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2016 (9) TMI 1030 - ITAT DELHI

2016 (9) TMI 1030 - ITAT DELHI - TMI - Disallowance of “Speculative Loss” - Held that:- CIT(A) has rightly held that the payment made by the assessee for breach of contract after the expiry date is a normal loss incidental to the business of the assessee and not a speculation loss within the meaning of section 43(5) of the Income Tax Act, 1961. Hence, we uphold the well reasoned order passed by the Ld. CIT(A) on the issue in dispute and accordingly, dismiss the Appeal filed by the Revenue. - ITA .....

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1996-97 in Form No. 36 filed by the Revenue). 1. The Ld. CIT(A) erred in law and on facts in deleting disallowance of ₹ 2,89,15,250/- held as Speculative Loss by the AO. 2. The appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal. 2. The facts in brief are that the return of income was filed electronically (e-return) on 27.09.2008 at a total income of ₹ 45,20,858/-. This r .....

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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 ₹ 2,89,15,250/- shown .....

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rtly allowing the appeal of the assessee. 4. Now the Revenue is aggrieved against the impugned order and filed the present appeal before the Tribunal. 5. At the time of hearing Ld. DR relied upon the order of the AO and reiterated the contentions raised by the Revenue in the grounds and requested that Appeal of the Revenue may be allowed. 6. On the contrary, Ld. Counsel of the Assessee has relied upon the order of the Ld. CIT(A) and stated that he has passed a well reasoned order by respectfully .....

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low the same decision and addition in dispute may be deleted. 7. We have heard both the parties and perused the records, especially the impugned order passed by the Ld. CIT(A). We find that Ld. First Appellate Authority has elaborately discussed the issue in dispute by considering the submissions of the assessee and adjudicated the issue vide para no. 6.1 to 6.9 of the impugned order. For the sake of convenience, we are reproducing para no. 6.1 to 6.9 of the impugned order as under:- 6.1 I have .....

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of purchases given by the appellant it is apparent that its imports from top 15 parties is more than ₹ 54 crores including from JK International 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 ₹ 56.84 crores. As per purchase details the import of ₹ 12.92 crores have been made during the y .....

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al 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 assessee in regular course of business but a speculative loss. The assessee paid difference of the purchase and sale prices in respect of goods which were not even in its .....

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stock with it. Under pressing circumstances, the contracts came to an end due to non-performance. Thereafter, the company settled the breach with the said party and paid the damages. 6.2 From the memorandum of understanding between seller J.K. International Pvt. Ltd. and buyer, Orient Overseas Pvt. Ltd., the appellant company executed on 06/05/2003 the cl. (3) of terms of agreement says:- "Cl (3). The buyer undertakes to submit the required documents and to accept the deliveries of goods w .....

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also noticed that market price of chick peas (chana) at MCX commodity exchange have fallen from ₹ 2,474/- per 100 kgs as on 04/04/2007 to ₹ 2, 188/- as on the date shipment on 30/04/2007. Therefore, to this extent the submission of the appellant that due to lower demand there is decline in market rate is found to be correct. From the chart of average cost of Chick Peas and estimated loss filed by the appellant it is also apparent that, if the appellant had imported the items at the .....

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o 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 final .....

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s on account of damages paid for breach of contracts. 6.4 From the above, it is evident that the appellant committed a breach of contract by failing to open the letter of credit as per the memorandum of understanding dt 06/05/2003 and contract no. 13584 dt 04/04/2007 before the date of shipment upto 30/04/2007. Thereafter, the breach was settled on 17/0S/2007 because of the inability of the appellant to take the delivery of goods due to lower demand and decline in market rates. The settlement in .....

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l Pvt. Ltd. by way of compensation. Therefore, it is a case of settling the quantum of damages. As such the loss suffered by the appellant is a normal loss incidental to the business of the appellant, which is not covered by the definition of speculative transaction in see 43(5). 6.5 Hon'ble Jurisdictional Delhi High ,Court in the case of CIT vs. Bhagwan Dass Rameshwar Dayal 22 Taxman 462 (Delhi) have held that: 15. A contract is speculative if it is settled without actual delivery. If the c .....

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or through any other cause which ends the contract under the contract Act or the sale of goods Act. 18. In view of our conclusion that s. 43(5) only covers cases where a contract is settled without breach, and not cases where there is a breach followed by a settlement of the quantum of the damages, we answer the question referred to us in the affirmative and against the department. 6.6 Hon'ble Calcutta High Court in CIT vs. Pioneer Trading Company (P) Ltd. 70 ITR 347 (Cal) have held that th .....

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e 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 .....

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eal of the appellant and tribunal upheld the decision of AAC. On further appeal by the revenue, Hon'ble Bombay High Court have held that: "In the view which the court had taken on the facts in the present case, viz., that the said sum of ₹ 50,000 had been paid to HSL after the breach by the assessee-company of its contract, it must be held that the settlement as a result of that payment was made, was not a settlement of the contract within the terms of section 43(5), but was a set .....

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uted concerns for ready delivery of its products. In the assessment Ayrs. 1966-67 to 1971-72, the assessee, though having sufficient oil to deliver, could not do so on account of non-availability of wagons, and as per the contract, the assessee had to pay to the buyer the difference between the price at which the buyer purchased oil from the open market and the contract price. The assessee claimed these amounts as business losses. The ITO disallowed the same on the ground that the said contracts .....

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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 .....

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pellant 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 reproducing the relevant portion of the ITAT, F Bench, Delhi decision dated 29.7.2015 in the case of ACIT vs. Ramji Lal & Sons (HUF) (Supra) as under:- 7. Considering the above submission, we find that there is no dispute on the facts of the issue in the present case. We also find that facts of the present case are similar to .....

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e to lower demand in the local market to which the supplier did not agree and thus the assessee could not honour the said two contracts by due dates and thus the contracts came to an end due to nonperformance of the assessee on 30.9.2006 and 31.10.2006. As a result, the supplier claimed damages for the breach of contract and the claim was settled in the case of contract dated 15.9.2006 and 17.10.2006 and in the case of contract dated 11.10.2006 on 30.11.2006. We thus find substance in tbe conten .....

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his case were in the nature or damages paid after the breach of contract. The Learned CJT(Appeals) following the ratios of decisions cited before it on the issue was thus justified in coming to the conclusion that the damages paid were fully allowable under sec. 37(1) of the Act. The Learned CIT(Appeals) has taken a stand, which is supported by several decisions cited before it, including the decisions of Hon'ble Delhi High Court in the cases of err vs. Bhagwan Dass Rameshwar Dayal (1984) 14 .....

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e 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 t .....

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is known as Sharp Corporation Ltd. In compliance of order dated 28.2.2011 of the ITAT in the case of Orient Overseas Pvt. Ltd., the Assessing Officer has also made the assessment afresh on the issue under sec. 254/143(3) of the Act with the following finding in para No.5 of the order: "5. I have carefully examined the submissions made before me. The assessee was asked to produce the books of account and all other material, documents and correspondences etc. in its possession, regarding the .....

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