TMI Blog1986 (1) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... erva Hosiery Mill Pvt. Ltd., and (1) M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd. The amount of Rs. 42,000 represented the amount paid as damages for non-performance of contracts which are said to have been orally entered into with the aforesaid parties for supply of wool tops. The details of the aforesaid oral contracts were supplied by the assessee to the Income-tax Officer. According to the contracts, the assessee had agreed to supply 30,000 kgs. of wool tops to M/s. Minerva Hosiery Mills Pvt. Ltd. and 22,000 kgs. of wool tops to M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd. in December, 1972. The supply was to be made from December, 1972, to June, 1973, in 5 or 6 instalments at the fixed rate of Rs. 24.47 per kg. The assessee, in fact, supplied 2,753 kgs. to M/s. Minerva Hosiery Mills Pvt. Ltd. and 9,140 kgs. to M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd., up to March, 1973. In April 1973, both the aforesaid parties were informed by the assessee that it will not be possible for it to supply the remaining contracted quantity. That gave rise to a dispute between the parties. The dispute, however, was amicably settled in March, 1974, and the compromise agreements were dra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellate Assistant Commissioner that the amount in question was an admissible deduction from the trading profits was erroneous. The Tribunal after taking into consideration the relevant provisions of the Act as well as the case law bearing on the question which was agitated before it came to the following conclusion : " The assessee has filed before us a statement which shows that a loss of nearly Rs. 4 lakhs would have been suffered by the assessee, if it had supplied the remaining quantity of wool at the prevailing rate of Rs. 34.47 per kg., and, therefore, the assessee agreed to pay by way of damages Rs. 42,000. The payment obviously was in the interest of the assessee's business and was dictated by commercial expediency. It was, thus, a loss which had arisen to the assessee in the course of the business and the learned Appellate Assistant Commissioner rightly held that the same was allowable ........" It is clear from the aforesaid extracted portion that the amount of Rs. 42,000 was held by the Tribunal to be an allowable deduction under section 37(1) of the Act. While dealing with the question whether the payment of Rs. 42,000 was a speculation loss under section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 kgs. of wool tops to M/s. Minerva Hosiery Mills Pvt. Ltd. and that supply was to be made from December, 1972, to June, 1973, and that too in 5 or 6 instalments. The rate stipulated was Rs. 24.47 per kg. The assessee was also to supply 22,000 kgs. of wool tops to M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd. That supply was to be made from December, 1972, to June 1973, in 5 or 6 instalments at the aforesaid rate. It has been found by the Tribunal that the assessee actually supplied 2,753 kgs. to M/s. Minerva Hosiery Mills Pvt. Ltd. and 9,140 kgs. to M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd. up to March, 1973. Thereafter, the supply was not made as stipulated by the assessee to the aforesaid two firms. The firms were informed that the remaining wool tops will not be supplied. It is clear that the assessee failed to perform its part of the contract entered into by it with the aforesaid two firms and thereby committed breach thereof. On account of breach of contract, dispute arose and that dispute was amicably settled by entering into compromise agreements according to which Rs. 42,000 was paid by the assessee by cheque to the aforesaid two firms. The Tribunal posed quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial conditions: (1) the contract should be for purchase or sale, (2) the purchase or sale should be of stocks or shares or commodity, (3) periodical or ultimate settlement of the contract, and (4) settlement to be otherwise than by actual delivery or transfer. The precise question in these circumstances would be whether the payment of damages by the assessee after the breach of contract has taken place is " settlement of the contract " within the meaning of section 43(5) of the Act. The Income-tax Officer has, however, referred to Swadeshi Cotton Mills' case [1967] 63 ITR 65 (SC). In that case, the Tribunal and the High Court accepted that the sum of Rs. 35,000 claimed as deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922 (" the old Act "), was really paid for breach of contract in respect of purchase of textile machinery which would have been a capital asset. The appellant before the Supreme Court which carried on the business of manufacturing and selling cloth and other textile goods, entered into two contracts for the purchase of textile machinery in order to expand his textile business. The circumstances altered and the appellant subsequently cancell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this loss in the computation of its income. The Tribunal ultimately held that the case fell within the scope of Explanation 2 to section 24(1) of the old Act. The question was referred whether the Tribunal was right in holding that the transactions entered into by the assessee were speculative transactions within the meaning of Explanation 2 to section 24(1) of the old Act. The Supreme Court approved the following observations made in D. M. Wadhwana v. CIT [1966] 61 ITR 154 (Cal) (at p. 722 of 100 ITR). " The Explanation to section 24(1), however, does not prevent persons from entering into contracts in which the buyers and sellers may not actually hand over the goods physically. The Explanation is only designed at segregating for income-tax purposes loss sustained in transactions of a certain kind. It may be that such transactions are not speculative in the light of section 30 of the Contract Act ... In enacting the Explanation 2 to section 24(1) of the Income-tax Act, the legislature did not intend to affect any transaction of sale wherein the goods were not physically delivered by the seller to the buyer but only laid down that if there was no actual or physical delivery, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but on its breach. B.N.Banerjee J., with whom K.L.Roy J. agreed, observed as under (at p. 352): " We need not concern ourselves with the other remedies for breach of contract under the Sale of Goods Act, namely, by specific performance or otherwise. In the instant case, part of the contract was not performed. The contract was also not dispensed with or remitted within the meaning of section 63 of the Indian Contract Act. From the facts hereinbefore mentioned, it appears that the assessee proceeded on the footing of a breach of contract by the purchasing Japanese company, namely, its default in opening a letter of credit and on that footing claimed damages, measured on the difference of price on the date of the breach. As we read Explanation 2 to section 24(1), we do not feel that a claim based on breach of contract comes within the meaning of contract settled as used in Explanation 2. In our reading the expression '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. Since the money which the assessee received in the instant case, in our reading of the facts, was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 347 (Cal) and Bhandari Rajmal Kushalraj's case [1974] 96 ITR 401 (Mys) were approved by the Supreme Court in CIT v. Shantilal P. Ltd. [1983] 144 ITR 57. His Lordship Pathak J., speaking for the court, made the following illuminating observations (at p. 60) : " Is a contract for the purchase or sale of any commodity settled when no actual delivery or transfer of the commodity is effected, and instead, compensation is awarded under an arbitration award as damages for breach of the contract ? A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract, the promisee in terms of s. 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit. It is quite another matter where instead of such acceptance, the parties raise 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 s. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantity of wool tops because of continuous 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 stipulating that the contracted wool tops will be supplied from December, 1972, to June, 1973, clearly shows that actual delivery was contemplated. Therefore, the Tribunal, in our opinion, was right when it held that the transactions could not be described as speculative transactions in the sense in which speculation is understood under the contract or in the general sense of the word. The breach was committed before the closing date of the contract. It was in June, 1973, and the assessee informed the two firms that it will not be able to supply the remaining quantity of wool tops. The assessee committed default by non-performance or non-fulfilment of the terms of the contract regarding supply of wool tops. As result of that, a dispute arose and that was settled by reducing into writing the compromise agreement by which a lump sum of Rs. 42,000 was paid as d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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