1980 (9) TMI 69 - HC - Income Tax

Foreign-exchange speculation loss deductible in year settled; s.56 Contract Act argument on implied term rejected

HC upheld the Tribunal and deleted the disallowance, holding the foreign-exchange speculation loss deductible in the assessment year when the claim was ... Nature of the transaction - speculation loss - forward contracts in foreign exchange - incidental part of the business operation for the export and import of the goods - Whether, the assessee maintained its books on the mercantile system, the Tribunal was right in holding that the liability accrued and became ascertained only in 1955 when the claim was settled and the assessee's account Was debited by the bank and in that view deleting the disallowance for the assessment year 1956-57 - HELD THAT:- Learned advocate for the revenue drew our attention to s. 56 of the Contract Act and submitted in aid of his submission that there was au implied term that the assessee might not be able to perform the full extent of the amount covered by the foreign exchange contract. Here, in this case, the contract was for pounds 1,00,000 and what the assessee paid in fulfilment of that obligation which was an implied term at the time of entering into the contract did not amount to a breach of the contract. He referred us to s. 56 of the Contract Act and the decision of the Supreme Court in the case of Naihati Jute Mills Ltd. v. Khyaliram Jaganath [1967 (10) TMI 66 - SUPREME COURT], where undoubtedly the question of liquidated damages arose' in the case of non-performance of a breach of contract. Furthermore, in view of the clear finding of the AAC and the Tribunal, we are of the opinion that question No. 1 must be answered in the affirmative and in favour of the assessee. It is true as was noted by the Tribunal that the claim arose in 1952 and the same amount which has been claimed had been paid by the assessee. But the claim was disputed and the contention was that the moment the damages arose, the principle of accrual of claim in the mercantile system of accounting must be applied appropriately. The liability to pay this claim was disputed. This could be adjusted either by settlement or by adjudication. It was done by settlement in the year of account. Therefore though the claim related to the breach alleged to have occurred in the year 1952, the settlement of liability was done by agreement between the parties in the year of account. Therefore, in our opinion, this lose was referable to the instant year. Therefore, we must also answer the question No. 2 in the affirmative and in favour of the assessee. Issues Involved:1. Whether the loss of Rs. 80,491 was a speculation loss or incidental to the assessee's business and allowable as revenue expenditure.2. Whether the liability for Rs. 80,491 accrued and became ascertained only in 1955 when the claim was settled, given the assessee maintained its books on the mercantile system.Summary:Issue 1: Speculation Loss vs. Business ExpenditureThe Tribunal held that the loss of Rs. 80,491 was not a speculation loss but incidental to the assessee's business and allowable as revenue expenditure. The Income Tax Officer (ITO) had disallowed the claim, stating that the contracts were speculative and did not relate to the accounting year. The Appellate Assistant Commissioner (AAC) found that the forward contracts in foreign exchange were a normal part of the assessee's export and import business. The AAC concluded that the loss was not speculative as it did not involve the purchase or sale of any commodity or stock. The Tribunal upheld this view, noting that the loss was incidental to the business and allowable as a deduction. The High Court agreed, stating that the loss was referable to the business carried on by the assessee and was not speculative under s. 24, Expln. 2 of the Indian I.T. Act, 1922.Issue 2: Accrual of LiabilityThe Tribunal held that the liability for Rs. 80,491 accrued and became ascertained only in 1955 when the claim was settled and the assessee's account was debited by the bank. The AAC noted that the liability arose on December 17, 1952, but was disputed and ultimately settled in the relevant accounting year. The High Court agreed, stating that the liability to pay damages under dispute could not be said to have arisen until it was adjudicated or settled. Therefore, the loss was referable to the year of settlement, 1955, and not the year when the breach occurred.Conclusion:Both questions were answered in the affirmative and in favor of the assessee. The loss was deemed incidental to the business and allowable as revenue expenditure, and the liability was considered to have accrued in the year of settlement. Each party was ordered to bear its own costs.