2019 (10) TMI 1260 - AT - Income Tax

Speculation loss - Loss arising on breach of contracts - assessee in the instant case has paid the towards compensation for breach of contract and claimed it as business loss - CIT(A) however held that the contract resulting in payment of compensation did not amount to speculative transact ion and directed the AO to allow the amount as business loss - HELD THAT - Hon ble Supreme Court in CIT vs. Shantilal (P. ) Ltd. 1983 (7) TMI 1 - SUPREME COURT held that the transact ion cannot be described as a speculative transactions within the meaning of Section 43(5) of the Act where there is a breach of contract and on a dispute between the parties damages were awarded as compensation by an arbitration award. The award of damages for breach of contract is not the same thing as the party to the contract has intended to settle the contract following a breach or non-performance of the contract. Such payment towards breach is not akin to the word settled used in Section 43(5) - In view of the decision of the Hon ble Supreme Court and the decision of various High Courts following the principles laid down by the Hon ble Supreme Court, we do not see any error in the conclusion drawn by the CIT(A). We thus decline to interfere. - Decided against revenue.

Summary

Issues:
1. Whether the loss arising on breach of contracts constitutes speculative loss or ordinary business loss under Section 43(5) of the Income Tax Act, 1961.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) concerning the assessment order for AY 2011-12. The Revenue contended that the amount representing damages paid for failure to deliver goods should be added to the appellant's business income as speculation loss. The appellant argued that the amount was deductible as it was paid for breach of contract and should be considered ordinary business loss. The AO treated the loss as speculative under Section 43(5), but the CIT(A) disagreed, allowing the amount as business loss.

The key question was whether the loss from breach of contracts should be classified as speculative transaction under Section 43(5) or ordinary business loss. The appellant paid compensation for breach of contract and claimed it as business loss. The AO treated it as speculative loss, while the CIT(A) held that it did not fall under speculative transaction. Citing the Supreme Court's decision in CIT vs. Shantilal (P.) Ltd., it was established that damages awarded for breach of contract do not align with the settled transaction concept in Section 43(5) of the Act. The payment for breach does not equate to a settled transaction. Following this legal precedent, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal.

Therefore, the Tribunal concluded that the loss incurred due to breach of contract should be considered ordinary business loss rather than speculative loss under Section 43(5) of the Income Tax Act, 1961. The decision was based on legal principles established by the Supreme Court and various High Courts, emphasizing that damages for breach of contract do not fall under the speculative transaction category.