RAGHUNARAYAN RICE MILLS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question of law referred to this court under section 256(1) of the Indian Income -tax Act, 1961, runs thus :

(2.) THE facts appearing in the statement of the case may be noticed in brief. The assessee is a registered firm carrying on business in rice, paddy and paddy milling. The assessment years are 1958 -59 and 1959 -60. The corresponding accounting years are Diwali year ending on October 21, 1957 and November 10, 1958, respectively. The assessee, during the relevant accounting periods, entered into various agreements for supply of rice to its constituents at Calcutta. During this period, however, the rice could not be despatched due to restrictions imposed by the Government of Orissa on the movement of paddy and rice. The assessee, accordingly, made settlement with the purchasers in Calcutta by paying the differences. In the assessment year 1958 -59 it paid a sum of Rs. 17,060.10; the amount paid in the assessment year 1959 -60 was Rs. 2,203. The Income -tax Officer disallowed the claim for 1958 -59 on the ground that the assessee could recover this loss from the Government of Orissa if the outsider -purchasers were not satisfied. For the year 1959 -60 he disallowed the loss holding that the transaction were of a speculative nature and could be only set of against future profits in speculation. In appeal, the Appellate Assistant Commissioner allowed the claim of the assessee in toto. He held that the liability to pay the aforesaid amounts fell on the assessee and it was a trading loss. The assessee, as a businessman, was bound to pay the dues arising out of his failure to carry out the contract. The expenditure was laid out for the purpose of business and was an allowable expenditure. The department filed an appeal before the Appellate Tribunal, which was of opinion that the amounts were paid by the assessee in settlement of transactions which were of a speculative nature.

(3.) SPECULATIVE transaction has thus been defined in Explanation 2. The definition is exhaustive. A transaction which is speculative under the contract Act may not be speculative under the Income -tax Act, while a transaction which is non -speculative under the Contract Act, may be speculative under the Income -tax Act. The essential feature of this definition is that the transaction must be speculative if the contract under which it takes place is not given effect to by actual delivery or transfer of the commodity or scrips.