TMI Blog1975 (12) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... l Ltd. negotiated the documents and received the proceeds from the bank. Under clause XI of the agreement, a performance bond was to be executed by the assessee-company concurrently with the signing of the agreement for a sum equivalent to 3 per cent of the contract value of the goods. It is not in dispute that a sum of Rs. 20,000 was paid by the assessee-company to M/s. Hindustan Steel Ltd., in lieu of that performance bond, but the assessee-company failed and neglected to open any letter of credit, as it was required to do under the said agreement dated 14th August, 1961. There is one important fact which must be mentioned at this stage, and that is, that as set out in para. 3 of the statement of the case, the assessee-company did not have any firm offer from any overseas party with reference to the goods in question. 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., M/s. Hindustan Steel Ltd., for an amicable settlement, as otherwise it would suffer substantial loss. The assessee-company, therefore, addressed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e requires, " speculative transaction " means a transaction in which a contract for the purchase or sale of any commodity " is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity ". Explanation 2 to section 28 lays down that where speculative transactions carried on by an assessee are of such a nature as to constitute a business. the business must be deemed to be distinct and separate from any other business. Section 73(1) enacts that any loss, computed in respect of a speculation business carried on by the assessee, cannot be set off except against profits and gains, if any, of another speculation business. The question that arises in the present case, therefore, is whether the sum of Rs. 50,000 which was paid by the assessee-company to M/s. Hindustan Steel Ltd. as a settlement arising out of the non-fulfilment of the contract in question could be said to make the contract itself a speculative transaction within the terms of section 43(5), and if so, whether that speculative transaction amounts to speculation business within the terms of Explanation 2 to section 28 which has already been referred to above. I will turn first to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cal), which has been followed by that court itself in Daulatram's case [1970] 78 ITR 503 (Cal) as well as by the Mysore High Court in Bhandari's case [1974] 96 ITR 401 (Mys) already cited above. In my opinion, once a contract is broken, there can be no cause of action founded on the contract itself which can be said to be capable of settlement. After the breach of a contract, what can be settled is only the right to damages resulting from the breach itself, though, undoubtedly, the breach, in the ultimate analysis, must arise from the contract. On a breach of contract occurring, the rights of the parties are crystallized as on the date of the breach, and it is only those rights that can thereafter be the subject-matter of a settlement. For these reasons, I prefer the view taken by the Calcutta High Court in the said two cases as well as by the Mysore High Court in Bhandari's case [1974] 96 ITR 401 (Mys) and do not agree with the view taken by the Madras High Court in R. Chinnaswami Chettiar's case [1974] 96 ITR 353 (Mad) on this point. Reliance was also placed by Mr. Joshi on the decision of the Supreme Court in the case of Davenport Co. P. Ltd. v. Commissioner of Income-tax [197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rightly in allowing the assessee's claim. It is from that decision of the Tribunal that the following question has been submitted to us for decision : " Whether, on the facts and in the circumstances of the case, the sum of Rs. 50,000 paid to Hindustan Steel Ltd. was liable to be disallowed as a loss in respect of a speculation business coming within the scope of section 73(1) read with Explanation 2 to section 28, and section 43(5) of the Income-tax Act, 1961 ? " In the view which I have taken on the facts in the present case, viz., that the said sum of Rs. 50,000 has been paid to Hindustan Steel Ltd. after the breach by the assessee-company of its contract, it must be held that the settlement as a result of which that payment was made, was not a settlement of the contract within the terms of section 43(5), but was a settlement of the assessee-company's liability for damages for the breach of that contract. Following the view taken by the Calcutta High Court, and by the Mysore High Court, in the cases cited above, I hold that the contract itself cannot, by reason of such settlement, be said to be a speculative transaction. In that view of the matter, the further question as t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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