TMI Blog1989 (8) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... to be supplied by December 21, 1971. The seller supplied one bale out of the 152 bales for which the contract was entered into and after receiving the said one bale, the assessee informed the seller that the rest of the bales of cloth should not be supplied and, therefore, the seller did not supply the remaining 151 bales of cloth to the assessee. The seller debited the account of the assessee with a sum of Rs. 9,567.36. The assessee claimed deduction of the said amount of Rs. 9,567.36 as business expenditure. The Income -tax Officer, however, disallowed the said claim of the assessee and held that the transaction was in the nature of a speculative transaction because the contract was settled without giving actual delivery of the goods. The said order of the Income-tax Officer was affirmed, in appeal, by the Appellate Assistant Commissioner who agreed with the Income-tax Officer that the transaction was a speculative transaction and was covered by section 43(5) of the Act because the settlement of the contract was arrived at without actual delivery. The Tribunal, on further appeal, has held that the assessee had contracted to purchase 152 bales of cloth out of which delivery of on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) of section 43 of the Act is in pari materia with the provisions contained in Explanation 2 to sub-section (1) of section 24 of Indian Income-tax Act, 1922. The said provision came up for consideration before the Supreme Court in Davenport and Co. P. Ltd. v. CIT [1975] 100 ITR 715. In that case, the Supreme Court held that "actual-delivery" means real as opposed to notional delivery. The Supreme Court has observed that, for income-tax purposes, a speculative transaction means what the definition of that expression in Explanation 2 says and that whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of the Explanation. In CIT v. Shantilal P. Ltd. [1983] 144 ITR 57, the Supreme Court, while construing the provisions of sub-section (5) of section 43 of the Act, has emphasised that sub-section (5) of section 43 speaks of a settlement of the contract and it has been pointed out that there is a distinction between settlement of a contract and settlement of a claim for damages for breach of the contract. The Supreme Court has observed that (at page 60) a contract can be said to be settled if, instead of effecting the deliv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct Act, the party suffering by such breach becomes entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, the settlement of such a dispute with regard to damages for the breach of contract cannot be regarded as a settlement of the contract. What is settled by the award of damages and the acceptance of the same by the aggrieved party is the dispute arising between the parties as a result of the breach of the contract. This would mean that a contract can be said to be settled before its breach and in cases where there has been a breach of the contract and any settlement takes place between the parties to the contract with regard to compensation or damages, it cannot be regarded as a settlement of the contract but it is a settlement of the dispute with regard to damages on account of a breach of the contract. For the purpose of deciding as to whether a particular transaction is a speculative transaction under section 43(5) of the Act, the transaction falling in the first category, namely, where there is a settlement of the contract, can be regarded as speculative transaction and a transaction falling in the second cat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the contract had not been performed by the agreed date, it could not be said that it was due to the default of the assessee and that if the default of the assessee was not established, the question of liability would not arise and, consequently, the question of payment of damages would not arise. in V. N. Sarsetty v. CIT [1987] 163 ITR 727 (Kar), the assessee had entered into a contract for sale of cotton and the assessee was required to deliver the cotton to the buyer before the end of April, 1969, and the agreement provided that the buyer could extend the time for the delivery of the goods. The assessee failed to deliver the cotton till May 23, 1969, in spite of repeated demands from the buyer and the assessee paid a sum of Rs. 35,000 as damages on account of non-delivery of the goods in full settlement of the contract to the buyer as per the decision of the panchas and claimed the same as deduction on the ground that there was a breach of contract resulting in payment of damages therefor. The deduction was disallowed by the income-tax authorities as well as the Income-tax Appellate Tribunal and the High Court of Karnataka affirmed the said view. The High Court held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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