Ramaswamy, J.
1. The assessee carries on business in the purchase and sale of yarn in Tirupur. During the previous year ending October 7, 1962, relevant for the assessment year 1963-64, the assessee entered into a number of contracts. In regard to three contracts of sale dated 13th, 16th and 19th July, 1962, and one contract of purchase dated 12th September, 1962, the assessee did not give or take actual delivery of yarn but the contracts were cancelled. The assessee paid a sum of Rs. 7,750 in respect of all these contracts and claimed these amounts at business losses incurred by him. The Income-tax Officer considered that this is a loss on speculation business and, therefore, could not be set off against the income from business but could be carried forward to be set off against speculation profits. On appeal, the Appellate Assistant Commissioner was of the view that the above contracts were entered into in the usual course of yarn trade, that the cancellation of contracts and payment of differences was a normal incident in yarn trade, that the contracts entered into by the assessee did not represent a speculative sale or purchase but represent a normal contract entered into by the assessee in the usual course of business and that the assessee had paid the difference in view of falling prices. In the appeal filed by the department, the Tribunal held that in regard to the first two sales above referred to, the assessee paid a sum of Rs. 4,600 as difference in price, that there was no actual delivery of goods and that the intention of the parties at the time of the original contract was immaterial and, therefore, these are speculative transactions. In regard to other two contracts, it held that it had not been shown that they were by way of damages and that it was for the purpose of the business. Following the decision in Juvvi Subbaramaiah and Co. v. Commissioner of Income-tax, : [1964]51ITR742(AP) . the Tribunal also held that the four transactions are in the nature of speculation business. In that view, the department's appeal was allowed and the order of the Income-tax Officer was restored. At the instance of the assessee the following two questions have been referred :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 4,600 constituted lossesof a speculative business and could not be set off against the income from business
(2) Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 7,750 is in accordance with law ?'
2. The contract dated July 13, 1962, was for sale of 20 bales of 200 lbs. each of 80s Sakthi Textiles Egyptian Cotton yarn at Rs. 68 10 lbs., to be effected in July-August, 1962, against cash payment. The receipt dated September 10, 1962, disclosed that this contract was settled and the purchaser under the contract received a sum of Rs. 2,200 being the difference in price and cancelled the contract. The date of settlement is not known but it has been treated as if the settlement was also on September 10, 1962, itself and it is on that basis we also proceed to consider the matter. On the date of this settlement and payment therefor, the period of delivery was over. Among the records we find a bill No. 117 dated September 10, 1962, given to the assessee by the purchaser. The relevant portion of the bill is extracted below :
CountParticularsQuantity in balesRateBundlesAmountRs. P.Rs. P.
80 s.Sakthi Textiles Mills Cotton yarn purchased irom you on 13-7-1962.2068.00Resold to you 73 50
Difference5.502,200.00
3. The concract of sale dated July 16, 1962, is also on identical terms except that the quantity and description of yarn and the difference in price is different. In respect of this contract a sum of Rs. 2,400 was paid on September 7, 1962, after the period of delivery. A bill similar to the other case was also passed. The third contract dated July 19, 1962, is also similar to the first contract. But the wording of the receipt was slightly different. It stated that with reference to the contract dated July 19, 1962, for the purchase of 25 bales of 60s S. B. M. the purchaser has received Rs. 1,500 as per settlement and that the parties mutually agreed to cancel to contract. There was no bill similar to the one which we have noticed in the other cases, but there was only a receipt for payment of Rs. 1,500. The purchase contract was entered into on September 12, 1962, and the difference in price was paid on September 17, 1962, though the period of delivery is given as September, 1962. A sum of Rs, 1,650 was paid by theassessee as amount payable by him against the cancellation of the contract. Here again no bill as in the first case was prepared.
