2016 (9) TMI 1030 - AT - Income Tax

Tribunal upholds decision on 'Speculative Loss' disallowance under Income Tax Act

The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to delete the disallowance of Rs. 2,89,15,250/- as a 'Speculative Loss' by the ... Disallowance of “Speculative Loss” - Held that:- CIT(A) has rightly held that the payment made by the assessee for breach of contract after the expiry date is a normal loss incidental to the business of the assessee and not a speculation loss within the meaning of section 43(5) of the Income Tax Act, 1961. Hence, we uphold the well reasoned order passed by the Ld. CIT(A) on the issue in dispute and accordingly, dismiss the Appeal filed by the Revenue. Issues Involved:1. Deletion of disallowance of Rs. 2,89,15,250/- held as 'Speculative Loss' by the Assessing Officer (AO).Issue-wise Detailed Analysis:1. Deletion of disallowance of Rs. 2,89,15,250/- held as 'Speculative Loss' by the AO:The Revenue filed an appeal against the order dated 10/2/2012 by the Commissioner of Income Tax (Appeals)-XVI, Delhi (CIT(A)), which deleted the disallowance of Rs. 2,89,15,250/- held as 'Speculative Loss' by the AO. The return of income for the assessment year 2008-09 was filed electronically on 27.09.2008, showing a total income of Rs. 45,20,858/-. The return was processed under section 143(1) of the Income Tax Act, 1961 on 10.12.2009, and the case was selected for scrutiny assessment with notices issued under sections 143(2) and 142(1) of the Act.The AO observed that the damages paid by the assessee for cancellation of a contract without taking delivery of goods constituted a speculative transaction. Consequently, the AO held that the speculative loss of Rs. 2,89,15,250/- could only be adjusted against speculative income and added this amount to the assessee's income, assessing it at Rs. 3,34,36,108/-.The assessee appealed to the CIT(A), who deleted the addition, concluding that the loss was a normal business loss and not a speculative loss under section 43(5) of the Act. The CIT(A) based this decision on the fact that the damages were paid due to a breach of contract, not a speculative transaction. The CIT(A) elaborated on the issue, considering submissions and various court decisions, including CIT vs. Bhagwan Dass Rameshwar Dayal (Delhi High Court), CIT vs. Pioneer Trading Company (P) Ltd. (Calcutta High Court), CIT vs. Indian Commercial Co. (P) Ltd. (Bombay High Court), and CIT vs. Andhra Oil & Fertilisers Co. (Andhra Pradesh High Court), which supported the view that damages paid for breach of contract are not speculative losses.During the hearing before the Tribunal, the Departmental Representative (DR) relied on the AO's order, while the Assessee's Counsel cited the CIT(A)'s order and the ITAT's decision in ACIT vs. Ramji Lal & Sons (HUF), where a similar issue was decided in favor of the assessee.The Tribunal, after hearing both parties and reviewing the records, upheld the CIT(A)'s order. The Tribunal noted that the CIT(A) had thoroughly discussed the issue and relied on various judicial decisions. The Tribunal reiterated that the loss incurred due to the breach of contract was a normal business loss and not a speculative loss. The Tribunal also referenced the ITAT's decision in ACIT vs. Ramji Lal & Sons (HUF), which supported this view.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming that the payment made by the assessee for breach of contract was a normal business loss and not a speculative loss under section 43(5) of the Income Tax Act, 1961. The Tribunal's decision was pronounced in the Open Court on 09/08/2016.