JUDGMENT JUDGMENT judgment of court was delivered by S.C. AGRAWAL J.-In this reference made at instance of Revenue, Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as " Tribunal ") has referred following question for opinion of this court: "Whether, on facts and in circumstances of case, Income- tax Appellate Tribunal was right in law in treating loss of Rs. 13,050 in groundnut oil as trading loss? " This reference relates to assessment year 1975-76. Shri Dina Lal Gupta, respondent herein (hereinafter referred to as " assessee,"), was carrying on business of adat in name of M/s. Dinalal Narendra Kumar, at Jaipur.. assessee entered into agreement on October 26, 1974, with M/s. R.C.S. Vanaspati Industries, Ltd., Jaipur, for sale of 290 quintals of groundnut oil at Rs. 795 per quintal. said goods were to be supplied on any date till November 15, 1974. On November 11, 1974, M/s. R.C.S. Vanaspati Industries Ltd. demanded supply of goods but by that time, prices had gone up and assessee expressed his inability to supply goods and preferred to pay damages at Rs. 45 per quintal and sum of Rs. 13,050 was paid by assessee to M/s. R.C.S. Vanaspati Industries on November 11, 1974. assessee claimed deduction of aforesaid amount of Rs. 13,050 as loss suffered by him in sale of groundnut oil. Income-tax Officer did not allow said deduction on ground that said transaction was of speculative nature and there was no delivery of goods. He added back said amount while computing income of assessee from business. On appeal; Appellate Assistant Commissioner upheld order of Incometax Officer and found that transaction in question was speculative transaction and loss arising therefrom was speculative loss. On further appeal, Tribunal, however, held that loss of Rs. 13,050 claimed by assessee was in nature of trading loss and transaction in question could not be regarded as speculative transaction under section 43(5) of Income-tax Act, 1961 (hereinafter referred to as " 1961 Act "). Feeling aggrieved by aforesaid order of Tribunal, Revenue moved for referring question of law arising out of order of Tribunal for opinion of this court and thereupon Tribunal has referred question mentioned above for opinion of this court. question which has been referred by Tribunal involves determination of question as to whether transaction with regard to sale of 290 quintals of groundnut oil entered into by assessee with M/s. R.C.S. Vanaspati Industries Limited was in nature of speculative transaction. Section 28 of 1961 Act prescribes income which shall be chargeable to income-tax under head " Profits and gains of business or profession ". Explanation 2 to section 28 provides that where speculative transactions carried on by assessee are of such nature as to constitute business, business (hereinafter referred to as " speculation business ") shall be deemed to be distinct and separate from any other business. In sub-section (1) of section 73 of 1961 Act, it is provided that any loss computed in respect of speculation business carried on by assessee shall not be set off except against profits and gains, if any, of another speculation business. expression "speculative transaction " has been defined in sub-section (5) of section 43 of 1961 Act to mean " transaction in which contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips ". There is proviso to said definition but same is not relevant for purpose of present case. In Indian Income-tax Act, 192) (hereinafter referred to as " 1922 Act "), definition of speculative transaction was contained in Explanation 2 to section 24(1) of said Act which provided that speculative transaction means " transaction in which contract for purchase and sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips". In Davenport and Co. P. Ltd. v. CIT [1975] 100 ITR 715, Supreme Court has considered aforesaid definition of speculative transaction contained in Explanation 2 to section 24(1) of 1922 Act, and it has been held that for income-tax purposes, speculative transaction means what definition of expression in Explanation 2 says and whether transaction is speculative in general sense or under Contract Act is not relevant for purpose of said Explanation. In that case, Supreme Court has also held that words " actual delivery " in Explanation 2 mean real as opposed to notional delivery. Although there is some difference in language used in Explanation 2 to section 24(1) of 1922 Act and section 43(5) of 1961 Act, that is not very material and in spite of said difference in language, it can be said that for income-tax purposes speculative transaction means what definition of that expression contained in section 43(5) of 1961 Act says and whether transaction is speculative in general sense or under Contract Act is not relevant for purpose of section 43(5) of 1961 Act and words " actual delivery " in section 43(5) of 1961 Act mean real delivery as opposed to notional delivery. While construing definition of " speculative transaction " in section 43(5) of 1961 Act, it has to be borne in mind that Legislature has used words " transaction in which contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips ". In other words, Legislature speaks of contract being settled. question which needs to be considered is as to when contract can be said to be settled? In CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347, Calcutta High Court while dealing with Explanation 2 to section 24(1) of 1922 Act has drawn distinction between settlement of contract and settlement of claim arising out of breach of contract and has observed as under (P. 352): " As we read Explanation 2 to section 24(1), we do not feel that claim