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2000 Supreme(Del) 790
High Court Of Delhi
COMMISSIONER OF INCOME TAX - Appellant
Versus
HANS MACHOO AND COMPANY , DELHI - Respondent
I.T.R. 355 of 1979
Decided On : 09/11/2000
AJAY JHA, Kamlesh Sabharwal, R.D.Jolly
The main legal point established in the judgment is that damages awarded for breach of contract do not constitute speculative transactions under Section 43(5) of the Income-tax Act, 1961.
Headnote:
Income-tax Act - Deductions - Section 256(1) - Arijit Pasayat - Income-tax Act, 1961 - Section 43(5), Section 73(1) - The court discussed the applicability of Section 43(5) and Section 73(1) of the Income-tax Act, 1961 in allowing deductions for damages paid by the assessee in the computation of income from business for the assessment years 1972-73 and 1973-74.
Fact of the Case:
The assessee, a sole selling agent for a sugar mill, suffered damages due to breach of contract by the principal and claimed them as allowable deductions. The Revenue contended that the transactions were speculative and thus inadmissible under Section 73(1) of the Income-tax Act, 1961.
Finding of the Court:
The Tribunal found that the damages were paid for breach of contract and not settled transactions, justifying the conclusion that the deductions were allowable as normal business losses.
Issues: The main issue was whether the damages suffered by the assessee constituted speculative transactions under Section 43(5) and were thus inadmissible under Section 73(1) of the Income-tax Act, 1961.
Ratio Decidendi: The court interpreted Section 43(5) and held that a transaction cannot be described as speculative if damages are awarded for breach of contract and there is no settlement of the transaction before the breach. The court emphasized that the settlement of a contract occurs when it is performed or when the promisee accepts any satisfaction, which was not the case here.
Final Decision: The court answered the question in favor of the assessee, holding that the damages suffered were allowable deductions as normal business losses.
( 1 ) THESE two applications involve identical question and are, therefore, being disposed of by this common order. At the instance of Revenue following question has been referred under Section 256 (1) of the Income-tax Act, 1961 (in short the act ) by Income-tax Appellate Tribunal, Delhi Bench d (in short the Tribunal) for opinion of this Court:
"whether on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing the deductions of Rs. 95,012. 00 and Rs. 43,808. 00 in the computation of the assessee s income from business for the assessment years 1972-73 and 1973-74 respectively"?
( 2 ) FACTUAL position as set out in the statement of case is as follows: For the assessment years 1972-73 and 1973-74 disallowances were made while computing assessee s income from business in respect of damages paid. Assessee was a sole selling agent for sale of sugar of Ajudhya Sugar Mills, a concern of M/s. Lakshmi Ji Sugar Mills Co. P. Ltd. Agency agreement was executed on 1. 1. 1968. Clauses 5 to 7 of the agreement, which have some relevance for present dispute, read as follows:
"5. That the agent shall keep in daily touch with the principals to know the quality and quantity of sugar to be sold and the rate at which that sugar can be sold as the sale programme to be dictated by the principals will change with the changes in the market conditions and the Government policy. Such sale programme may be indicated by the principals by telephonic conversation. In the event of any dispute regarding the sale programme, the decision of the principals shall be final.
6. That the sole selling agent shall sell sugar in wagon load/truck load quantities at prices indicated to him by the principals and submit despatching instructions in duplicate to the principals for workable destinations unless priority of movement or prior permission of the principals in writing has been obtained. The principal s factory will then in due course despatch sugar in accordance with the despatching instructions.
7. Provided that the principals shall not be responsible for any loss or damage to the sole selling agent on account of entering into contracts of sale at prices not confirmed by the principals. " Assessee s stand was that for carrying on its agency business it had to enter into transactions for sale of sugar with various parties on behalf of its principal. Transactions used to be subsequently confirmed by the principal and the goods were also supplied to concerned parties. Some of the transactions were not honoured by the principal because of price rise of sugar and assessee had to honour them and to suffer damages as per Clause (7) of agreement reproduced above. Such damages amounted to Rs. 95,012. 00 and Rs. 43,8080 for two assessment years respectively. These were claimed as allowable deductions in the respective years. These were also allowed by the Assessing Officer. For assessment year 1972-73 assessee went in appeal before the Appellate Assistant Commissioner (in short the AAC) on certain other grounds. Said Authority examined the above matter and was of the view that assessee was regular speculator in the past and above transactions were speculative transactions within the meaning of Section 43 (5) of the Act. They constituted a separate and distinct business as per Explanation 2 to Section 28 of the Act. Therefore, a view was taken that Assessing Officer was not justified in allowing deduction which was otherwise inadmissible under Section 73 (1) of the Act. Enhancement to the extent of Rs. 95,012. 00 for assessment year 1972-73 was made. Claim of assessee for sum of Rs. 43,808. 00 which was allowed as a deduction for 1973-74 was set aside by the Commissioner of Income-tax (in short the CIT) exercising power under Section 263 of the Act. Orders of AAC and CIT were assailed before the Tribunal by assessee. Assessee s stand was that there was no speculative profit or speculative loss involved. Loss had been suffere
