Settlement of a contract by payment of compensation, without evidence of a genuine dispute or calculation of damages, constitutes a speculative transaction under Section 43(5) of the Income-tax Act, 1961.

Gokal Chand Mital, J.

1. M/s. Maya Ram Jia Lal (hereinafter referred to as the "assessee") carries on business in the sale of wool-tops and manufacture of yarn. During the course of the assessment proceedings for the assessment year 1969-70, the Income-tax Officer found that the assessee paid a sum of Rs. 62,060 to various parties as compensation for non-fulfilling contracts to supply goods to them. The Income-tax Officer came to the conclusion that since there was no written agreement between the parties, the compensation paid for non-fulfilment of the contracts was treated as speculative in nature and was disallowed. On appeal, the assessee furnished before the Appellate Assistant Commissioner the following details regarding the claim of Rs. 62,060.

Name of the party Date of Contract Quantity Contracted Date and Payment of advance received Date of Payment of compensation Amount Paid Rate at Which Paid

Rs. Rs.

M/s. Jay Udhay Hosiery, Madhopuri , Ludhiana15-5-686,000 Kg.17-5-68 _______

1,00010-3-6919,5003-25

M/s. Mammal Sant Lal, Chaura Bazar, Ludhiana1-6-683,500 Lb.5-6-60 _______

3,000 10-3-692,8351-00

M/s. Surinder Kumar Jain & Bros., Ludhiana10-7-685,000 Lb.3-8-68 _______

2,00010-3-697,5001-50

M/s. Knitting Inds. Amritsar 27-8-68 9,000 Kg.4-9-68 _______

2,00017-3-6922,5002-25

Kumar Tex. Mills, Amritsar 22-8-683,600 Kg.-12-3-699,0002-50

Kesho Dass Kahan Chand Tex. Mills, Amritsar2,000 Lb.12-7-68 _______

2,00016-12-687251-45

2 It was pointed out that due to unavoidable reasons, the assesses could not fulfil the contracts for the supply of the goods and hence had to pay damages for breach of the contracts. The assessees case was that the amount paid was not in the nature of speculative loss, but was in the nature of liquidated damages. The Appellate Assistant Commissioner accepted the assessees contention and deleted the addition of Rs. 62,060. The Department took the matter in appeal before the Income-tax Appeal-late Tribunal. The Tribunal came to the conclusion that the loss of Rs. 62,060 was on account of payment as damages for breach of the contract and was, therefore, allowable as a trading liability. It rejected the contention of the Department that it was a speculative loss within the meaning of Section 43(5) of the Income-tax Act, 1961 (hereinafter called "the Act"). In coming to the conclusion, the Tribunal relied on the decisions of the Calcutta High Court in CIT v. Pioneer Trading Co. Pvt. Ltd. [1968] 70 ITR 347 and Daulatram Rawatmull v. CIT [1970] 78 ITR 503 and the decision of the Mysore High Court in Bhandari Rajmal Kushalraj v. CIT [1974] 96 ITR 401. The conclusion was arrived at after recording the following observations:

"We have gone through the details of the various transactions and find that in respect of all the transactions in dispute, the settlement was made long after the date of the delivery as contemplated in the contracts. Thus, the claim made by the assessee was based on breach of contract and does not come within the meaning of a contract settled as used in Section 43(5) of the Income-tax Act, 1961."

3. The Department sought a reference and the Tribunal has referred the following two questions for our opinion :

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment of Rs. 62,060 made by the assessee to the various parties during the assessment year 1969-70 was based on breach of the contracts and was not a speculation loss within the meaning of Section 43(5) of the Income-tax Act, 1961 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 62,060 made towards the total income of the assessee during the assessment year 1969-70 ?"

4. Since the questions referred have to be answered on the facts and circumstances of the case, the admitted facts as are disclosed from the statement of t