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2020 (3) TMI 1025 - HC - Income TaxAddition of speculation loss - Payment of damages made - monetary loss for the breach of contract and the settlement of the contract - whether it would not fall within the purview of Section 43(5)? - Whether the nature of compensation for breach of contract, whether speculation or otherwise can be determined irrespective of the nature of contract breached? - HELD THAT - The dictum as laid down in Shantilal 1983 (7) TMI 1 - SUPREME COURT is that the award of damages for the breach of a contract is not the same thing as a party to the contract except the satisfaction of the contract otherwise than in accordance with the original terms thereof. In view of the aforesaid, it is difficult to accept the submission of the learned standing counsel appearing for the Revenue that the case is one of a speculative transaction within the meaning of Section 43(5) of the Act. No substantial questions of law
Issues Involved:
1. Addition of speculation loss. 2. Nature of compensation for breach of contract. 3. Determination of speculative or business nature of compensation. Issue-wise Detailed Analysis: 1. Addition of Speculation Loss: The Revenue challenged the order of the Income Tax Appellate Tribunal (ITAT) which upheld the CIT (A)'s deletion of the addition of speculation loss amounting to ?3,83,12,474/-. The Assessing Officer (AO) initially treated the transactions as speculative under Section 43(5) of the Income Tax Act, 1961, since they were settled without delivery of goods, and thus disallowed the claimed business loss. However, the CIT (A) and subsequently the ITAT concluded that these transactions were not speculative as they involved breach of contract and payment of damages, which do not fall under the purview of speculative transactions as defined in Section 43(5). 2. Nature of Compensation for Breach of Contract: The core issue was whether the compensation paid for breach of contract should be considered speculative income or loss. The CIT (A) noted that the assessee, engaged in the business of refining edible oil, had entered into contracts for delivery of goods, which were not honored due to unfavorable market conditions. The CIT (A) held that the payment of damages was a monetary loss for breach of contract and not a speculative transaction. This view was supported by various judicial precedents, including the Supreme Court's ruling in CIT vs. Shantilal (P.) Ltd., which stated that damages awarded for breach of contract do not equate to speculative transactions. 3. Determination of Speculative or Business Nature of Compensation: The CIT (A) and ITAT both emphasized that the intention behind the transactions was to deliver goods, and the failure to do so, resulting in monetary compensation, did not make the transactions speculative. The ITAT cited the Supreme Court's decision in Shantilal (P.) Ltd., which clarified that a transaction is not speculative if it involves breach of contract and subsequent payment of damages, as opposed to settling the contract by mutual agreement without delivery. The ITAT affirmed that the loss incurred was a business loss and not speculative, as the payment of damages was due to non-performance of the contract to minimize losses. Conclusion: The High Court dismissed the Revenue's appeal, agreeing with the findings of the CIT (A) and ITAT. The court concluded that the transactions in question were not speculative within the meaning of Section 43(5) of the Income Tax Act, 1961, and thus the addition of ?3,83,12,474/- as speculative loss was not justified. The court held that the questions of law proposed by the Revenue did not qualify as substantial questions of law.
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