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Issues: Whether the sum received on settlement of a claim arising from breach of an iron ore supply contract was a speculative receipt within Explanation 2 to section 24(1) of the Income-tax Act, 1922, so as to be set off only against speculative losses.
Analysis: Explanation 2 treats a transaction as speculative only where a contract for purchase or sale of a commodity is settled otherwise than by actual delivery or transfer. A distinction was drawn between a contract settled before breach and a claim arising after breach. Where the buyer defaults, the seller's right is to damages for breach under the contract law and sale of goods law, not a settlement of the contract itself. On the facts, the assessee received the amount as damages for the purchaser's breach in failing to open the agreed letter of credit, and not as the result of settling a subsisting contract otherwise than by delivery.
Conclusion: The amount was not a speculative receipt. It could not be treated as a speculative transaction under Explanation 2 to section 24(1), and the answer was against the assessee.
Ratio Decidendi: A receipt arising from damages for breach of contract is not a speculative receipt unless the underlying contract itself is settled otherwise than by actual delivery or transfer before breach.
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