4. It is seen from the above facts that in the first two cases the procedure adopted is as if there was a notional purchase under the contract of sale and a notional resale to the assessee on the dates of settlement and the difference in prices was received by the purchaser. No actual delivery was effected. In the latter two contracts definite amounts were paid without mentioning about the difference in prices and without showing a notional purchase and a notional resale. It is not clear what was the case of the assessee before the Tribunal in respect of these two latter cases. The Tribunal held in respect of these two transactions that it was not shown that ' they were by way of damages and that it was for purposes of the business '. But from the questions referred, it appears that the assessee's contentions before the Tribunal were that : (1) the first two sale contracts in respect of which he paid Rs. 4,600 were not speculative transactions at all; (2) the four transactions did not constitute a speculation business ; and (3) the loss incurred in speculative transactions could be set off against the income from his business unless the speculative transactions themselves constitute or form part of speculation business which will attract the provisions of Section 73 of the Income-tax Act, 1961. The two questions referred involve a consideration of all these points.
5. Section 43(5) of the Income-tax Act, 1961 (hereinafter called ' the Act') defines ' speculative transactions ' as meaning ' 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 actual delivery or transfer of the commodity or scrips '. It was contended by the learned counsel for the assessee that the first two contracts of sale were not speculative transactions. He submitted that difference in prices were paid in the normal course of business as there were fluctuations in the market. The mere fact that the parties settled the contracts by paying the difference of price does not establish that it was the intention of the parties even at the time of contract, not to give delivery of the goods and that unless there was evidence of such an intention at the time of contract the transaction cannot be called a speculative transaction. It was further contended that there was a breach of the contracts when the deliveries of the goods were not effected before the periods of delivery fixed for contracts and that the amounts paid by the assessee were, therefore, damages for breaches of contract and the damages were measured and settled on the difference of prices. The word ' settled ' in Section 43(5) of the Act means, according to the learned counsel, ' settled before breach '. The learned counsel also submitted that under the settlement there was a purchase and resale to the assessee, though notionally, as evidenced by the bills, and thatsatisfies the tests of delivery of the commodities under the settlement. In this connection, he relied on the decision in Commissioner of Income-tax v. Pioneer Trading, Company Private Ltd., : [1968]70ITR347(Cal) . In that case the assessee, a private limited company, entered into a contract with a Japanese company and agreed to supply 52,000 long tons of Indian iron ore. This contract was later varied by mutual consent and the supply had to be effected under the varied contracts in three consignments of 24,000, 8,000 and 20,000 long tons, respectively. The agreed basis of payment was by an irrevocable letter of credit in pound sterling, at a particular rate. In terms of the contract, as varied, the first and second parts of the contract were consigned and the payment received. So far as the third part of the contract was concerned under which the assessee was to consign 20,000 tons, a quantity of 12,010 tons was consigned and accepted by the Japanese company ; the remaining quantity of 7,990 tons could not be supplied because the Japanese company defaulted in performance of their part of the contract and did not open a letter of credit as agreed upon. For breach of the contract, the assessee claimed from the Japanese company the difference of price for the said quantity of 7,990 tons not supplied because of the default on the part of the purchasing company. The claim for difference was ultimately settled and the Japanese company agreed to pay the difference amounting to Rs. 22,627 and actually paid the same in settlement of the claim. This amount was sought to be set off by the assessee against certain unabsorbed speculative loss brought forward from the earlier years on the ground that the amount of difference obtained from the Japanese company was a profit on speculation business. Two contentions were raised before the High Court--one was the expression ' contract settled ' in Section 24(1), Explanation 2, of the Indian Income-tax Act, 1922, corresponding to Section 43(5) of the new Act which means ' contract settled before breach ' and after a breach of contract the money received by the assessee was in settlement of the amount of damages suffered by the assessee by reason of the breach of contract and that will not come within Explanation 2 to Section 24(1); the second ground was that the settlement of a part of the contract would not fall within Explanation 2 to Section 24(1). On the first argument, the learned judges of the Calcutta High Court held :
' ......part of the contract was not performed. The contract wasalso not dispensed with or remitted within the meaning of Section 63 of theIndian Contract Act. From the facts hereinbefore mentioned, it appearsthat the assessee proceeded on the footing of a breach of contract bythe purchasing Japanese company, namely, its default in opening aletter of credit and on that footing claimed damages, measured on thedifference of price on the date of the breach. As we read Explanation 2 to Section 24(1), we do not feel that a claim based on breach of contract comes within the meaning of contract settled as used in Explanation 2. In our reading, the expression ' contract settled ' means ' contract settled before breach '. After breach of contract, the cause of action is no longer based on the contract itself but on its breach. Since the money which the assessee received in the instant case, in our reading of the facts, was the amount of damages suffered by it by reason of breach of the contract, the nature of the transaction was not speculative transaction as defined in Explanation 2, The nature of the contract, which we have recited hereinbefore, gives no implication that the contract was of speculative nature. If that contract had been settled we do not know whether it would have fallen within the meaning of Explanation 2. We have held that the contract was not settled but damages for breach of the contract were realised. That makes all the difference and the transaction cannot be characterised as speculative transaction within the meaning of Explanation 2.'
