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TMI Blog2016 (9) TMI 1030X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act, 1961 (hereinafter referred the Act) on 10.12.2009. The case was selected for scrutiny assessment and notices u/s 143(2) of the l.Tax Act dated 04.09.2009 was issued and duly served upon the assessee within prescribed statutory time limit. Thereafter, notice u/s 142(1) of I.Tax Act dated 13.10.2010 was issued and served upon the assessee. In response to these statutory notices the Authorized Representative of the assessee company attended the assessment proceedings and filed necessary details/ documents as called for therein. These details were examined by the AO. Books of accounts were also produced and examined on test check basis. Thereafter AO observed that the damages paid by the assessee for cancellation of contract without taking any delivery of goods due to breach would constitute a speculative transaction and such speculative loss can only be adjusted against speculative income. Therefore loss of Rs. 2,89,15,250/- shown as damages paid for breach of contract is held to be a speculative loss and it cannot be allowed against the business profits. Accordingly an addition of Rs. 2,89,15,250/- was made and accordingly, AO assessed the income at Rs. 3,34,36,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Pvt. Ltd. (Rs. 12.92 crores). It has made similar import from J.K. International Pvt. Ltd. for the last several years. In the A.Y. 2008-09, its imports from J.K. International Pvt. Ltd. constitute about 22.75% of total purchase of pulses of Rs. 56.84 crores. As per purchase details the import of Rs. 12.92 crores have been made during the year from J.K. International Pvt. Ltd. on the basis of contracts that were honoured. However, one particular contract for import of chick peas from J.K. International Pvt. Ltd. entered on 04/04/2007 was not honoured and finally settled between the parties on 17/05/2007 as under:- Contract No. Date of Contract Due date of shipment Date of Breach of contract Date of settlement 13584 04-April-07 30-April-07 30-April-07 17-May-07 The appellant paid damages of Rs. 2,89,15,250/- to J.K. International Pvt. Ltd. as this contract could not be honored. According to the A.O., the loss was not by sale of pulses at prices lower than what they were bought but was by indemnification as it had to pay damages for the breach of contract. The contract was cancelled without taking deliveries. It was not an actual loss incurred by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 04/05/2007 it is also evident that J.K. International Pvt. Ltd. has claimed an amount of $ 7,50,000/- [15,000 MT x $ 501- per MT] @ $501- per MT being the difference between contract price @$ 545/- and market price $ 495/- as the appellant has failed to open the L/C within the contract shipment period upto 30/04/2007. The above communication also suggests the fall in international market price of chick peas from the agreed rate of $5451- per MT as on 04/04/2007 to $4951- per MT as on 30/04/2007. From the email communication dt 04/05/2007 from the MD of the appellant company and dt 07/05/2007 from J.K. International Pvt. Ltd. it is also evident that the offer of $45 per MT by the appellant was rejected by J.K. International Pvt. Ltd. and finally it was settled at $ 47.50 per MT being the difference between contract p-rice ($545) and settled priced ($497.5). Accordingly, the price was settled $47.50 per MT on 17/05/2007 and the account of the appellant was debited by J.K. International Pvt. Ltd. at the settled amount of $7,12,5001- [15,000 MT x $ 47.50]. The amount of $7,12,SOO paid by the appellant to J.K. International Pvt. Ltd. being Rs. 2,89,15,250/- @ Rs. 40.58, the exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the department. 6.6 Hon'ble Calcutta High Court in CIT vs. Pioneer Trading Company (P) Ltd. 70 ITR 347 (Cal) have held that the meaning of a contract settled otherwise than by actual delivery or transfer of the commodity means a contract settled before a breach takes place. If there is a settlement after the breach, it is a case of settling the quantum of damages. 6.7 In the case of CIT vs. Indian Commercial Co. (P) Ltd. 106 ITR 465 (Born), the assessee-company entered into an agreement with HSL for purchasing 250 metric tons of Hot Pressed Naphthalene, f.o.b., Calcutta. Under clause III, delivery of the goods was to be so arranged that the entire quantity would be shipped from Calcutta before 30-9-1961. Under clause V, it was provided that a letter of credit was to be opened by the assessee-company forthwith. But the assessee-company failed and neglected to open any letter of credit, as it was required to do under the said agreement. The price of the said goods having gone down in foreign markets, the assessee-company which had failed to open a letter of credit as required by the agreement between it and the sellers, negotiated with the sellers, viz., HSL for an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and literally speaking there is a distinction between settling the contract and settling the claim for damages arising from the breach of a contract. Both are not synonymous. In case of breach of contract, what is settled is the claim arising from the breach of the contract and not the contract. Settling a contract so as to make a transaction a speculative one means settling the contract before the occurrence of the breach by payment of difference. Where the breach occurs and thereafter claims arising from the breach are settled between the parties to the contract, it would not amount to settling of contract. In this view of the matter, the transactions in question did not amount to speculative transactions and, therefore, the assessee was entitled to treat the impugned amounts as business losses." 6.9 In view of the facts discussed above and following the above decisions, the payment made by the appellant for breach of contract after the expiry date is a normal loss incidental to the business of the appellant and not a speculation loss within the meaning of section 43(5) of the I.T. Act. Appeal is allowed in respect of ground nos. 1 & 2 of appeal." 7.1 We are also rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the case of Bhagwan Dass Rameshwar Dayal (supra), the Hon'ble Delhi High Court has been pleased to hold that if the contract is settled otherwise than by actual delivery or transfer of the commodity, it is a speculative transaction but if there is a settlement after the breach, it is a case of settling the quantum of damages and the loss is incidental to business and allowable as a business loss. Again in the case of Hans Machoo & Co. (supra), the Hon'ble Delhi High Court has been pleased to hold that the ITAT having recorded a finding that there was a breach of contract and the assessee had to pay damages, it was justified in allowing deduction of amounts paid, such a transaction cannot be described as a speculative transaction within the meaning of sec. 43(5) of the Act. Besides, in the case of Orient Overseas Pvt Ltd., a sister concern of the assessee, the Assessing Officer in compliance of the directions of the 1TAT has decided the issue afresh vide order dated 24.11.2011 in favour of the assessee. It is pertinent to mention over here that the first appellate authority in the case of Orient Overseas Pvt. Ltd. had decided the issue in favour of the assessee, which w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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