Rajasthan High Court - Jaipur
Commissioner Of Income-Tax vs Ganesh Das Ram Swaroop Kakani on 21 August, 1989
Equivalent citations: [1990]181ITR93(RAJ)
Author: S.C. Agrawal
Bench: S.C. Agrawal
JUDGMENT S.C. Agrawal, J.
1. In this reference made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), under Section 256 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the following question of law has been referred for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the loss of Rs. 9,567 claimed by the assessee was a business loss and should be allowed as a business expenditure ?"
2. This reference relates to the assessment year 1973-74.
3. Ganesh Das Ram Swaroop Kakani (hereinafter referred to as "the assessee") is a proprietorship firm of which Shri Ram Swaroop is the proprietor. The assessee had entered into a contract on October 15, 1971, with Mewar Textile Mills Ltd., Bhilwara, for purchase of 152 bales of cloth. The said goods were to be supplied by December 21, 1971. The seller supplied one bale out of the 152 bales for which the contract was entered into and after receiving the said one bale, the assessee informed the seller that the rest of the bales of cloth should not be supplied and, therefore, the seller did not supply the remaining 151 bales of cloth to the assessee. The seller debited the account of the assessee with a sum of Rs. 9,567.36. The assessee claimed deduction of the said amount of Rs. 9,567.36 as business expenditure. The Income-tax Officer, however, disallowed the said claim of the -assessee and held that the transaction was in the nature of a speculative transaction because the contract was settled without giving actual delivery of the goods. The said order of the Income-tax Officer was affirmed, in appeal, by the Appellate Assistant Commissioner who agreed with the Income-tax Officer that the transaction was a speculative transaction and was covered by Section 43 of the Act because the settlement of the contract was arrived at without actual delivery. The Tribunal, on further appeal, has held that the assessee had contracted to purchase 152 bales of cloth out of which delivery of only one bale was taken by the assessee and for the remaining bales of cloth the assessee wrote to the other party not to send the contracted goods and that this position was taken by the assessee long before the date of delivery. According to the Tribunal, the assessee had broken the contract long before the date of delivery and after the breach of the contract, what can be settled is only the right to damages resulting from the breach itself and in the present case, as a result of the breach of the contract, the assessee had to pay damages to the other party to the extent of Rs. 9,567, and the payment in question was not a settlement of the contract within the terms of Section 43 of the Act but it was a settlement of the assessee's liability for damages for breach of that contract. The Tribunal, therefore, held that the contract itself could not, by reason of the settlement, be said to be a speculative transaction and the loss of Rs. 9,567 was not a speculative loss but was a business loss and it should be allowed as business expenditure. Feeling aggrieved by the said decision of the Tribunal, the Revenue moved an application under Section 256 of the Act before the Tribunal for referring the question of law arising out of the decision of the Tribunal for the opinion of this court. On the said application, the Tribunal has made this reference referring the question mentioned above for the opinion of this court.
4. We have heard Shri V.K. Singhal, learned counsel for the Revenue. The assessee has not appeared even though he has been duly served.
5. As noticed earlier, the question which has been referred to this court involves the interpretation of the provisions of Section 43 of the Act which define the expression "speculative transaction" to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scraps. By the proviso to Section 43, certain categories of contracts have been excluded from the ambit of the main part and it has been provided that the said contracts shall not be deemed to be speculative transactions. The proviso is not relevant for the purpose of the present case and here we are concerned only with the main part of Section 43(5) of the Act. The aforesaid provision in Clause (5) of Section 43 of the Act is in pari materia with the provisions contained in Explanation 2 to Sub-section (1) of Section 24 of the Indian Income-tax Act, 1922. The said provision came up for consideration before the Supreme Court in Davenport and Co. P. Ltd. v. CIT [1975] 100 ITR 715. In that case, the Supreme Court held that "actual delivery" means real as opposed to notional delivery. The Supreme Court has observed that, for income-tax purposes, a speculative transaction means what the definition of that expression in Explanation 2 says and that whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of the Explanation.
