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TMI Blog2016 (9) TMI 1030X X X X Extracts X X X X X X X X Extracts X X X X ..... in law and on facts in deleting disallowance of ₹ 2,89,15,250/- held as "Speculative Loss" by the AO. 2. The appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal. 2. The facts in brief are that the return of income was filed electronically (e-return) on 27.09.2008 at a total income of ₹ 45,20,858/-. This return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred the Act) on 10.12.2009. The case was selected for scrutiny assessment and notices u/s 143(2) of the l.Tax Act dated 04.09.2009 was issued and duly served upon the assessee within prescribed statutory time limit. Thereafter, notice u/s 142(1) of I.Tax Act dated 13.10.2010 was issued and served upon the assessee. In response to these statutory notices the Authorized Representative of the assessee company attended the assessment proceedings and filed necessary details/ documents as called for therein. These details were examined by the AO. Books of accounts were also produced and examined on test check basis. Thereafter AO observed that the damages paid by the assessee for cance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business of trading in pulses and chemicals on whole sale basis for which it imports pulses and PVC resin in bulk quantities from foreign parties. The appellant company also carried processing activities to make dal from whole grain pulses. For import of the items it enters into contracts with foreign parties. From the details of purchases given by the appellant it is apparent that its imports from top 15 parties is more than ₹ 54 crores including from JK International Pvt. Ltd. (Rs. 12.92 crores). It has made similar import from J.K. International Pvt. Ltd. for the last several years. In the A.Y. 2008-09, its imports from J.K. International Pvt. Ltd. constitute about 22.75% of total purchase of pulses of ₹ 56.84 crores. As per purchase details the import of ₹ 12.92 crores have been made during the year from J.K. International Pvt. Ltd. on the basis of contracts that were honoured. However, one particular contract for import of chick peas from J.K. International Pvt. Ltd. entered on 04/04/2007 was not honoured and finally settled between the parties on 17/05/2007 as under:- Contract No. Date of Contract Due date of shipment Date of Breach of contract D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellant that due to lower demand there is decline in market rate is found to be correct. From the chart of average cost of Chick Peas and estimated loss filed by the appellant it is also apparent that, if the appellant had imported the items at the agreed rice as per the import contract the appellant would have suffered a huge of loss of ₹ 4. 5 crores. Therefore, the loss of ₹ 2.89 crores suffered by appellant is a case of loss minimization. 6.3 From the email communication dated 04/05/2007 it is also evident that J.K. International Pvt. Ltd. has claimed an amount of $ 7,50,000/- [15,000 MT x $ 501- per MT] @ $501- per MT being the difference between contract price @$ 545/- and market price $ 495/- as the appellant has failed to open the L/C within the contract shipment period upto 30/04/2007. The above communication also suggests the fall in international market price of chick peas from the agreed rate of $5451- per MT as on 04/04/2007 to $4951- per MT as on 30/04/2007. From the email communication dt 04/05/2007 from the MD of the appellant company and dt 07/05/2007 from J.K. International Pvt. Ltd. it is also evident that the offer of $45 per MT by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract. A breach takes place on account of repudiation of the contract or failure to perform it or a contract may be terminated through frustration, impossibility or through any other cause which ends the contract under the contract Act or the sale of goods Act. 18. In view of our conclusion that s. 43(5) only covers cases where a contract is settled without breach, and not cases where there is a breach followed by a settlement of the quantum of the damages, we answer the question referred to us in the affirmative and against the department. 6.6 Hon'ble Calcutta High Court in CIT vs. Pioneer Trading Company (P) Ltd. 70 ITR 347 (Cal) have held that the meaning of a contract settled otherwise than by actual delivery or transfer of the commodity means a contract settled before a breach takes place. If there is a settlement after the breach, it is a case of settling the quantum of damages. 6.7 In the case of CIT vs. Indian Commercial Co. (P) Ltd. 106 ITR 465 (Born), the assessee-company entered into an agreement with HSL for purchasing 250 metric tons of Hot Pressed Naphthalene, f.o.b., Calcutta. Under clause III, delivery of the goods was to be so arranged that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business losses. The ITO disallowed the same on the ground that the said contracts were speculative in nature, and hence the losses could be set off only against any profit arising from another speculative business. The AAC confirmed the findings of the ITO. On further appeal, however, the Tribunal allowed the impugned losses, holding that the contracts in question were not speculative transactions. On further appeal by the revenue, Hon'ble Andhra Pradesh High Court have held that.- "It is settled that taxing law has to be construed literally, and literally speaking there is a distinction between settling the contract and settling the claim for damages arising from the breach of a contract. Both are not synonymous. In case of breach of contract, what is settled is the claim arising from the breach of the contract and not the contract. Settling a contract so as to make a transaction a speculative one means settling the contract before the occurrence of the breach by payment of difference. Where the breach occurs and thereafter claims arising from the breach are settled between the parties to the contract, it would not amount to settling of contract. In this view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase were in the nature or damages paid after the breach of contract. The Learned CJT(Appeals) following the ratios of decisions cited before it on the issue was thus justified in coming to the conclusion that the damages paid were fully allowable under sec. 37(1) of the Act. The Learned CIT(Appeals) has taken a stand, which is supported by several decisions cited before it, including the decisions of Hon'ble Delhi High Court in the cases of err vs. Bhagwan Dass Rameshwar Dayal (1984) 149 ITR 387 (DeL) and CIT vs, Hans Machoo & Co. (20CH) - 2471TR 79 (Del.). In the case of Bhagwan Dass Rameshwar Dayal (supra), the Hon'ble Delhi High Court has been pleased to hold that if the contract is settled otherwise than by actual delivery or transfer of the commodity, it is a speculative transaction but if there is a settlement after the breach, it is a case of settling the quantum of damages and the loss is incidental to business and allowable as a business loss. Again in the case of Hans Machoo & Co. (supra), the Hon'ble Delhi High Court has been pleased to hold that the ITAT having recorded a finding that there was a breach of contract and the assessee had to pay damages, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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