2017 (12) TMI 40 - AT - Income Tax

Loss on account of breach of contract - treated as a speculation loss - Held that - On perusal of the clause of contract it appears that timely compliance with the required documents and acceptance of the goods is the essence of the letter of understanding entered into between the buyer and the seller. As assessee has deemed to have breached the contract by not accepting the deliveries of the goods within the agreed period the seller has the right to claim all losses and damages from the buyer at the prevailing market price. There is a categorical finding by Hon ble High Court that the fact of loss being genuine was not in dispute. In the facts of the present case assessing officer himself is recording that assessee made payments to these parties for indemnifying damages caused due to cancellation of contract. As the sale has not taken place at all it cannot be considered as speculative transaction. Accordingly ground raised by revenue stands dismissed.

Summary

Issues involved:
1. Whether the loss incurred by the assessee is speculative in nature or was due to damages for breach of contract as claimed by the assessee.

Detailed Analysis:
1. The case involved a situation where the assessee, engaged in trading pulses, incurred a loss of ?3,08,75,218 due to breach of contract with foreign parties. The Assessing Officer (AO) treated this loss as speculative.
2. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who ruled in favor of the assessee and deleted the addition.
3. The revenue then appealed to the Income Tax Appellate Tribunal (ITAT), which sent the matter back to the AO for re-examination. Subsequently, the High Court directed the ITAT to determine whether the loss was speculative or due to damages for breach of contract.
4. The Tribunal was tasked with deciding if the loss was speculative or due to breach of contract. The assessee argued that it had to pay damages for breach of contract to avoid litigation and maintain business reputation, citing normal business practices.
5. The AO contended that the loss was speculative as the assessee sold goods not in its possession. However, the Tribunal found no evidence to support this claim and referred to precedents where losses due to breach of contract were considered allowable business losses.
6. The Tribunal examined the contract details and agreements, emphasizing the importance of timely compliance and delivery in determining breach of contract. The High Court confirmed that the genuineness of the loss was not in dispute.
7. Ultimately, the Tribunal upheld the CIT(A)'s decision based on previous judgments and the specific circumstances of the case. The revenue's appeal was dismissed, and the Tribunal's order was pronounced on May 11, 2017.