Speculative transaction treatment depends on settlement without delivery, not original intention; hedging exception applies only in limited business cases.

A contract settled otherwise than by actual delivery is treated as a speculative transaction under Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, regardless of the parties' original intention. The note explains that the decisive factor is the mode of settlement, not contractual purpose under general contract law. It further states that the hedging exception applies only to contracts entered into in the course of manufacturing or merchanting business to guard against future price fluctuations in respect of actual delivery contracts, and those conditions were not shown on the facts. The resulting loss is therefore confined to the restrictive set-off scheme for speculative transactions and is not an ordinary trading loss.

---

---

Issues: Whether the assessee's loss from the two forward contracts was a speculative loss under Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, and, if so, whether it could nevertheless be treated as a trading loss or saved as a hedging transaction so as to be set off against business profits.

Analysis: Explanation 2 to section 24(1) defines a speculative transaction by the mode of settlement, namely, a contract for purchase and sale of a commodity settled otherwise than by actual delivery or transfer. On that language, the decisive factor is not the original intention of the parties under the general law of contracts, but whether the contract was in fact finally settled without delivery. The Court also held that the proviso excluding hedging contracts applies only where the contract is entered into in the course of manufacturing or merchanting business to guard against loss through future price fluctuations in respect of actual delivery contracts, and that those conditions were not established on the facts.

Conclusion: The transactions were speculative transactions and not protected hedging contracts; the loss could not be treated as an ordinary trading loss under section 10(1), and its treatment was governed by the restrictive scheme of section 24(1).

Ratio Decidendi: Under Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, a contract settled otherwise than by actual delivery is a speculative transaction irrespective of the parties' original intention, and such loss can be adjusted only within the limits prescribed for speculative transactions.

---