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1976 Supreme(Cal) 174
High Court Of Calcutta
S. C. Deb, Dipak Kumar Sen
COMMISSIONER OF INCOME-TAX - Appellant
Versus
RAMJEEWAN SARAWGEE AND SONS. - Respondent
Income-Tax Reference 224 Of 1969
Decided On : 05/11/1976
A.SEN GUPTA, B.L.PAL, D.PAL, J.C.SHAH, MANISHA SEAL
A settlement of a claim for damages arising out of a breach of contract is not a speculative transaction within the meaning of Section 43 (5) of the Income-tax Act, 1961.
Headnote:
INCOME TAX - Speculative transaction - Loss arising from breach of contract - Whether speculative transaction - Interpretation of Section 43 (5) of the Income-tax Act, 1961.
Fact of the Case:
The assessee, a jute broker, entered into several contracts for sale and specific delivery of jute goods by installments. In one such contract, the assessee failed to deliver the goods on due dates, committed a breach of contract, and became liable to pay damages to the other party. The assessee claimed the amount paid as damages as a loss against its other business income. The Income-tax Officer rejected the claim, holding it to be a speculative transaction. The Appellate Assistant Commissioner upheld the finding, but the Tribunal reversed it, allowing the assessee's appeal.
Finding of the Court:
The High Court held that the loss claimed by the assessee was not a speculative transaction within the meaning of Section 43 (5) of the Income-tax Act, 1961, and allowed it as a deduction against the assessee's other business income.
Issues: Whether the loss claimed by the assessee was a speculative transaction within the meaning of Section 43 (5) of the Income-tax Act, 1961.
Ratio Decidendi: The High Court interpreted Section 43 (5) of the Income-tax Act, 1961, and held that a settlement of a claim for damages arising out of a breach of contract cannot be hit by the mischief of this Section. The Court distinguished the case of Davenport and Co. Private Ltd. v. Commissioner of Income-tax, where the Supreme Court dealt with transactions involving pucca delivery orders without actual delivery of goods, and held that the observations of the Supreme Court were in the background of an existing or a subsisting contract. The Court also distinguished the case of R. Chinnaswami Chettiar v. Commissioner of Income-tax, where the Madras High Court held that a settlement of a claim for damages arising out of a breach of contract would be a speculative transaction, and respectfully dissented from their Lordships of the Madras High Court.
Final Decision: The High Court answered the question in the affirmative, in favor of the assessee, overruling the contentions of the revenue.
( 1 ) THE following question is involved in this reference under Section 256 (2) of the Income-tax Act, 1961:"whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the loss claimed by the assessee in respect of the sum of rupees one lakh seventy-nine thousand and two hundred paid by it to M/s. Khardah Company Ltd. was not a loss arising from a speculative transaction and in directing the said sum to be allowed as a loss against the other business income of the assessee. "
( 2 ) THE assessment year is 1961-62. The accounting period ended on November 7, 1961. The assessee is a firm. The facts stated and found by the Tribunal may be briefly stated as follows : The firm is a dealer and a jute broker. Several contracts for sale and for specific delivery of jute goods by instalments were entered into by the firm in the accounting year. In this reference, we are concerned with only one contract, namely, the contract between the firm and Messrs. Khardah Co. Ltd. The firm failed to deliver those goods on due dates and committed a breach of the said contract and became liable to pay Rs. 1,79,200 as damages to M/s. Khardah Co. Ltd. in the accounting year.
( 3 ) THE Income-tax Officer has rejected the firm's claim for deduction of the said amount with a finding that it was a speculative transaction. The Appellate Assistant Commissioner has sustained the said finding and has dismissed the appeal filed by the firm, but the Tribunal has reversed the said finding and has allowed further appeal by the firm. Hence, the above question is now before us at the instance of the Commissioner.
( 4 ) MR. B. L. Pal, the learned counsel for the revenue, has contended before us that the loss claimed by the assessee was a speculative loss within the meaning of that expression used in Section 43 (5) of the Income-tax Act, 1961, and, therefore, it should not have been allowed by the Tribunal. It is also the submission of Mr. Pal that if the goods are not actually delivered even after the breach of contract and difference is paid by way of settlement, it will be a speculative transaction as defined by Section 43 (5) of the Act. In support of his first contention he has cited the decision of the Supreme Court in the case of Davenport and Co. Private Ltd. v. Commissioner of Income-tax and for the last contention he has relied on the decision of the Madras High Court in the case of R. Chinnaswami Chettiar v. Commissioner of Income-tax.
( 5 ) WE are, however, not impressed by his contentions. Pucca delivery orders changed hands resulting in a loss in Davenport's case and it was held by the Supreme Court that the words "actual delivery" in Explanation 2 to Section 24 (1) of the Indian Income-tax Act, 1922, meant a real as opposed to a notional delivery of the goods or the scrips. The said Explanation does not invalidate the speculative transactions which are otherwise legal but categorises them in a separate group for the purposes of the Income-tax Act as held by the Calcutta High Court in the case of D. M. Wadhwana v. Commissioner of Income-tax [1966] 61 ITR 154 (Cal) and followed by the Supreme Court in Davenport's case by dissenting from its earlier view in the case of Raghunath Prosad Poddar v. Commissioner of Income-tax.
( 6 ) RAGHUNATH Prosad Poddar's case was also on pucca delivery orders like Wadhwana's case [1966] 61 ITR 154 (Cal) but the present case before us is not on any pucca delivery order as found by the Tribunal but on a breach of contract resulting in damages which were paid by the firm to M/s. Khardah Co. Ltd. Hence, reliance on Davenport's case was misplaced by Mr. Pal. Further, in Davenport's case the Supreme Court was not even concerned with the question as to whether on a breach of contract to deliver the goods resulting in a liability for damages and payment of such damages will be a speculative transaction within the meaning of the said Explanation to Section 24 (1) of the 1922 Act.
