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TMI Blog1990 (5) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... One of the terms of the contract was to open a confirmed irrevocable unrestricted letter of credit to be established by the assessee in favour of the seller on Bank of India, Singapore, for 100 per cent value, by 22nd Oct., 1980, and the letter of credit was to be confirmed by the foreign bank. This was complied with accordingly by opening of a letter of credit through Andhra Bank on 23rd Oct., 1980. The assessee in turn entered into contracts with the following parties for the supply of the imported palm stearin oil in India: Name Date 1. M/s Godrej Soaps Ltd., Bombay 18th Oct., 1980 2. M/s Lakshmi Soap Factory, Bombay 14th Oct., 1980 3. M/s Dhanthak & Company, Bombay (i) 29th Sept., 1980 . (ii) 13th Oct., 1980 . (iii) 14th Oct., 1980 4. M/s The Tata Oil Mills Co., Ltd., Bombay 21st Oct., 1980 The foreign supplier did not honour the contract. As a result, the assessee had to pay damages in the form of price difference in terms of the contract with the buyers after or near about the respective due dates of delivery envisaged in the respective contracts, and the sum involved is Rs. 8,28,780. This was claimed as a business loss. 4. In the proceedings under s.144B of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amy, learned counsel for the assessee, submitted that the transaction was a bona fide business transaction. The assessee hoped to import palm stearin oil from Singapore for which there was a binding contract covered by the opening of a letter of credit representing 100 per cent value of the contract. Because the oil prices were galloping, the foreign seller on some technical point did not honour the contract. The assessee was moving heaven and earth to get the supplies. Sri Swamy referred to the correspondence in the paper book in support of his contention. As a result, the assessee could not deliver the imported oil to the local buyers as per the delivery schedule agreed upon in the respective contracts with the buyers. Hence, the local buyers claimed damages or price difference in lieu of non-delivery of the contracted goods. The claim was made by the local buyers in debit notes raised against the assessee and the claim was settled by account payee cheques. On these facts, there is no dispute. Thus, the inability to make deliveries to the Indian buyers was as a result of the assessee's inability to procure the supply from the foreign supplier. There was no intention to speculate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because in a hedging transaction there should be stock ready for delivery, but delivery is not made, nor is it the case of the assessee or of the Department that it was a hedging transaction. The motive for entering into the contract is not the criterion for deciding whether a transaction is a speculative transaction or not. Any transaction which is not accompanied by delivery would squarely fall with in the provisions of s. 43(5) of the IT Act and it is for the assessee to take his transaction out of the clutches of s. 43(5) by adducing evidence. This has not been done in this case and, therefore, the ITO was justified in disallowing the loss as a non-business loss. He further submitted that the CIT(A) erred in accepting one of the transactions as a regular transaction. Besides, he emphasised that there was no evidence to show that the assessee was forced to pay damages after the breach had occurred. He relied on the following decisions: CIT vs. Bhikamchand Jankilal (1980) 19 CTR (MP) 311 : (1982) 131 ITR 554 (MP); M.A. Dhawan vs. CIT (1979) ITR 412 (Del); Hoosen Kasam Data (India) Ltd. vs. CIT (1964) 52 ITR 171 (Cal); R. Chinnaswami Chettiar vs. CIT (1974) 96 ITR 353 (Mad); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some technical reason or other. As early as 3rd Dec., 1980, the assessee had sent a telex message to the broker when it was known that the seller was not prepared to honour the contract. The telex message is as follows: "Recd the FLWNG reply FRM Sanjiv Kumar Dhanji RDNG as under: Re C/N TAIM/830/80 500 MTs palm stearin seller manilal your TLX Dtd. 2nd Dec., 1980 surprised and shocked to learn seller view, it seems SLR Manilal trying to withdraw FRM their contractual obligation regret cannot accept/agree to SLRs contention for treating us into default stop necessary amendments to letter of credit as and when called for has been attended and instructed by us to our bankers for doing the needful stop we hold SLRs into highest esteem and never expected such action FRM them however we hold them fully responsible for non-shipment against the contract and reserve our right to hold them into default and claim all losses/damages of whatsoever nature arising out of their default in case we do not receive their appropriation in time as per contract kindly inform SLR about this and RVRT UNQQ kindly note the ABV N do the needful". On 5th Dec., 1980, the assessee addressed a letter to