Actual delivery test under income-tax law treats forward cotton contracts as speculative transactions when settled without delivery.

Forward cotton contracts settled without actual delivery were treated as speculative transactions under section 43(5) of the Income-tax Act, 1961. The analysis relied on the governing test of real, not notional, delivery and the Supreme Court's approach in Davenport & Co., noting that the use of "or" in the provision broadened the statutory scope. On that reasoning, contracts entered into on both purchase and sale sides, but never performed by delivery, fell within the definition of speculation, so the resulting loss was not allowable for set-off.

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Issues: Whether the loss arising from the assessee's forward cotton transactions was a speculative loss falling within section 43(5) of the Income-tax Act, 1961 and therefore not allowable for set-off.

Analysis: The transactions were forward dealings in which the assessee entered into contracts both on the purchase side and the sale side, but no actual delivery was taken as purchaser or effected as seller. The earlier interpretation under the Indian Income-tax Act, 1922, based on the requirement of a contract for purchase and sale, was considered in the light of the later Supreme Court ruling in Davenport & Co., which held that speculative character depends on the absence of actual delivery and that real, as opposed to notional, delivery is the governing test. On that footing, the substitution of "or" in section 43(5) was treated as enlarging the provision, and the assessee's transactions were held to fall within the statutory definition of speculation.

Conclusion: The transactions were speculative transactions under section 43(5), and the disallowance of the loss was ; the finding was against the assessee and in favour of the Revenue.

Ratio Decidendi: A transaction is speculative for income-tax purposes where a contract for purchase or sale is settled otherwise than by actual delivery, and absence of real delivery brings the loss within section 43(5).

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