6. In view of this finding, the learned judges considered that it was not necessary for them to express any opinion on the contention that settlement of a part of the contract would not fall within the Explanation.
7. With great respect to the learned judges, we are of the view that this is a narrow construction of the word ' settled ' in the definition of the expression 'speculative transactions'. It is true that on breach of a contract the cause of action for the claim of damages is based on its breach. But that, in our opinion, does not mean that when the claim is settled, the settlement is not of the contract itself but of the breach alone. The rights and liabilities of the parties flow from the contract which was broken. The emphasis in Section 43(5) of the Act is on the words ' periodically or ultimately settled otherwise than by actual delivery '. The word ' settled ' is used in this part of the section without any restriction as to whether it was before breach or after breach. Whether the settlement was before or after breach of the contract is immaterial if actual delivery of the good is absent. In fact, even in cases where the contract is highly speculative and amounts to a wagering contract, if it was settled by actual delivery, for the purpose of Section 43(5), it is not a speculative transaction. Thus the section dispenses with all other formalities except that there must be actual delivery or transfer of the commodity when the contract is settled.
8. In Hoosen Kasam Dada (India) Ltd. v. Commissioner of Income-tax, [1964] 52 I.T.R. 171 which is also a decision of the Calcutta High Court, the facts were these. The assessee in the usual course of business had entered into forward contracts in gunnies for the purpose of export, through brokers of the Indian Jute Mills Association. In view of certain difficulties caused by a notification of the Controller of Exports in regard to export of jute goods to Pakistan, the assessee-company entered into a number of settlement contracts. The result of such settlement contracts was that the assessee suffered a loss and the total loss amounted to Rs. 6,39,897. The Income-tax Officer allowed such losses as were referable to contracts where delivery was given, but he had refused to allow losses where they were the subject-matter of settlement contracts and no delivery was given. The case arose under the Indian Income-tax Act, 1922, and the court held on the scope of Explanation 2 to Section 24(1) :
' It has been provided that, subject to three exceptions, a speculative transaction means a transaction in which there is a contract for purchase and sale of commodities, where there is a periodical or ultimate settlement otherwise than by the actual delivery or transfer of the commodity. Simply put, it means that where there is no delivery under a settlement contract, it is a speculative transaction. On the other hand, however speculative the transaction might be, if there is delivery, it cannot be considered as a speculative transaction for the purposes of Section 24.'
9. This decision of the same court was not referred to in Commissioner of Income-tax v. Pioneer Trading Company (Privte) Ltd. The decision in Hoosen Kasam Dada (India) Ltd. v. Commissioner of Income-tax was followed in Abdul Gani Haji Habib v. Commissioner of Income-tax, : [1969]72ITR6(Cal) . It was held therein that the transactions which are settled by payment of difference must be treated as speculative transactions even though the assessee did not intend, when the contracts were entered into, to settle them by payment of difference. The intention of the parties is immaterial for the purpose of finding out whether the transaction was a speculative transaction within the meaning of Explanation 2 to Section 24(1) of the Indian Income-tax Act, 1922. The Andhra Pradesh High Court also took the same view in Juvvi Subbaramaiah and Co. v. Commissioner of Income-tax. The loss in that case which the assessee claimed to set off arose in respect of two contracts for future delivery of turmeric and they resulted in payment of the difference in price. It was held :
' The words ' ultimately settled otherwise than by the actual delivery or transfer of the commodity ' are very significant, and must be given effect to. They can only mean, by implication, that even if at the outset the parties intended the performance or to claim the difference in price, if ultimately the contract is settled otherwise than by actual delivery or transfer of the commodity, it is a speculative transaction. The reason for the Explanation is quite obvious, as the legislature is aware that, under the general law, it will not be a speculative transaction. This definition, to our minds, is exhaustive, and does not permit the importing into income-tax law the general notions of wagering or speculative transactions in the domain of contract law. The effect of this Explanation is thus two-fold : (i) where actual delivery of goods, or transfer of commodity or scrips takes place, the transaction is not a speculative transaction, however highly speculative it may be in fact; and (ii) even if the original intention was not to gamble in differences, if in fact the contract is settled by payment of the differences, it is a speculative transaction under the Act. '
10. In all these cases, though the settlement seems to have been effected prior to the breach of the contract, the decisions themselves did not lay emphasis on that fact but the whole thing is decided only with reference to the fact whether there was an actual delivery of the commodity under the settlement or whether there was no such delivery. If there was no delivery of the commodity under the settlement then it was a speculative transaction.
