1983-VIL-10-SC-DT

Equivalent Citation: [1983] 144 ITR 57 (SC)

Supreme Court of India

Date: 21.07.1983

COMMISSIONER OF INCOME-TAX, BOMBAY CITY III

Vs

SHANTILAL PVT. LIMITED

BENCH

Judge(s)  : A. P. SEN., E. S. VENKATARAMAIAH. and R. S. PATHAK.

JUDGMENT

The judgment of the court was delivered by

PATHAK J.-In this tax reference made under s. 257 of the Income-tax Act, 1961, we are called upon to express our opinion on the following question of law :

" Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the order of the Appellate Assistant Commissioner that the loss suffered by the assessee was not a loss incurred in a speculative transaction within the meaning of sec. 43(5) of the Income-tax Act, 1961 ? "

The assessee, M/s. Shantilal Pvt. Ltd., Bombay, is a private limited company. In the assessment proceedings for the assessment year 1971-72, it claimed a sum of Rs.. 1,50,000 paid by it as damages to M/s. Medical Service Centre as a business loss. During the previous year relevant to the said assessment year the assessee had contracted to sell 200 kilograms of Folic Acid USP at the rate of Rs. 440 per kilogram to M/s. Medical Service Centre and the delivery was to be effected on or before November 1, 1969, within about three months of the date of entering into the contract. The case of the assessee is that as the price of the commodity rose very sharply to as high as Rs. 2,000 per kilogram during the period when the delivery was to be effected, the assessee was unable to fulfil the contract, giving rise to a dispute in regard to the payment of compensation between the parties. The dispute was referred to arbitration and by an award dated August 25, 1970, the arbitrator directed the assessee to pay Rs. 1,50,000 as compensation to M/s. Medical Service Centre. A consent decree in terms of the award was made by the High Court.

In the assessment proceedings, the ITO rejected the claim of the assessee that the payment of compensation was a business loss. He found that the transaction was a speculative transaction as defined by sub-s. (5) of s. 43, I.T. Act, 1961. The AAC allowed the assessee's appeal on the view that the payment made by it represented a settlement of damages on breach of the contract, which was distinct from a settlement of the contract. Accordingly, he found that the loss must be regarded as business loss and not as a speculation loss. The ITO's appeal was dismissed by the Income-tax Appellate Tribunal by its order dated February 18, 1976. The Commissioner of Income-tax applied in reference for a decision on the question of law set out earlier, and, in view of an apparent conflict between different High Courts on the point, the Tribunal has made this reference.

There is no doubt that the arbitration award granting compensation to M/s. Medical Service Centre proceeds on the footing that there was breach of contract. The Tribunal took the view that the award of damages for the breach of a contract did not bring the transaction within the definition of "speculative transaction " set forth in sub-s. (5) of s. 43, I.T. Act, 1961. In this, the Tribunal found support in the view expressed by the Calcutta High Court in CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347, Daulatram Rawatmull v. CIT [1970] 78 ITR 503 and by the Mysore High Court in Bhandari Rajmal Kushalraj v. CIT [1974] 96 ITR 401, which they preferred to the view expressed by the Madras High Court in R. Chinnaswami Chettiar v. CIT [1974] 96 ITR 353, P.L. KN. Meenakshi Achi v. CIT [1974] 96 ITR 375 and A. Muthukumara Pillai v. CIT [1974] 96 ITR 557. On a careful consideration of the matter we are of the opinion that the Tribunal is right. Sub-section (5) of s. 43 defines "speculative transaction " to mean :

" A transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips ........"

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 to contracts should not be imported into the definition of " speculative transaction ". The award of damages for the breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof. It may be that in a general sense the layman 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 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. We are concerned with the sense of law, and it is that sense which must prevail in sub-s. (5) of s. 43. Accordingly, we hold that a transaction cannot be described as a " speculative transaction " within the meaning of subs. (5) of s. 43, I.T. Act, 1961, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation by an arbitration award. We are unable to endorse the view to the contrary taken by the Madras High Court in R. Chinnaswami Chettiar [1974] 96 ITR 353, and, approve of the view taken by the Calcutta High Court in Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347 and by the Mysore High Court in Bhandari Rajmal Kushalraj [1974] 96 ITR 401. The decisions of the Madras High Court in P. L. KN. Meenakshi Achi [1974] 96 ITR 375 and A. Muthukumara Pillai [1974] 96 ITR 557, are not apposite and are not concerned with the point before us. Our attention was invited by learned counsel for the Revenue to the decision of this court in Davenport & Co. P. Ltd. v. CIT [1975] 100 ITR 715, but this point did not arise there either.

Accordingly, we answer the question referred in the affirmative, in favour of the assessee and against the Revenue. There is no order as to costs.

Question answered in the affirmative.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.