TMI Blog1993 (10) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... was justified in upholding the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs. 68,620 representing expenditure incurred upon celebration of 10th anniversary of the assessee company ? " The brief facts of the case are that in the assessment year 1974-75, the assessee claimed Rs. 1,86,764 as damages paid for breach of contract which included a payment of Rs. 41,998 to Indo-Burma Trading Corporation, Bombay, Rs. 1,17,767 paid to Keshavlal Talakchand, Rs. 7,606.90 to Mitter Tax Fabrics, Bombay, Rs. 14,893 paid to Mangal Textiles, Bombay, and Rs. 4,500 to Cotton Textiles Export Promotion Council. The Income-tax Officer came to the conclusion that in view of the provisions of section 43(5) of the Income-tax Act, the amount of Rs. 1,86,764 is a speculation loss and cannot be allowed as deduction from the business profits. The sum of Rs. 68,620 was incurred in connection with the 10th anniversary of the company for which the Income-tax Officer came to the conclusion that so me of the items are purely of charitable nature and the others are in respect of presents like wrist watches given by the company to the staff members in excess of Rs. 50 which is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the expenditure was not in the nature of charity or otherwise not connected with the business. The addition was accordingly deleted. In the second appeal filed before the Income-tax Appellate Tribunal, reliance was placed on the Bombay High Court decision in the case of CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465 and CIT v. Ramjeewan Sarawgee and Sons [1977] 107 ITR 845 (Cal). In the later case, the Calcutta High Court held that breach of the contract puts an end to the contract and creates a liability in damages and section 43(5) does not say that "a settlement of a claim for damages arising out of a breach of contract will be a speculative transaction". A "contract settled" means "contract settled before breach". After breach of contract, the cause of action is no longer based on the contract itself but on its breach. A settlement of a claim for damages arising out of a breach of contract is not a speculative transaction under section 43(5). The decisions of the Karnataka High Court in the case of Bhandari Rajmal Kushalraj [1974] 96 ITR 401 and of the Madhya Pradesh High Court in Thakurlal Shivprakash Poddar v. CIT [1979] 116 ITR 190 were also taken into cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered was given to its employees and no expenditure was incurred by way of charity. The gift was given to the employees for promoting the business. This finding has not been challenged. The celebrations were held entirely for the business and for encouragement to be given to its employees and workers and for promoting the interest of business in the business world. The said celebration was attended besides the officers, employees and workers, by the dealers, sales representatives and persons connected with the assessee-company as well as ex-employees. Section 37 provides that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee) laid out or expended wholly and exclusively for the purposes of the business has to be allowed as deduction. The expenditure in the present case neither falls within the specific provisions contained in section 30 to 36 nor is in the nature of capital expenditure or personal expenditure besides the fact that a finding has been recorded by the Income-tax Tribunal that they it was expenditure wholly and exclusively for the purpose of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t applicable. The remaining transactions of Rs. 1,67,372 comprise the payments made to Indo-Burma Trading Corporation, Keshavlal Talakchand and Mitter Tax Fabrics of Rs. 41,998, 1,17,767, and Rs. 7,606, respectively. In these matters, part of the contracts entered into with these parties have been fulfilled and for the rest of the contracts the payments have been made which according to the assessee are in the nature of damages paid on account of compensation for breach of contract on account of the non-fulfilment of the contract timely. According to the Revenue, amounts have been paid for settlement of the contract which was otherwise than by actual delivery of the goods and, therefore, the provisions of section 43(5) were invoked. The law on the point is settled by the various decisions of the apex court as well as this court and it has been held that if the compensation has been paid for breach of contract then it does not come within the expression "settled" as used in section 43(5) of the Act. Explanation 2 of section 28 provides that, where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led 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 case 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 a speculative transaction and a transaction falling in the second category, namely, where there is a breach of the contract and the dispute with regard to damages or compensation for the breach of the contract is settled, it cannot be regarded as a speculative transaction." In CIT v. Rajasthan Wool Agencies [1986] 160 ITR 358 (Raj), it was held that there are four essential ingredien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract otherwise than in accordance with the original terms thereof. It may be that in a general sense the lay man 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 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. " The three amounts mentioned above in which it is alleged that it was the payment of damages for breach of contract have to be examined on the basis of the facts of each case. In respect of payment to Indo-Burma Trading Corporation, the contract was entered into for supply of 2,400 bags of 50 kgs. each up to April, 1973, 1,250 bags were supplied during September/October against this contract. The contract was entered into with the party on February 13, 1973. In respect of the balance quantity not supplied, Indo-Burma Trading Corporation, Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise than by the actual delivery or transfer of the commodity. The said section is not restricted to a contract where the settlement is only in respect of the entire contract. The word "periodically" makes it clear that it could apply even to a part of a contract. Suppose, in a contract the supplies were to be made in equal instalments for 6 months and the supplies have been made for 5 months only, and the rest of the contract was settled without actual delivery, in that case, it will be still a speculative transaction. The argument thus, that where a part of a contract is performed by actual delivery of the goods and part of the contract is settled otherwise than by actual delivery of the goods, the provisions of section 43(5) will not be attracted is not a correct interpretation of the provisions of section 43(5). The provisions of section 43(5) can be made applicable when there is a delivery of part of the goods and the part of the contract is settled otherwise than by actual delivery of the goods. That part where the settlement of the contract is without actual delivery of goods, it will fall under section 43(5). In the present case, the time of delivery was extended ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the settlement of a contract and the payment on account of breach of contract. For the purpose of settlement of contract, it was held that it would not cover cases where there is a breach of the contract on a dispute between the parties and damages are awarded as compensation by an arbitration award. The award of damages for breach of contract has been considered as not the same thing as a party to the contract accepting satisfaction of the contract, otherwise than in accordance with the original terms thereof. Here also, the parties have accepted satisfaction of the contract otherwise than in accordance with the original terms thereof without effecting delivery of the goods or without there being a breach of the contract by virtue of section 73 of the Contract Act. It was a case of mutual settlement in terms of the provisions of section 63 of the Contract Act where parties have accepted a particular sum without delivering the goods. It is also not a case where there were any circumstances for non-delivery of the goods within the extended time either by virtue of any statutory provisions or for reasons which could be said to be beyond the control of the party which makes the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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