11. We are also of the view that the delivery contemplated in Section 43(5) of the Act is a ' real ' delivery and not a ' notional ' delivery. In fact, the section uses the words ' actual delivery '. Mere making of entries as if there was a purchase and resale without effecting actual delivery of the commodity will not satisfy the test of actual delivery in Section 43(5). A similar view was taken by the Calcutta High Court in D. M. Wadhwana v. Commissioner of Income-tax, : [1966]61ITR154(Cal) .In that case, the assessee, among other contracts, entered into a contract with one Kedar Nath Hariram firm to sell to the said firm 500 bales of heavy cess at the rate of Rs. 180 for 100 bags on September 1, 1951, Out of this 250 bales were deliverable on April 30, 1952. On October 31, 1951, the assessee entered into a second contract with the same party agreeing to purchase 500 bales of the same quality of heavy cess at Rs. 216-8-0 per 100 bags; deliveries under the second contract were to be made as under the first contract. On April 15, 1952, Kedar Nath Hariram firm drew up a bill for Rs. 2,40,441-9-0 against the assessee being the value of 250 bales in pursuance of the second contract dated October 10, 1951. On the same date the assessee drew up a bill against Kedar Nath Hariram firm for Rs. 1,99,905-3-3 in pursuance of the first contract being the cost of 250 bales agreed to be sold by the assessee. The books of the assessee showed a debit entry for Rs. 2,40,441-9-0 and a credit entry for Rs. 1,99,905-3-3 in respect of the above transactions on the date April 15, 1952. Similar bills were drawn by the two parties against each other and similar entries in cash book and the bank pass books are found in respect of deliveries of the remaining 250 bags to be effected on April 30, 1952. It was contended on behalf of the assessee thatthere was actual delivery or transfer of the goods inasmuch as the parties actually sent pucca delivery orders of the mills along with their bills. These pucca delivery orders, it was contended, represented the goods and as such the transactions never had any speculative element in them. It was held that the word ' actual' in Explanation 2 to Section 24(1) of the Indian Income-tax Act, 1922, means' real' as opposed to the words 'theoretical or probable ' and that the pucca delivery orders in that case amounted only to a ' notional ' and not a 'real' delivery of goods as contemplated in Explanation 2 to Section 24(1). We are in respectful agreement with this decision.
12. We are, therefore, of the view that the two contracts of sale dated 13th and 16th July, 1962, which were settled by payment of the sum of Rs. 4,600 are speculative transactions.
13. It was next contended that what Section 73 prohibits is the setting off of any loss incurred in a speculation business against the profits and gains of any other business and that if the loss was incurred in a speculation transaction which is not in the nature of a speculation business, such loss could be set off against the profits and gains of the business. This argument of the assessee was met by the Tribunal without giving detailed reasons with a cryptic sentence which reads : ' As regards the submission about the transaction being in the nature of business it is also fully met by the decision in Juvvi Subaramaiah and Co. v. Commissioner of Income-tax.' The learned counsel for the assessee submitted that the Tribunal has not given a finding on the question whether it amounted to a speculation business and that the appeal had not been properly disposed of. Though there is some justification for this argument, we do not agree with the learned counsel that the Tribunal had not considered the question. Further, a point of law raised before the Tribunal but not decided could be raised in a reference to this court provided the question of law referred included that point. The questions which have been referred to us require a consideration of this point on the nature of the transactions and whether the transaction is a speculation business. We, therefore, proceed to consider the questions without remanding the matter for fuller consideration by the Tribunal.
