Compensation for breach of contract is not speculative transaction loss and remains allowable as business loss.

Compensation paid for breach of contract was held not to be a speculative transaction under section 43(5) of the Income-tax Act, 1961, because speculative settlement requires substitution of performance by acceptance of satisfaction, not mere breach followed by damages. The court applied the Supreme Court's interpretation of "settlement" and noted that damages for breach remain governed by contract law, including the right to compensation under the Indian Contract Act, 1872. On that basis, the resulting loss was treated as a business loss and allowed in favour of the assessee.

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Issues: Whether compensation paid for breach of contract amounts to a speculative transaction within section 43(5) of the Income-tax Act, 1961, and whether the resulting loss is allowable as a business loss.

Analysis: The amount paid by the assessee was on account of compensation for breach of contract. A transaction is not speculative merely because damages are paid for breach; a speculative transaction involves settlement of the contract by acceptance of satisfaction other than performance, whereas breach followed by award of damages is governed by the law of contract, including the right to compensation under the Indian Contract Act, 1872. Applying the Supreme Court ruling on the meaning of settlement under section 43(5), compensation for breach does not fall within the statutory concept of a speculative transaction.

Conclusion: The payment did not constitute a speculative transaction, and the loss was rightly allowed as a business loss, in favour of the assessee.

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