Speculative loss from forward contracts settled without delivery is not set off against non-speculative business income absent a valid hedging exception.

Loss arising from forward sale contracts settled otherwise than by actual delivery was treated as speculative under Explanation 2 to section 24(1) of the Income-tax Act, 1922, and therefore could not be set off against non-speculative business income. The assessee's cotton processing activity was recognised as manufacturing, but that did not change the character of the impugned contracts. The statutory hedging exception in clause (a) of the proviso to Explanation 2 did not apply because there was no corresponding contract in raw materials or merchandise entered into to guard against price fluctuations. The proviso operated as a substantive restriction on set-off of speculative losses.

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Issues: Whether the loss arising from forward contracts for sale of cotton lint, settled otherwise than by actual delivery, was a speculative loss not entitled to set-off under the proviso to section 24(1) of the Income-tax Act, 1922.

Analysis: The contracts were ultimately settled without actual delivery and therefore answered the statutory definition of speculative transactions under Explanation 2 to section 24(1). The protective carve-out in clause (a) of the proviso to Explanation 2 did not apply because the assessee had only one set of contracts for sale of the manufactured product and no corresponding contract in respect of raw materials or merchandise entered into to guard against future price fluctuations. The assessee's activity of buying kapas, ginning it into lint, and selling the resulting product was treated as manufacturing, but that did not alter the character of the impugned contracts. The proviso to section 24(1) was applied as a substantive restriction on set-off of speculative business losses against non-speculative business income.

Conclusion: The loss was correctly treated as speculative and was not allowable as a set-off against other business income; the answer was in the affirmative and against the assessee.

Ratio Decidendi: Loss arising from contracts settled otherwise than by actual delivery is speculative, and unless the transaction falls strictly within the statutory hedging exception, such loss cannot be set off against non-speculative business income.

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