1993 (10) TMI 40 - HC - Income Tax

Summary

Issues Involved:

1. Disallowance u/s 43(5) of the Income-tax Act
2. Nature of transactions as speculative under section 43(5)
3. Disallowance of expenditure incurred on the 10th anniversary of the assessee company

Summary:

Issue 1: Disallowance u/s 43(5) of the Income-tax Act

The Tribunal upheld the Commissioner of Income-tax (Appeals) order reducing the disallowance from Rs. 1,86,764 to Rs. 4,500, allowing relief of Rs. 1,82,264. The Income-tax Officer initially considered the amount of Rs. 1,86,764 as a speculation loss. However, the Commissioner found that the payments were compensations for non-fulfillment of contracts and not speculative transactions. The Tribunal agreed, except for Rs. 4,500, which was not allowable as it pertained to earlier years.

Issue 2: Nature of transactions as speculative under section 43(5)

The Tribunal held that none of the transactions were speculative under section 43(5). The Tribunal relied on various High Court decisions, including CIT v. Indian Commercial Co. P. Ltd. and CIT v. Ramjeewan Sarawgee and Sons, which state that a settlement of a claim for damages arising out of a breach of contract is not a speculative transaction. The Tribunal found that the transactions involved actual delivery of goods and were not speculative. However, the High Court disagreed, stating that part performance of a contract with subsequent settlement without actual delivery falls under section 43(5), making Rs. 1,67,371 speculative transactions.

Issue 3: Disallowance of expenditure incurred on the 10th anniversary of the assessee company

The Tribunal upheld the Commissioner's order deleting the disallowance of Rs. 68,620 incurred on the 10th anniversary. The expenditure was found to be for promoting the business and encouraging employees, not charitable in nature. The Tribunal concluded that the expenditure was revenue in nature and wholly and exclusively for business purposes, making it an allowable deduction u/s 37.

Conclusion:

The High Court held that the Tribunal was partly justified in its decisions. The transactions amounting to Rs. 1,67,371 were speculative under section 43(5), while Rs. 14,893 was not. The expenditure of Rs. 68,620 on the anniversary was rightly considered as revenue expenditure. Thus, questions Nos. 1 and 2 were answered partly in favor of the assessee and partly in favor of the Revenue, and question No. 3 was answered against the Revenue and in favor of the assessee.