6. In CIT v. Shantilal P. Ltd. [1983] 144 ITR 57, the Supreme Court, while construing the provisions of Sub-section (5) of Section 43 of the Act, has emphasised that Sub-section (5) of Section 43 speaks of a settlement of the contract and it has been pointed out that there is a distinction between settlement of a contract and settlement of a claim for damages for breach of the contract. The Supreme Court has observed that (at page 60) 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 the Contract Act, accepts, instead of it, any satisfaction which he thinks fit, whereas in a case where, instead of such acceptance, the parties raise a dispute and no agreement can be reached for a discharge of the contract, there is a breach of the contract and by virtue of Section 73 of the Contract Act, the party suffering by such breach becomes entitled to receive from the party who broke the contract compensation for any loss or damage caused to him thereby. The Supreme Court has laid down that the award of damages for the breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof.
7. The Supreme Court has further observed as under (at page 60) :
"It may be that, in a general sense, the layman would understand that the contract must be regarded as settled when damages are paid by way of compensation for its breach. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. The law, however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promisee dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts, instead of it any satisfaction which he thinks fit."
8. In CIT v. Dina Lal Gupta [1988] 170 ITR 583, this court has considered the aforesaid decision of the Supreme Court and has observed as under (at page 589):
"From the aforesaid observations of the Supreme Court, it is clear that a distinction is to be drawn between a settlement of a contract and the settlement of a dispute arising out of the breach of a contract. A contract is said to be settled if, instead of effecting delivery or transfer of the commodity envisaged by the contract, the promisee, in terms of Section 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit In other words, the contract is said to be settled when it is either performed or the promisee dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts instead of it any satisfaction which he thinks fit. In cases where there is a breach of the contract and by virtue of Section 73 of the Contract Act, the party suffering by such breach becomes entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, the settlement of such a dispute with regard to damages for the breach of contract cannot be regarded as a settlement of the contract. What is settled by the award of damages and the acceptance of the same by the aggrieved party is the dispute arising between the parties as a result of the breach of the contract. This would mean that a contract can be said to be settled before its breach and in cases where there has been a breach of the contract and any settlement takes place between the parties to the contract with regard to compensation or damages, it cannot be regarded as a settlement of the contract but it is a settlement of the dispute with regard to damages on account of a breach of the contract. For the purpose of deciding as to whether a particular transaction is a speculative transaction under Section 43(5) of the Act, the transaction falling in the first category, namely, where there is a settlement of the contract, can be regarded as a speculative transaction and a transaction falling in the second category, namely, where there is a breach of the contract and the dispute with regard to damages or compensation for the breach of the contract is settled, it cannot be regarded as a speculative transaction."
9. In that case, the assessee had entered into a contract for sale of 290 quintals of groundnut oil and the goods were to be supplied by the asses-see on any date till November 15, 1974. On November 11, 1974, the purchaser demanded the supply of the goods but since the prices had gone up, the assessee expressed his inability to supply the goods and preferred to pay damages at Rs. 45 per quintal. The assessee claimed deduction of the aforesaid payment as loss suffered by him in the sale of groundnut oil. This court held that the said deduction could not be allowed since the said transaction was in the nature of a speculative transaction.
10. In CIT v. Maya Ram Jia Lal [1986] 162 ITR 520 (P & H), the asses-see had entered into contracts with various parties for the supply of certain goods but the assessee failed to fulfil those contracts and had paid compensation to the contracting parties and the assessee claimed the said amount of compensation paid by him as business loss. The Tribunal had allowed the said claim of the assessee on the view that since the settlement was made long after the delivery as contemplated in the contracts, the claim of the assessee was based on breach of contract and did not come within the meaning of settlement of contract as used in Section 43(5) of the Act. The High Court of Punjab and Haryana disagreed with the said view and held that such claim of the assessee could not be allowed because the contracts were in the nature of speculative transactions. The High Court did not agree with the finding recorded by the Tribunal that the compensation was for breach of contract and, in this regard, the High Court has observed that there was no evidence to show whether the persons with whom the assessee had contracted to sell certain items gave any notice to the assessee alleging breach of contract on the part of the assessee or filed suits against the assessee claiming compensation and there was no evidence to show as to why the assessee was not able to perform his part or as to how the damages were calculated or as to what was the agreed rate before the breach of contract and what rate prevailed on the date of delivery and that merely because the contract had not been performed by the agreed date, it could not be said that it was due to the default of the assessee and that if the default of the assessee was not established, the question of liability would not arise and, consequently, the question of payment of damages would not arise.
