Damages for breach of export contract were not speculative loss and remained allowable business expenditure.

Damages paid under an arbitral award for non-fulfilment of an export contract were treated as business expenditure, not speculative loss. The contract provided for damages on default, and the award arose because the assessee could not perform after failing to obtain export permission. A speculative transaction requires settlement of the contract otherwise than by actual delivery or transfer; a post-breach claim for damages does not meet that test. The payment was therefore not a loss in speculation within Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, and was allowable under section 10.

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Issues: Whether the sum paid under the arbitral award on account of non-fulfilment of an export contract was a speculative loss within Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, or an allowable business expenditure under section 10.

Analysis: The contract contemplated an award and payment of damages on default, and the award was made because the assessee failed to perform the contract due to inability to obtain export permission. On those facts, the payment was not made on a settlement of the contract itself, but as damages for breach or non-performance. A transaction is speculative only where the contract for purchase and sale is settled otherwise than by actual delivery or transfer; a claim for damages arising after breach does not answer that description.

Conclusion: The amount of Rs. 44,226 was not a loss in speculation within Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922, and was allowable as an expenditure under section 10 of that Act.

Ratio Decidendi: A payment made as damages for breach or non-fulfilment of a contract is not a speculative loss unless the contract itself is settled otherwise than by actual delivery or transfer.

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