TaxTMI 
TaxTMI 
2014 (6) TMI 225
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.... production of vegetable ghee and oil and simultaneously also manufacturing its own commodities out of tin plates. A return was submitted by the respondent-assessee declaring a loss of Rs. 44,05,060 on August 31, 1974, which was revised on October 30, 1976, declaring a loss of Rs. 44,05,888. Notices were issued and during the course of hearing the Assessing Officer required details on various issues on which the return was submitted. Facts and decision on question No. 1 In so far as the question of disallowance of Rs. 4,250 out of office expenses is concerned it was claimed that it was spent on crockery, tea, coffee, dry fruits, snacks, cold drink, pan, cigarettes, etc., and it was essentially a business expenditure spent for business expediency and customary in nature for the guests and customers coming at the factory as also office of the respondent-assessee and thus allowable. However, the Assessing Officer was of the view that it is in the nature of entertainment and thus disallowed the amount holding it by way of entertainment. In the first appeal the learned Appellate Assistant Commissioner also did not accept the contention of the respondent-assessee, however, the Tribunal....
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....essing Officer was not satisfied with the explanation offered and, according to the Assessing Officer, the said transaction was purely speculative in nature and he held that wherever the actual delivery of goods was not there and all these contracts are settled otherwise than by actual delivery are speculative transactions and, accordingly, held it as speculation profit which was to be separately considered. The Assessing Officer also relied upon the judgments of the Allahabad High Court in the case of CIT v. Ratan Lal Mohanlal [1972] 86 ITR 200 (All) ; D. M. Wadhwana v. CIT [1966] 61 ITR 154 (Cal) and the Supreme Court decision in the case of Davenport and Co. P. Ltd. v. CIT [1975] 100 ITR 715 (SC). The matter was carried in appeal before the Appellate Assistant Commissioner who also agreed with the finding of the Assessing Officer and held the said amount of Rs. 1,67,189 as speculative in nature. The matter was further agitated before the Income-tax Appellate Tribunal wherein it was submitted that the respondent-assessee had received damages in the normal course of business and that the breach was committed by the supplier for the reasons unknown to the respondent-assessee and t....
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....ts of the present case are more nearer to the judgment rendered by this court in the case of CIT v. Dina Lal Gupta (supra) and, accordingly, urged that the Income-tax Appellate Tribunal erred in holding the transaction as in the nature of business income rather than speculative in nature when it was clearly proved by the conduct of the assessee itself that delivery was not effected and when delivery is not effected and the transaction is settled otherwise than by delivery then it is speculative in nature as defined under section 43(5) of the Income-tax Act. We have heard counsel for the petitioner-Revenue and have also gone through the impugned order as well as the judgments cited by counsel for the petitioner-Revenue and the judgments referred to by the Income-tax Appellate Tribunal and have also gone through later judgments of the hon'ble apex court and other courts which we shall refer to hereinafter. However, it would be fruitful to refer to section 43(5) of the Income-tax Act, 1961, which provides as under : " 'speculative transaction', means a transaction in which a contract for the purchase or sale of any commodity, inducing stocks and shares, is periodically o....
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....ment of the damages arising from the breach of the transaction does not result from the contract but from the breach. A contract can be settled during the subsistence of the contract and if a breach occurred by the non-performance of the contract or by the actual delivery, a party to the contract settled the amount of damages by paying the difference between the contract price and the market price on the due date of performance that would not amount in law to settling a contract. What has been settled is settling the damages consequent to the breach. The hon'ble apex court in the case of CIT v. Shantilal P. Ltd. [1983] 144 ITR 57 (SC) after referring to section 43(5) of the Income-tax Act, observed as under (page 60) : "Is a contract for purchase or sale of any commodity settled when no actual delivery or transfer of the commodity is effected and instead, compensation is awarded under an arbitration award as damages for breach of the contract ? A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract the promisee, in terms of section 63 of....
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.... to the decision of this court in Davenport and Co. P. Ltd. v. CIT [1975] 100 ITR 715 (SC) but this point did not arise there either." This court in the case of CWT v. Shree Bhagpatia Food Industries [1994] 207 ITR 1045 (Raj) held as under (page 1051) : "It is well-settled that in accordance with the provisions of section 43 if the payment has been made as damages for breach of contract then it could not be considered to be a 'contract settled'. The provisions of section 43(5) contemplated such transaction in which a contract for the purchase or sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity . . . It is not only actual non-delivery of the goods but it must be coupled with settlement of contract in a transaction for which the payment is made. If the payment is by way of damages and not by way of settlement of a contract, then the question of actual delivery or transfer of the goods would be irrelevant . . . in view of the finding recorded by the Tribunal that the payments have been made by way of damages for non-performanc....
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....eculative transaction for the purpose of the Act and it only covers those transactions or contracts which are periodically or ultimately settled otherwise than by actual delivery. As already held in the present case, the contract was not settled but a breach of contract had taken place before the due date for performance. In these circumstances, we are disposed to think that section 43(5) of the Act will not apply and for that matter, it will not be material whether there was actual delivery or not. This conclusion of ours stands fortified from the decisions referred to above." The Bombay High Court, in the case of CIT v. Kamani Tubes Ltd. [1994] 207 ITR 298 (Bom) held that the payment of difference between the agreed price and the market price on the date of refusal was a case of breach of contract and the payments made by the assessee were by way of damages for the breach of the contract and it was not a case of performance of a contract within the meaning of section 33 of the Indian Contract Act and, therefore, the payment could not be termed as speculative transaction within the meaning of section 43(5) of the A....
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....(Bom) held as under (headnote) : "That the two letters exchanged between the assessee-company and HS Ltd. leave no room for doubt that both the parties admittedly proceeded on the footing that the assessee-company had committed breach of the contract and indeed that was the correct position as the assessee had not opened any letter of credit 'forthwith' as required by clause V of the agreement, with the result that HS Ltd. was under no obligation to deliver the goods. Once a contract is broken there can be no cause of action founded on the contract itself which can be said to be capable of settlement. After the breach of contract what can be settled is only the right to damages resulting from the breach itself. In this case as the sum of Rs. 50,000 was paid to HS Ltd. after the breach of the contract by the assessee-company, it must be held that the settlement, as a result of which that payment was made was not a settlement of the contract within the terms of section 43(5), but was a settlement of the assessee-company's ....