11. In V.N. Sarsetty v. CIT [1987] 163 ITR 727 (Kar), the assessee had entered into a contract for sale of cotton and the assessee was required to deliver the cotton to the buyer before the end of April, 1969, and the agreement provided that the buyer could extend the time for the delivery of the goods. The assessee failed to deliver the cotton till May 23, 1969, in spite of repeated demands from the buyer and the assessee paid a sum of Rs. 35,000 as damages on account of non-delivery of the goods in full settlement of the contract to the buyer as per the decision of the panchas and claimed the same as deduction on the ground that there was a breach of contract resulting in payment of damages therefor. The deduction was disallowed by the income-tax authorities as well as the Income-tax Appellate Tribunal and the High Court of Karnataka affirmed the said view. The High Court held that the buyer had kept the contract subsisting with his right to extend the time for performance and, since there was no performance of the contract even within the extended time, the buyer accepted the amount agreed upon by the panchas in full settlement of the contract and not as damages for the breach of the contract. The buyer, instead of waiting to take actual delivery of the cotton, had accepted the total amount of Rs. 35,000 in full settlement of the contractual obligations. Therefore, the transaction entered into by the assessee with the buyer was a speculative transaction and payment of Rs. 35,000 amounted to a speculative loss within the meaning of Section 43(5).
12. If the facts of the present case are considered in the light of the decisions referred to above, there is no escape from the conclusion that the transaction in the present case was in the nature of a speculative transaction within the meaning of Section 43(5) of the Act. The assessee had agreed to buy 152 bales of cloth from Mewar Textile Mills Ltd., Bhilwara, under a contract dated October 15, 1971. The goods were to be supplied by December 21, 1971. Till the said date, delivery of only one bale of cloth was taken by the assessee and he refused to take delivery of the balance quantity of 151 bales and instead of taking delivery of the same, he agreed to the debit of Rs. 9,567.36 by the seller in the account of the assessee. This would show that instead of taking actual delivery of 151 bales of cloth, the assessee agreed to pay to the seller a sum of Rs. 9,567.36. There is no material on record to show that any dispute had arisen between the assessee and the seller of the cloth bales with regard to the damages for breach of the contract on the part of the assessee in not taking delivery of the goods and the said dispute with regard to the claim for damages for breach . of contract was settled by payment of a sum of Rs. 9,567.36. Merely because the amount of Rs. 9,567.36 was debited to the account of the assessee by the seller on December 31, 1971, i.e., after the due date of delivery of the goods, does not mean that the said payment was not by way of settlement of the contract but was a payment made by way of settlement of a dispute about damages for breach of the contract by the assessee. The fact that the assessee failed to take delivery of the goods contracted for and agreed to pay Rs. 9,567.36 to the seller in lieu thereof would mean that the said payment was made by way of settlement of the contract. The transaction was, therefore, in the nature of a speculative transaction as provided by Section 43(5) of the Act and the said loss of Rs. 9,567.36 could not be allowed as business expenditure.
13. The question referred is, therefore, answered in the negative as under :
In the facts and circumstances of the case, the Tribunal was not justified in holding that the loss of Rs. 9,567.36 claimed by the assessee was a business loss and it should be allowed as a business expenditure.
14 The reference is returned to the Tribunal for passing appropriate order in the light of this answer. There is no order as to costs.