based on breach of contract comes within meaning of contract settled as used in Explanation 2. In our reading, expression'contract settled' means'contract settled before breach'. After breach of contract, cause of action is no longer based on contract itself but on its breach." In that case, there was failure on part of assessee to perform its part of contract as result of which part of goods could not be supplied on account of fault of foreign buyer and claim for breach of contract was subsequently settled by foreign buyer by paying difference of price. It was held that since settlement took place after breach of contract, contract could not be hold to be speculative transaction under Explanation 2 to section 24(1) of 1922 Act. same view was taken by said High Court in Daulatram Rawatmull v. CIT [1970] 78 ITR 503 (Cal), where also assessee was required to pay difference between market rate and contract rate under award of arbitrator and it was held that it was not case of settlement of contract itself but of payment of damages for breach or non-fulfilment or non-performance of contract. To same effect is decision of Karnataka High Court in Bhandari Rajmal Kutshalraj v. CIT [1974] 96 ITR 401. Madras High Court in R. Chinnaswami Chettiar v. CIT [1974] 96 ITR 353, has taken contrary view and has held that where contract is settled, whether before breach of contract or after breach by payment of difference without actual delivery of goods, transaction is covered by section 43(5) of Act and has to be treated as speculative transaction and it is immaterial whether intention of parties at time of commencement of contract was that delivery of goods would be given and whether failure of party to give delivery for reasons beyond its control or for other valid reasons and that what is material is that contract is being settled without actual delivery of goods. In CIT v. Shantilal Private Ltd. [1983] 144 ITR 57, Supreme Court has considered decisions of High Courts of Calcutta, Karnataka and Madras referred to above and has preferred view taken by High Courts of Calcutta and Karnataka and has not approved view taken by Madras High Court in R. Chinnaswami Chettiar v. CIT [1974] 96 ITR 353. In that case, assessee had contracted to sell certain goods and delivery was to be effected on or before November, 1969, i.e., within about 3 months of entering into contract. On account of high rise in prices, assessee was unable to fulfil contract and dispute arose between parties with regard to payment of compensation which was referred to arbitration and on basis of award of arbitrator, consent decree in terms of award was passed by court and assessee claimed said sum paid by it as damages to buyer as business loss. Revenue claimed that said loss was in nature of speculative loss and could not be allowed. Supreme Court did not accept said contention of Revenue. Supreme Court posed following question (p. 60): "Is contract for purchase or sale of any commodity settled when no actual delivery or transfer of commodity is effected, and instead, compensation is awarded under arbitration award as damages for breach of contract?" said question was answered as under (p. 60): " contract can be said to be settled if instead of effecting delivery or transfer of commodity envisaged by contract, promisee, in terms of section 63 of Contract Act, accepts, instead of it, any satisfaction which he thinks fit. It is quite another matter where instead of such acceptance, parties raised dispute and no agreement can be reached for discharge of contract. There is breach of contract and by virtue of section 73 of Contract Act, party suffering by such breach becomes entitled to receive from party who broke contract compensation for any loss or damage caused to him thereby. There is no reason why sense conveyed by law relating to contracts should not be imported into definition of'speculative transaction'. award of damages for breach of contract is not same thing as party to contract accepting satisfaction of contract otherwise than in accordance with original terms thereof. It may be that in general sense, layman would understand that contract must be regarded as settled when damages are paid by way of compensation for its breach. What is really settled by award of such damages and their acceptance by aggrieved party is dispute between parties. law, however, speaks of settlement of contract, and contract is settled when it is either performed or promisee dispenses with or remits, wholly or in part, performance of promise made to him or accepts instead of it any satisfaction which he thinks fit. We are concerned with sense of law, and it is that sense which must prevail in sub-section (5) of section 43. Accordingly, we hold that transaction cannot be described as speculative transaction within meaning of sub- section (5) of section 43, Income-tax Act, 1961, where there is breach of contract and on dispute between parties, damages are awarded as compensation by arbitration award." From aforesaid observations of Supreme Court, it is clear that distinction is to be drawn between settlement of contract and settlement of dispute arising out of breach of contract. contract is said to be settled, if instead of effecting delivery or transfer of commodity envisaged by contract, promisee in terms of section 63 of Contract Act accepts instead of it any satisfaction which he thinks fit. In other words, contract is said to be settled when it is either performed or promisee dispenses with or remits, wholly or in part, performance of promise made to him or accepts instead of it any satisfaction which he thinks fit. In eases where there is breach of contract