1975 (12) TMI 52 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 50,000 paid to Hindustan Steel Ltd. was a speculative transaction u/s 43(5) of the Income-tax Act, 1961.
2. Whether the transaction amounted to "speculation business" within the terms of Explanation 2 to section 28.
3. Applicability of section 73(1) regarding the set-off of losses from speculation business.

Summary of Judgment:

Issue 1: Speculative Transaction u/s 43(5)
The court examined whether the contract between the assessee-company and Hindustan Steel Ltd. could be considered a speculative transaction under section 43(5). The court referred to the case of Commissioner of Income-tax v. Pioneer Trading Co. Pvt. Ltd. [1968] 70 ITR 347 (Cal), which held that a transaction settled after the breach of contract is not speculative. The court preferred this view over the contrary opinion of the Madras High Court in R. Chinnaswami Chettiar v. Commissioner of Income-tax [1974] 96 ITR 353 (Mad). The court concluded that the payment of Rs. 50,000 was a settlement of liability for damages due to breach of contract and not a speculative transaction.

Issue 2: Speculation Business within Explanation 2 to Section 28
The court considered whether the transaction could be classified as "speculation business" under Explanation 2 to section 28. The court cited the Supreme Court's definition of "business" in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 ITR 765 (SC), which requires a systematic or organized course of activity. The court noted that a single transaction does not constitute "speculation business" as per the plural usage of "speculative transactions" in Explanation 2 to section 28. The court found no evidence of a systematic course of activity by the assessee-company to not fulfill contracts and settle them, thus ruling out the transaction as speculation business.

Issue 3: Applicability of Section 73(1)
Given the conclusions on the first two issues, the court found that section 73(1), which restricts the set-off of losses from speculation business, was not applicable. The court held that the transaction did not amount to a speculative transaction or speculation business, thus allowing the deduction of Rs. 50,000 from the other business income of the assessee-company.

Conclusion:
The court answered the question in favor of the assessee, stating that the sum of Rs. 50,000 paid to Hindustan Steel Ltd. cannot be disallowed as a deduction from the other business income of the assessee-company under section 43(5), Explanation 2 to section 28, and section 73(1) of the Income-tax Act, 1961. The Commissioner was ordered to pay the assessee's costs of the reference.