Deemed business income from remission of speculative trading liability retains speculative character and permits set-off of loss.

A deemed benefit on remission of a trading liability under section 10(2A) of the Income-tax Act, 1922 retains the character of the underlying liability when the liability arose from speculative transactions. The legal fiction treating the remission as profits and gains of business must be carried to its logical conclusion, so the notional income is attributable to the same speculative business from which the liability originated. The resulting amount was therefore treated as speculative income and could be set off against speculation loss, with the outcome in favour of the assessee.

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Issues: Whether an amount deemed to be profits and gains of business on remission of a speculative trading liability under section 10(2A) of the Income-tax Act, 1922 is to be treated as income arising from speculative business.

Analysis: Section 10(2A) creates a legal fiction that any benefit obtained by remission or cessation of a trading liability previously allowed as a deduction shall be deemed to be profits and gains of business. Where the liability originally arose from speculative transactions, the source and character of the liability are known, and the deemed income cannot be divorced from that source. The fiction must be carried to its logical conclusion, and the notional business profit is to be related to the same business from which the liability arose. The earlier categorisation of the liability as speculative supports the conclusion that the remission retains that character when brought to tax as business income.

Conclusion: The amount deemed to be profits and gains under section 10(2A) was income from speculative business and was available for set-off against speculation loss; the answer was in favour of the assessee.

Ratio Decidendi: Where a trading liability originally incurred in speculative business is later remitted and taxed as deemed business income, the deeming fiction carries with it the character of the underlying business and the income is to be treated as speculative income.

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