Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAXBOMBAY CITY-III, BOMBAY
Vs.
RESPONDENT:
SHANTILAL PRIVATE LlMITED BOMBAY
DATE OF JUDGMENT21/07/1983
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
SEN, A.P. (J)
VENKATARAMIAH, E.S. (J)
CITATION:
1983 AIR 952 1983 SCR (3) 470
1983 SCC (3) 561 1983 SCALE (2)37
ACT:
Income-Tax Act, 1961-Sub-s. (5) of s. 43-Speculative
transaction. A transaction where there is a breach of
contract and damages are awarded as compensation by an
arbitration award is not a speculative transaction.
Words and phrases-Speculative transaction-Meaning of.
HEADNOTE:
The respondent assessee claimed that a sum of Rs.
1,50,000 paid by them as compensation for being unable to
fulfil a contract was a business loss. The Income tax
officer rejected the claim on the ground that the
transaction was a speculative transaction as defined by sub-
s. (5) of s. 43 of the Income-tax Act, 1961. The Appellate
Assistant Commissioner held that the loss was a business
loss and not a speculative loss on the view that the payment
made represented a settlement of damages on breach of the
contract, which was distinct from a settlement of the
contract. The Income Tax Appellate Tribunal confirmed the
order of the Appellate Assistant Commissioner. On the
request of the Commissioner of Income-tax the Appellate
Tribunal has referred the question whether the loss suffered
by the assessee was not a loss in a speculative transaction
within the meaning of s. 43(5) of the Income-tax Act, 1961.
Answering the question in the affirmative,
^
HELD: A transaction cannot be described as a
"speculative trans action" within the meaning of sub-s. (5)
of s. 43 where there is a breach of the contract and on a
dispute between the parties damages are awarded as
compensation by an arbitration award. [474 A-B]
Sub-s. (5) of s. 43 speaks of the settlement of a
contract. 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 s. 63 of
the Contract Act, accepts instead of it any satisfaction
which he thinks fit. It is quite another matter 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 s. 73 of
the Contract Act the party suffering by such breach becomes
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entitled to receive from the party who broke the contract
compensation for any loss or damage caused to him thereby.
There is no reason why the sense conveyed by the law
relating to contracts should not be imported into the
definition of "speculative transaction" What
471
is really settled by the award of such damages and their
acceptance by the aggrieved party is the dispute between the
parties. [473 A, C-G]
Commissioner of Income-Tax, West Bengal v. Pioneer
Trading Company Private Ltd., 70 ITR 347; Bhandari Rajmal
Kushiraj v. Commissioner of Income Tax, Mysore, 96 ITR 401
approved.
R. Chinnaswami Chettiar v. Commissioner of Income-Tax,
Madras, 96 ITR 353 overruled.
P.L. KN. Meenakshi Achi v. Commissioner of Income-Tax,
Madras, 96 ITR 375; A. Muthukumara Pillai v. Commissioner of
Income-Tax, Madras, 96 ITR 557 and Devenport & Co. P. Ltd.
v. Commissioner of Income-Tax, West Bengal 11, (1975) 100
ITR 715 not relevant to the point raised.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Tax Reference Case No. 4
of 1978.
Tax Reference Under Section 257 of the Income Tax Act,
1961 made by the Income Tax Appellate Tribunal, Bombay
(Bench ’C’).
D. V. Patel, T. A. Ramachandran & Miss A. Subhashini
for the Appellant.
The Judgment of the Court was delivered by
PATHAKJ, J. In this tax reference made under S. 257 of
the income Tax Act, 1961, we are called upon to express our
opinion on the following question of law:
"Whether, on the facts and in the
circumstances of the case, the Tribunal was right
in confirming the order of the Appellate Assistant
Commissioner that the loss suffered by the
assessee was not a loss incurred in a speculative
transaction within the meaning of Sec. 43 (5) of
the Income-tax Act, 1961 ?"
