Law:

Section:

Explanation 2 to section 24(1) of the Indian Income-tax Act, 1922 [Corresponding to section 43(5) of the income-tax act, 1961] - Speculative transactions - Assessee carrying on import and export business in jute entered into foreign exchange contract for 1 lakh pounds but could utilise the same for only 55,000 pounds - Paid Rs. 80,491 as damages representing exchange difference and interest - Whether tribunal right in holding that impugned sum was not speculation loss and was incidental to carrying on assessee's business - Held, on facts, yes Section 10(2)(xv) of the Indian Income-tax Act, 1922 [Corresponding to section 37(1) of the income-tax act, 1961] - Business expenditure - Assessee, carrying on import and export business, entered into a foreign exchange contract - Assessee maintained its books on mercantile system - Due to its under utilisation, claim for damages of Rs. 80,491 (representing exchange difference and interest) was made against assessee in 1952 which was disputed - Assessee ultimately paid said damages after settlement in year of account - Whether impugned sum allowable in year of account - Held, yes Facts The assessee was a firm consisting of several partners. It used to carry on business of export and import of jute goods and maintained its books on mercantile system. It earned income under various heads. In the course of normal business, it used to enter into forward contracts of foreign exchange to cover up loss and difference of foreign exchange valuation. In one such contract of 1 lakh pounds entered into in 1950 with a bank, the assessee could utilise foreign exchange contracts for only 55,000 pounds. Since the balance remained unutilised, the assessee was required to pay the exchange difference (Rs. 4,239) and the interest (Rs. 76,252) aggregating Rs. 80,491. Such payment was determined on 17-12-1952 but the assessee disputed the payment and ultimately accepted the liability in 1955 and its account was also debited by the bank on 3-6-1955. The assessee claimed deduction of this sum on revenue account for the assessment year 1956-57, but the same was disallowed by the ITO, holding (i) that the contracts were of a speculative nature and…

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