TMI Blog2014 (6) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... the damages received was certainly in the nature of business profits and not speculative in nature - there was no question of settling the contract as the cause of action was no longer based on the contract itself but on the breach and settlement of the damages arising from the breach of the transaction does not result from the contract but from the breach - A contract can be settled during the subsistence of the contract and if a breach occurred by the non-performance of the contract or by the actual delivery, a party to the contract settled the amount of damages by paying the difference between the contract price and the market price on the due date of performance that would not amount in law to settling a contract - What has been settled is settling the damages consequent to the breach. Relying upon CIT v. Shantilal P. Ltd. [1983 (7) TMI 1 - SUPREME Court] - The Tribunal was of the view that the assessee received damages for non-performance of the contract and that non-performance of the contract was for reasons beyond the control of the assessee, and the Tribunal was justified in coming to the conclusion that the amount is to be treated as business income and not the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, it was allowable and is not in the nature of entertainment. Mr. J. K. Singhi, learned senior advocate assisted by Mr. Anuroop Singhi, learned counsel for the Revenue, submitted that the Income-tax Appellate Tribunal erred in holding the said expenditure in routine when the expenditure was purely in the nature of entertainment and entertainment expenditure was disallowable and, accordingly, submitted that the finding of the Income-tax Appellate Tribunal on this deserves to be reversed. Heard learned counsel of the petitioner-Revenue and in our view, the Income-tax Appellate Tribunal has correctly come to the conclusion that the expenditure claimed by the respondent-assessee, namely ; on tea, coffee, cold drinks, pan, cigarette, biscuits, crockery are not in the nature of entertainment and looking to the turnover of the assessee, the expenditure is a routine expenditure and customary in nature. Expenditure incurred are for the business considerations and cannot be said to be in the nature of entertainment. The hon'ble Supreme Court had an occasion to consider the issue relating to providing ordinary meals and refreshment to outstation customers according to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case the suppliers did not provide the goods and, therefore, at least the respondent-assessee was able to recover compensation damages. It was further submitted that it was the normal business transaction and it was not at all speculative in nature. It was further submitted that the goods were required for its own use and the respondent had to purchase from the open market following the breach made by the supplier and in that process, the respondent suffered loss by paying more price to the other suppliers after the breach was committed. Before the Income-tax Appellate Tribunal reliance was placed on the judgments in the cases of CIT v. Pioneer Trading Co. P. Ltd. reported in [1968] 70 ITR 347 (Cal) ; Daulatram Rawatmull v. CIT reported in [1970] 78 ITR 503 (Cal) ; Bhandari Rajmal Khushalraj v. CIT reported in [1974] 96 ITR 401 (Mys), CIT v. Indian Commercial Co. P. Ltd. reported in [1977] 106 ITR 465 (Bom) and Thakurlal Shivprakash Poddar v. CIT reported in [1979] 116 ITR 190 (MP). The Income-tax Appellate Tribunal ultimately, by referring to the judgment, rendered by the Bombay High Court in the case of CIT v. Indian Commercial Co. (P.) Ltd. (supra) agreed with the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him ; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member ; shall not be deemed to be a speculative transaction. Section 43(5) of the Income-tax Act contemplates a transaction in which a contract for purchase or sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. It is not only actual delivery of the goods but it must be coupled with settlement of contract in a transaction for which the payment is ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 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 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 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and for which relevant documents were produced before the Income-tax Officer as well as the Appellate Assistant Commissioner, the Tribunal was justified in coming to the conclusion that the amount is to be treated as a business loss and not as a speculative loss. This court in the case of CIT v. Rajasthan Wool Agencies reported in [1986] 160 ITR 358 (Raj) had also an occasion to consider this issue and held as under (page 368) : Bearing in mind the principles laid down in Pioneer Trading Co.'s case [1968] 70 ITR 347 (Cal), Daulatram Rawatmull case [1970] 78 ITR 503 (Cal) ; Bhandari Rajmal Kushalraj's case [1974] 96 ITR 401 (Mys) and Shantilal P. Ltd.'s case [1983] 144 ITR 57 (SC), let us recapitulate the facts found by the Tribunal, reference to which have already been made hereinabove. The assessee failed to supply the agreed quantity of wool tops because of continuos rise in the market price. It had already supplied part of the agreed quantity. It is thus clear that the parties never intended not to make actual delivery of the goods contracted to be supplied. On the other hand, the intention of the parties at the time of entering into contract and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the parties damages are awarded as compensation, e.g., by an arbitration award. What is really settled by the award of such damages and their acceptance by the aggrieved party is a dispute between the parties. Section 43(5), however, speaks of a settlement of the contract and 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. The word settled or settlement in connection with the contract has not been defined in the Income-tax Act or in the Contract Act or in the Sale of Goods Act or in any other statute. However, the proper meaning to be given to the words to contract, settled in the definition clause would be a contract determined or concluded or disposed of . By the use of the expression settled , what is intended to be dealt with is a case of performance of contract and not non-performance and, accordingly, held that the transaction was in the nature of business transaction and not speculative in nature. The Madras High Court in the case of CIT v. Sri Ramalinga Choodambigai Mills Ltd. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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