the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission of the Revenue. On the one hand, it proceeds to disallow the loss for the reason that no delivery was effected by the assessee in the case of three Indian buyers contending that since no delivery was made the transaction was a speculative one in terms of s. 43(5) of the IT Act, and in the same breath it also raises objection to the settlement of the rate difference even in a case where delivery was in fact effected with the consent of the assessee though from a different seller. Therefore, we reject the Revenue's appeal against the deletion of the disallowance of Rs. 2,36,867 being the loss arising on account of the price difference claimed by Tata Oil Mills Co. Ltd. 11. In the case of the other three parties, we notice that settlement did not take place as per the delivery schedule envisaged in the contract. For example, damages were paid to Godrej Soaps Ltd. on their claim dt. 6th Jan., 1981 whereas the assessee ought to have delivered to them between 15th Nov., 1980 and 15th Dec., 1980. In the case of Dhanthak & Co., deliveries were envisaged in Nov., 1980 and Jan., 1981. Hence, in the above cases, it cannot be held that there was settlement of contract before the breac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices without delivery being contemplated. 12. We are also supported by the decision of the Honourable Andhra Pradesh High Court in CIT vs. Sri Venkateswara Rice & Oil Mills. The Honourable High Court, while approving the principles laid down by the Bombay High Court in CIT vs. Indian Commercial Co. Pvt. Ltd. (1977) 106 ITR 465 (Bom), that even a single speculative transaction, on application of proper tests may be found to constitute speculation business, did not accept the submissions of the learned Standing Counsel for the Revenue that there are no recognised tests which are applicable for the purpose of determining whether an assessee is carrying on speculation business by reference to the nature of the speculative transactions carried on by him. The Honourable High Court further went to explain that "the question whether an assessee is carrying on speculation business can be determined by the application of recognised tests, namely, whether speculative transactions carried on by the assessee connote some real, substantial and systematic or organised course of activity or conduct with a set purpose and without application of test, it will be impermissible to come to a conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o show that the assessee had in fact taken all possible steps to procure the imports from the Singapore party in order to honour the contracts with the Indian buyers but failed in its efforts. Besides, these two transactions are part of the other transactions where breach of contract had taken place due to the inability of the assessee to import the materials. In this view of the matter, we hold that even though in respect of these two transactions the settlement was made before the due date of delivery, still that would not partake of the nature of speculative transaction. We are supported by the observations of the Tribunal in its order dt. Aug., 1979 in ITA No. 123/Hyd/1978-79 in the case of ITO vs. M/s Gopala Krishna General Trading Co. Anantapur, where the Bench approvingly took note of the earlier decision of the Tribunal in ITA No. 1067 holding that "if out of several transactions one or two transactions, or for that matter a few transactions, could not be settled by actual delivery of goods, but by paying the rate differences, such transactions could not amount to speculation business and, therefore, the loss should not be disallowed. 14. For these reasons, we delete the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent areas. Which is popularly know as price discrimination, and there is nothing wrong in a dealer incurring loss in a particular market with a view not to completely lose a particular market in a particular area. There is also no material on record to show that the assessee had inflated the cost of its purchases or that it had purchased from people who are related to its partners or any source in which the relatives of the partners are interested. In the circumstances, we delete the disallowance for both the years. 17. The last ground in the assessee's appeal for the asst. yr. 1981-82 is about the disallowance of the claim under s. 35B of the IT Act on the expenditure incurred by the assessee on foreign travel in a sum of Rs. 15,000. This amount was allowed as a business expenditure under s. 37 of the IT Act but the assessee's claim for weighted deduction was disallowed. The learned CIT(A) had not gone into the claim of the assessee and on that score we restore the matter to his file for determination of the claim in accordance with law. 18. In the assessee's appeal for the asst. yr. 1982-83, there is another ground which is in relation to the disallowance of deduction under s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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