and by virtue of section 73 of Contract Act, party suffering by such breach becomes entitled to receive from party who has broken contract, compensation for any loss or damage caused to him thereby, settlement of such dispute with regard to damages for breach of contract cannot be regarded as settlement of contract. What is settled by award of damages and acceptance of same by aggrieved party is dispute arising between parties as result of breach of contract. This would mean that contract can be said to be settled before its breach and in cases where there has contract can be said to be settled before its breach and in cases where there has been breach of contract and any settlement takes place between parties to contract with regard to compensation or damages, it cannot be regarded as settlement of contract but it is settlement of dispute with regard to damages on account of breach of contract. For purpose of deciding as to whether particular transaction is speculative transaction under section 43(5) of Act, transaction falling in first category, namely, where there is settlement of contract, can be regarded as speculative transaction and transaction falling in second category, namely, where there is breach of contract and dispute with regard to damages or compensation for breach of contract is settled, it cannot be regarded as speculative transaction. In present case, Tribunal has followed decisions of High Court of Calcutta in CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347 and Daulatram Rawatmull v. CIT [1970] 78 ITR 503 and decision of Karnataka High Court in Bhandari Rajmal Kushalraj v. CIT[1974] 96 ITR 401, referred to above, and has held that phrase " contract settled " in section 43(5) applies to transactions where subsisting contracts are settled without actual delivery and not to cases where contracts are broken before due date for performance. Having given our careful consideration to aforesaid view of Tribunal, we are unable to agree with Tribunal that in present case, there was settlement of contract between assessee and M/s. R.C.S. Vanaspati Industries Ltd. As noticed earlier, goods contracted for could be delivered up to November 15, 1974, and four days before last date for delivery of goods, settlement was arrived at between assessee and buyer, whereunder assessee agreed to pay to buyer compensation for non-delivery of goods at Rs. 45 per quintal, for reason that price of groundnut oil at time when contract was entered into was Rs. 295 per quintal and on November 11, 1974, it had gone up by Rs. 45 per quintal. This shows that before last date for delivery of goods, parties to contract had arrived at settlement whereunder assessee agreed to pay to buyer difference between price of goods on date of contract and price on date on which said settlement was arrived at. On November 11, 1974, date of said settlement, breach of contract had not occurred because last date for delivery was November 15, 1974, and breach of contract could occur only after November 15, 1974, if assessee had failed to deliver goods by that date. It cannot, therefore, be said that on November 11, 1974, breach of contract had taken place and what was settled was dispute with regard to damages for breach of contract. settlement which took place between parties on November 11, 1974, was settlement of contract between assessee and M/s. R.C.S. Vanaspati Industries Ltd. and it falls within ambit of speculative transaction " as defined in section 43(5) of 1961 Act. We find that Bombay High Court in Seksaria Riswan Sugar Factory Ltd. v. CIT[1980] 121 ITR 196, has taken same view. In that case, assessee had entered into transactions for sale of sugar in June, 1952, and goods were to be delivered on August 5, 1952. There was rise in price of sugar and assessee did not deliver goods but paid difference in prices. In that case, question was as to whether said transactions were speculative transactions under Explanation 2 to section 24(1) of 1922 Act. Bombay High Court held that said transactions were speculative transactions and in this connection, it was found that contracts were cancelled by assessee between July 2, 1952, and July 14, 1952, before due date of performance of its contractual obligations, namely, August 5, 1952. learned judges of Bombay High Court have referred to decisions of Calcutta High Court in C.IT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347 and Daulatram Rawatmull v. CIT [1970] 78 ITR 503 and decision of Karnataka High Court in Bhandari Rajmal Kushalraj v. CIT [1974] 96 ITR 401 and have observed that said decisions related to cases involving payment of damages for breach of contract. In present case, we have found that on November 11, 1974, date of settlement, contract that was entered into between assessee and M/s. R.C.S. Vanaspati Industries Ltd. was subsisting and said settlement was in nature of settlement of contract and not settlement of dispute for damages on account of breach of contract. Since this is case of settlement of contract, it is covered by section 43(5) of Act and it must be held to be speculative transaction and loss suffered by assessee in this transaction cannot be held to be trading loss as found by Tribunal. For reasons aforesaid, question referred for opinion of this court is answered in negative, i.e., against assessee and in favour of Revenue, as under: On facts and in circumstances of case, Income-tax Appellate Tribunal was not right in law in treating loss of Rs. 13,050 in groundnut oil as trading loss. said loss was in nature of loss sustained in speculative transaction. There will be no order as to costs. *** COMMISSIONER OF INCOME TAX v. DINALAL GUPTA