A payment for breach of contract does not constitute a speculative transaction under Section 43(5) of the Income-tax Act, 1961.

S.S.Sodhi, J.

1. The assessee, Murari Lal Ahuja and Sons, Abohar, carries on the business of sale of cotton and cotton seeds and also acts as commission agents. The assessee entered into a contract for the sale of 925 bales of cotton to Elgin Mills Co. Ltd. and Cawnpore Textile Mills Ltd. The assessee could not fulfil its contractual obligation of supplying this cotton to these mills and eventually settled with them by paying them a sum of Rs. 48,158. The question that now arises is "whether this amount was a payment in the nature of a speculative transaction in terms of Section 43(5) of the Income-tax Act, 1961 ?"

2. The Income-tax Officer disallowed the payment of the said sum of Rs. 48,158 holding it to be a speculative transaction, This order was upheld in appeal by the Appellate Assistant Commissioner of Income-tax, Bhatinda. The Tribunal, however, took a contrary view and the disallowance was consequently vacated by it. According to the Tribunal, it was "because of abnormal circumstances that it had to flout the sale agreement to save itself from a ruinous situation and because of the breach of contract, that the resultant compensation was paid in the shape of the settlement."

3. It was in these circumstances that the following question of law came to be referred to this court:

"Whether, on the facts and in the circumstances of the case, the Tribunal rightly vacated the addition of Rs. 48,158 on the ground that payments for breach of contract was an allowable deduction ?"

4. There is a thin line that divides what is to be termed as "speculative transaction" as envisaged by Sub-section (5) of Section 43 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and payment made under a settlement which falls outside its ambit. The Supreme Court had occasion to consider this matter in CIT v. Shantilal P. Ltd. [1983] 144 ITR 57, where it was held ; "A transaction cannot be described as a speculative transaction within the meaning of Sub-section (5) of Section 43 of the Income-tax Act, 1961, where there is a breach of the contract and on a dispute between the parties, damages are awarded as compensation by an arbitration award". It was further observed (at p. 60) : "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."

5. A similar view was taken by our court in CIT v. Maya Ram Jia Lal [1986] 162 ITR 520, where it was held that "if the dispute is settled between the parties, then it is not a speculative transaction, but if the contract is settled and under the settlement of the contract, damages are paid, it would be a speculative transaction".

6. In the present case, it will be seen that a finding of fact has been recorded by the Tribunal that the payment of the said sum of Rs. 48,158 was made by the assessee for breach of contract The transaction here cannot, therefore, in the circumstances, be branded as a "speculative transaction" in terms of Section 43 of the Act.

7. The question referred is accordingly answered in the affirmative, in favour of the assessee and against the Revenue. There will, however, be no order as to costs.