The assessee, M/s Shantilal Pvt. Ltd., Bombay, is a
private limited company. In the assessment proceedings for
the assessment year 1971-72 it claimed a sum of Rs. 1,50,000
paid by it as damages to M/s Medical Service Centre as a
business loss. During the previous year relevant to the said
assessment year the assessee had contracted to sell 200
Kilograms of Folic Acid USP at the rate of Rs. 440 per
Kilogram to M/s. Medical Service Centre and the delivery was
to be effected on or before November 1, 1969, within about
three months of the date of entering into the contract. The
472
case of the assessee is that as the price of the commodity
rose very sharply to as high as Rs. 2,000 per Kilogram
during the period when the delivery was to be effected, the
assessee was unable to fulfil the contract, giving rise to a
dispute in regard to the payment of compensation between the
parties. The dispute was referred to arbitration and by an
award dated August 25,1970 the arbitrator directed the
assessee to pay Rs. 1,50,000 as compensation to M/s. Medical
Service Centre. A consent decree in terms of the award was
made by the High Court.
In the assessment proceedings, the Income Tax officer
rejected the claim of the assessee that the payment of
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compensation was a business loss. He found that the
transaction was a speculative transactions as defined by
Sub-s. (5) of s. 43. Income Tax Act, 1961. The Appellate
Assistant Commissioner allowed the assessee’s appeal on the
view that the payment made by it represented a settlement of
damages on breach of the contract, which was distinct from a
settlement of the contract. Accordingly, he found that the
loss must be regarded as a business loss and not as a
speculation loss. The Income Tax officer’s appeal was
dismissed by the Income Tax Appellate Tribunal by its order
dated February 18, 1976. The Commissioner of Income Tax
applied in reference for a decision on the question of law
set out earlier, and in view of an apparent conflict between
different High Courts on the point the Tribunal has made
this reference.
There is no doubt that the arbitration award granting
compensation to M/s. Medical Service Centre proceeds on the
footing that there was a breach of contract. The Tribunal
took the view that the award of damages for breach of a
contract did not bring the transaction within the definition
of "speculative transaction" set forth in sub-s. (5) of s.
43, Income Tax Act, 1961. In this, the Tribunal found
support in the view expressed by the Calcutta High Court in
Commissioner of Income-Tax, West Bengal v. Pioneer Trading
Company Private Ltd.,(1) Daulatram Rawatmull v. Commissioner
of Income-Tax (Central), Calcutta(2) and by the Mysore High
Court in Bhandari Rajmal Kushalroj v. Commissioner of
Income-tax, Mysore,(9) which they preferred to the view
expressed by the Madras High Court in R. Chinnaswami
Chettiar v. Commissioner of Income
473
Tax, Madras.,(1) P.L. KN. Meenakshi Achi v. Commissioner of
Income-Tax, Madras(a) and A. Muthukumara Pillai v. Commis-
sioner of Income-Tax, Madras.(3) on cereful consideration of
the matter we are of opinion that the Tribunal is right.
Sub-s. (5) of s. 43 defines "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 scrips ...."
Is a contract for purchase or sale of any commodity settled
when no actual delivery or transfer of the commodity is
effected, and instead compensation is awarded under and
arbitration award as damages for breach of the contract ? 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 s. 63 of the Contract
Act, accepts instead of it any satisfaction which he thinks
fit. It is quite another matter where instead of such
acceptance the parties raise a dispute an d no agreement can
be reached for a discharge of the contract. There is a
breach of the contract and by virtue of s. 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.
There is no reason why the sense conveyed by the law
relating to contracts should not be imported into the
definition of "speculative transaction". The award of
damages for 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. It may be that in a general sense the layman would
understand that the contract must be regarded as settled
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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. We are concerned with the sense of the law,
and it is
474
that sense which must prevail in- sub-s. (5) of s. 43.
Accordingly, we hold that a transaction cannot be described
as a "speculative transaction" within the meaning of sub-s.
(5) of s. 43, 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. We are
unable to endorse the view to the contrary taken by the
Madras High Court in R. Chinnaswami Chettiar(supra) and
approve of the view taken by the Calcutta High Court in
Pioneer Trading Company Private Ltd. (supra) and by the
Mysore High Court in Bhandari Rajmal Kushalra; (supra). The
decisions of the Madras High Court in P. L. K. N. Meenakshi
Achi (supra) and A. Muthukumara Pillai (supra) are not
apposite and are not concerned with the point before us. Our
attention was invited by learned counsel for the Revenue to
the decision of this Court in Devenport o. P. Ltd. v.
Commissioner of Income-Tax, West Bengal II(1) but this point
did not arise there either.
Accordingly, we answer the question referred in the
affirmative, in favour of the assessee and against the
Revenue. There is no order as to costs.
H.S.K. Question answered in affirmative.
475