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Issues Involved:
1. Whether the transactions in question constituted a speculation business under section 43(5) read with Explanation 2 to section 28 of the Income-tax Act, 1961. 2. Whether the amounts paid by the assessee to the purchasers could be treated as business losses. Detailed Analysis: Issue 1: Speculation Business under Section 43(5) The primary question was whether the transactions, which resulted in payment of price differences, constituted a speculation business under section 43(5) read with Explanation 2 to section 28 of the Income-tax Act, 1961. The assessee, a firm engaged in the manufacture and sale of rice bran oil and deoiled bran, failed to deliver oil due to non-availability of railway wagons. Consequently, the assessee paid price differences to the purchasers, which it claimed as business losses. Section 43(5) defines a speculative transaction as one where a contract for purchase or sale of any commodity is settled otherwise than by actual delivery. Explanation 2 to section 28 states that speculative transactions constituting a business shall be deemed distinct from any other business. The Tribunal found that the assessee had sufficient oil but could not deliver due to circumstances beyond its control. The contracts stipulated that non-availability of wagons was no excuse for non-performance. The purchasers exercised their option to re-purchase oil from the open market and recover the price difference from the assessee. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) had disallowed these claims, considering them speculative transactions. Issue 2: Treatment of Payments as Business Losses The Tribunal, on appeal, agreed with the assessee that the transactions were not speculative. The Tribunal referred to decisions from the Calcutta and Karnataka High Courts, which distinguished between settling a contract before breach and settling claims arising from a breach. The majority view was that settling claims from a breach does not constitute settling the contract under section 43(5). The High Court referred to several decisions: - CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347 (Cal): Held that settling claims from a breach is not settling the contract. - Daulatram Rawatmull v. CIT [1970] 78 ITR 503 (Cal): Affirmed the distinction between settling a contract and settling claims from a breach. - CIT v. Anglo-Indian Jute Mills Co. Ltd. [1980] 124 ITR 384 (Cal): Similar clause to the present case, held that the amount received was for breach, not settling the contract. - Bhandari Rajmal Kushalraj v. CIT [1974] 96 ITR 401 (Karnataka): Held that settling damages from a breach is not settling the contract. - CIT v. Indian Commercial Co. P. Ltd. [1977] 106 ITR 465 (Bombay): Held that after breach, only the right to damages is settled, not the contract. - Addl. CIT v. R.D. Ram Nath & Co. [1983] 141 ITR 897 (Delhi): Affirmed the majority view. Conversely, the Madras High Court in R. Chinnaswami Chettiar v. CIT [1974] 96 ITR 353 held that the definition in section 43(5) does not distinguish between settlement before or after breach. However, the High Court favored the majority view, stating that taxing law should be construed literally, and there is a clear distinction between settling a contract and settling claims from a breach. Conclusion The High Court concluded that the transactions in question were not speculative transactions under section 43(5). Consequently, the assessee was entitled to treat the amounts paid to the purchasers as business losses. The reference was answered in favor of the assessee and against the Department, with no order as to costs.
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