date. If the facts and circumstances of a case indicate that a breach had occurred, whether by repudiation or otherwise of a contract unilaterally by one of the parties to the contract, nothing survives for settlement of the contract thereafter and what has to be settled subsequently is not the contract as such which was entered into, but the disputes arising out of the breach committed by one of the parties to the contract. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action " within the meaning of s. 43(5) of the Act. The Delhi High Court held that the assessee committed a breach of the contract when it informed on August 22, 1968, that it would not be in a position to deliver the goods and the settlement by payment of Rs. 25,000 on account of non-supply of goods is relatable to the breach committed by the assessee. The Delhi High Court, therefore, held that the sum of Rs. 25,000 paid by the assessee represented loss arising in the course of the assessee's business and was not loss in a speculative transaction. We may usefully quote below the observations of the Delhi High Court (p. 392): " A contract is speculative if it is settled without actual delivery. If the contract is broken, i.e., for any reason one party is unable to give delivery or the other party is unable to take delivery, it is a case of breach of contract. It depends, therefore, on the facts and circumstances of the case as to whether there has actually been a 'breach ' of the contract or ' settlement' of the contract. A breach takes place on account of repudiation of the contract or failure to perform it or a contract may be terminated through frustration, impossibility or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peculative transactions in any given year in order to determine whether the assessee is carrying on speculation business. Section 73(1) of the Act provides that any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. While s. 43(5) of the Act provides an artificial definition of " speculative transaction ", s. 73(1) does not in terms provide that any loss in respect of a speculative transaction carried on by the assessee shall not be set off except against the profits and gains, if any, of another speculative transaction. The expression used in s. 73(1) is " speculation business ". If speculation business is to be understood in the normal commercial parlance, the ingredients are totally different and a " speculative transaction " artificially defined in s. 43(5) of the Act does not amount to Id speculation business " as is commercially understood. A Full Bench of the Gujarat High Court in Pankaj Oil Mills v. CIT [1978] 115 ITR 824, has succinctly explained what is understood to be a speculative transaction in the ordinary commercial sense. We may quote below t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion business, as canvassed by the learned standing counsel for the Revenue. What is required for speculation business is that the course of speculative transactions carried on by an assessee is of such a nature as to constitute a business. It is, therefore, necessary in each case to examine and find out whether the speculative transactions carried on by an assessee are of such a nature as to constitute a business. It may be that, in a given case, a single speculative transaction, on application of proper tests, may be found to constitute " speculation business ". It may equally be true that a plurality of speculative transactions, on application of proper tests, constitute " speculation business ". It would depend upon the facts of each case. It is not possible to accept the submission of the learned standing counsel for the Revenue that no recognised tests are applicable for the purpose of determining whether an assessee is carrying on speculation business by reference to the nature of the speculative transactions carried on by him. We do not find direct acceptance of such a proposition, as contended by the learned standing counsel for the Revenue, in the decision of this court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by this court in Addl. CIT v. Maggaji Shermal [1978] 114 ITR 862. We may also refer to the decision of the Madhya Pradesh High Court in CIT v. Bhikamchand Jankilal [1981] 131 ITR 554. The Madhya Pradesh High Court clearly held that a speculative transaction would amount to speculation business if it fulfils the definition of " business " under s. 2(13) of the I.T. Act, 1961, or if it amounts to an adventure or concern in the nature of trade. We are, therefore, fortified in our view that the question whether an assessee is carrying on speculation business can be determined by the application of recognised tests, viz., whether the speculative transactions carried on by the assessee connote some real, substantial and systematic or organised course of activity or conduct with a set purpose. In the application of this test, it can conceivably be found that even a single or isolated transaction constitutes " speculation business ". All that we wish to state is that, without application of the tests, it will be impermissible to come to a conclusion that every speculative transaction carried on by an assessee in the course of his ordinary business amounts to " speculation business ". In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the profits of business. In the assessment year 1969-70, one transaction is referred. The loss in that is Rs. 320. In 1970-71, in 6 transactions, the loss is Rs. 28,513. In 1971-72, in 19 transactions, the loss is Rs. 7,091. In 1972-73, in 10 transactions, the loss is Rs. 3,892. In 1973-74, in 8 transactions, the loss is Rs. 4,467 and in 1974-75, in a transaction, the loss is Rs. 3,600. In the 45 transactions, the loss claimed is Rs. 47,883. The question referred is whether the 45 transactions are speculative transactions or not and whether the losses incurred in the transactions are hit by sub-s. (1) of s. 73 of the Act is the question at issue. In the case of Chinnaswami Chettiar v. CIT [1974] 96 ITR 353, the Madras High Court referring to the provisions of s. 28, s. 43 and s. 73 of the Act applied a literal interpretation to the provisions. The Supreme Court in CIT v. Shantilal P. Ltd. [1983] 144 ITR 57 was reluctant to " endorse " the method adopted. The reluctance was to hold when goods are not delivered in a transaction per se under the I.T. Act, 1961, whether transaction is a speculative transaction ? This court in CIT v. Andhra Oil and Fertilisers Company [1983] 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a common thread and by themselves constitute a speculative business as such, Expln. 2 is superfluous. Parliament would not have put in the Explanation merely for affirming an obvious and existing fact ......... The three provisions (ss. 28, 43 and 73) referred to above are parts of a single scheme. Parliament has first defined what is a speculative transaction and in doing so, as we have stated above, they have totally excluded from consideration the intention of the parties. Having so defined the speculative transactions, Parliament provided that if these transactions are business transactions, they must be treated as a separate and distinct business ...... It would not be consistent or reasonable to hold that while determining whether a transaction is a speculative transaction or not, the intention of the parties is not relevant, but that such intention is relevant while determining whether the speculative transactions constitute a speculative business or not." To hold as a " speculative business ", Parliament in s. 28 and s. 73 has prescribed different indicia is not correct. It is in this regard, the view stated by the Bombay High Court in CIT v. Indian Commercial Co. P. L ..... X X X X Extracts X X X X X X X X Extracts X X X X
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