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Issues:
1. Whether the compensation paid by the assessee towards breach of contract is allowable as trading loss? 2. Whether the compensation paid for breach of contract without business activity can be considered as business loss? Analysis: The case involved the assessment year 1974-75 where the assessee-firm entered into contracts for the supply of wool to a foreign buyer. Due to the imposition of export duty, the assessee would have incurred a significant loss if the supplies were made. Consequently, the assessee did not fulfill two contracts and agreed to pay compensation for breach of contract. The Appellate Assistant Commissioner allowed the claim as a trading loss, considering it in the interest of the business. The Tribunal upheld this decision, relying on relevant case law. The Tribunal referred two questions to the High Court for opinion. Question No. (1): The High Court, considering previous judgments, held that the compensation paid by the assessee for breach of contract was allowable as a trading loss under section 37(1) of the Income-tax Act. The court agreed with the Tribunal's decision in confirming the amount of compensation as a trading loss, justifying the allowance under the Act. Question No. (2): The High Court found that the compensation paid by the assessee for breach of contract without engaging in business activity was also considered a business loss. The court reasoned that since the assessee was in the business of wool supply, the compensation paid was wholly for business purposes. The court clarified that the provisions of section 43(5) of the Act were not applicable in this case, further supporting the characterization of the payment as a business loss. In conclusion, the High Court answered both questions in favor of the assessee, allowing the compensation paid for breach of contract to be treated as a trading loss and a business loss. The court upheld the Tribunal's decision and directed the parties to bear their own costs for the reference.
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