TMI Blog1980 (9) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 ? " 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, follows : " ........ Rs. Rs Loss in foreign hundis claimed at Rs. 80,491. The amount had been debited by Hindusthan 80,491 5,94.424 Mercantile Bank Ltd. -------------- ------------------ Net loss to assessee's a/c. on 13-2-56. 22,75,727 It 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. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timately 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 came riot 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 expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilise the full amount of foreign exchange covered by the contract and it utilised only pounds 55,000 out of pounds 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 con tended 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 seize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culative 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 merchandis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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. [1968] 70 ITR 347, where this court hold 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 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 low of earlier years. This view has been consistently followed by this court. Reference may be made to the decision in the case of CIT v. Ramjeevan Sara ..... 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