Contract breach damages, not speculative loss, where import contracts were cancelled and compensation was paid for non-performance.

Cancellation and settlement of import contracts gave rise to a business loss, not a speculative loss under section 43(5), because the assessee failed to honour contractual obligations and paid damages or indemnification for breach. The transactions were not settled through trading without delivery or through futures or options dealings. Where parties settle only the quantum of compensation after breach, the payment is treated as damages for contractual default rather than a speculative settlement. On the facts, no sale had taken place and the amount was paid solely to compensate the other contracting parties, so the loss was allowable as a business loss.

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Issues: Whether the loss arising from cancellation and settlement of import contracts was a speculative loss within the meaning of section 43(5) of the Income-tax Act, 1961, or a business loss by way of damages for breach of contract.

Analysis: The loss was found to have arisen because the assessee could not honour the contractual obligations and had paid damages or indemnification to the other contracting parties on cancellation of the contracts. The record showed that the transactions were not settled by trading in goods without delivery or by any futures or option dealing. Where a contract is breached and the parties thereafter settle the quantum of damages, the payment is compensation for breach and not a speculative settlement. On the facts, the sale itself had not taken place and the payment was made only to compensate the other side for the contractual breach.

Conclusion: The loss was not speculative in nature and was allowable as a business loss arising from damages for breach of contract.

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