14. Explanation 2 to Section 28 of the Act states that when a business is carried on in speculative transaction, that business is deemed to be distinct and separate from any other business. Section 73 enacts that the losses in speculation business cannot be set off under Section 70 against any income under the head 'business or profession' nor under Section 71 against income under any other head, but it can be set off only against profits, if any, of another speculative business. In the instant case, thefour transactions were entered into as part of the general business of the assessee. The assessee is a dealer in yarn and during the assessment year he had entered into a number of forward contracts of which these four transactions were speculative. The transactions were not isolated transactions in the sense that they are totally unconnected with his business as a dealer in yarn. These speculative transactions, which form part of the business, by a fiction of law under Explanation 2 to Section 28 of the Act. are deemed to be distinct and separate from any other business. The losses incurred in respect of these transactions therefore constituted a loss in a speculation business. This view of ours also finds support in Juvvi Subbaramaiah and Co, v. Commissioner of Income-tax, Hoosen Kasam Dada (India) Ltd. v. Commissioner of Income-tax and Abdul Gani Haji Habib v. Commissioner of Income-tax. In Juvvi Subbaramaiah and Co. v. Commissioner of Income-tax, the Andhra Pradesh High Court considered a similar question and held :
' As already stated, the two transactions in question are only a part of a larger activity of the assessee, and the other transactions were found to be admittedly in the nature of tejimandi contracts, prohibited outright by Section 19 of the Forward Contracts (Regulation) Act, 1952. It cannot, therefore, be contended on behalf of the assessee that the two forward contracts are only isolated transactions, which do not constitute ' business '.
That apart, according to Section 2(42) of the Act, 'business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The Supreme Court in Raja J. Rameshwara Rao v. Commissioner of Income-tax, : [1961]42ITR179(SC) laid down that even a single venture may be regarded as 'in the nature of trade or business '.'
15. We have already noticed the facts in Hoosen Kasam Dada (India) Ltd. v. Commissioner of Income-tax. It is seen from the facts stated therein that the assessee had entered into a number of forward contracts some of which were settled by delivery of the goods and some were settled by payment of the difference in price without delivery of the goods. The Income-tax Officer allowed such losses as were referable to contracts where delivery was given but refused to allow losses where no delivery was given. It was argued that the speculative transactions of the assessee did not constitute speculation business. In meeting this contention it was held at page 179 :
'I now come to another point of view put for ward by Mr. Mitra. According to him, we must not lose sight of the fact that in the proviso tosection 24 (Indian Income-tax Act, 1922) not only the words ' speculative transactions ' are mentioned but they are followed by the words ' which are in the nature of a business '. He argues that if you have a business including a number of transactions of the same nature, then if you are going to single out certain specified transactions as speculative transactions they must form a distinct or separate group. He argues that, in the present case, the facts are otherwise. In other words, in a series of transactions in gunnies, some transactions were non-speculative and others were speculative. Under such circumstances, the proviso does not apply. I must admit that I am unable to understand the logic of this argument. Perhaps, it is putting forward the views of Messrs. Kanga and Palkhivala in another form. I must point out that if that was so, the introduction of Explanation 1 would have been utterly superfluous. Explanation 1 says that where speculative transactions carried on are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business. In considering the proviso, we are considering the profits and gains of a business. Other headings do not. enter into the picture. But the proviso does not contemplate that the speculative transactions should form a separate unit. On the other hand, it has been stated in Explanation I that they would be ' deemed ' to be a distinct and separate unit. I cannot see any difficulty in separating 1he two kinds of businesses, viz., speculative and non-speculative, and considering them as separate groups.'
16. This decision was followed in Abdul Gani Haji Habib v. Commissioner of Income-tax. The result is, that we are unable to accept the contention of the learned counsel for the assessee that the losses incurred in respect of these transactions did not constitute losses in speculation business.
17. In view of our finding that the losses were incurred in a speculation business, the prohibition contained in Section 73 operates. The question whether the losses incurred in a speculative transaction which is not in the nature of a business could be set off against the income from the other business of the assessee, therefore, does not arise. In the result, we answer the two questions in the affirmative and against the assessee. The respondent will be entitled to his costs. Counsel's fee Rs. 250.