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PETITIONER: COMMISSIONER OF INCOME-TAXBOMBAY CITY-III, BOMBAY

       Vs.

RESPONDENT: SHANTILAL PRIVATE LlMITED BOMBAY

DATE OF JUDGMENT21/07/1983

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. SEN, A.P. (J) VENKATARAMIAH, E.S. (J)

CITATION:  1983 AIR  952            1983 SCR  (3) 470  1983 SCC  (3) 561        1983 SCALE  (2)37

ACT:      Income-Tax Act,  1961-Sub-s. (5)  of s.  43-Speculative transaction. A  transaction  where  there  is  a  breach  of contract and  damages are  awarded  as  compensation  by  an arbitration award is not a speculative transaction.      Words and phrases-Speculative transaction-Meaning of.

HEADNOTE:      The respondent  assessee claimed  that  a  sum  of  Rs. 1,50,000 paid  by them  as compensation  for being unable to fulfil a  contract was  a  business  loss.  The  Income  tax officer  rejected   the  claim   on  the   ground  that  the transaction was a speculative transaction as defined by sub- s. (5)  of s.  43 of the Income-tax Act, 1961. The Appellate Assistant Commissioner  held that  the loss  was a  business loss and not a speculative loss on the view that the payment made represented  a settlement  of damages  on breach of the contract, which  was  distinct  from  a  settlement  of  the contract. The  Income Tax  Appellate Tribunal  confirmed the order  of  the  Appellate  Assistant  Commissioner.  On  the request of  the Commissioner  of  Income-tax  the  Appellate Tribunal has referred the question whether the loss suffered by the  assessee was not a loss in a speculative transaction within the meaning of s. 43(5) of the Income-tax Act, 1961.      Answering the question in the affirmative, ^      HELD:  A   transaction  cannot   be  described   as   a "speculative trans  action" within the meaning of sub-s. (5) of s.  43 where  there is  a breach of the contract and on a dispute  between   the  parties   damages  are   awarded  as compensation by an arbitration award. [474 A-B]      Sub-s. (5)  of s.  43 speaks  of the  settlement  of  a contract. A contract can be said to be settled if instead of effecting  the   delivery  or   transfer  of  the  commodity envisaged by the contract the promisee, in terms of s. 63 of the Contract  Act, accepts  instead of  it any  satisfaction which he  thinks fit.  It  is  quite  another  matter  where instead of  such acceptance  the parties raise a dispute and no agreement can be reached for a discharge of the contract. There is  a breach of the contract and by virtue of s. 73 of the Contract  Act the party suffering by such breach becomes

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entitled to  receive from  the party  who broke the contract compensation for  any loss  or damage caused to him thereby. There is  no reason  why  the  sense  conveyed  by  the  law relating to  contracts  should  not  be  imported  into  the definition of "speculative transaction" What 471 is really  settled by  the award  of such  damages and their acceptance by the aggrieved party is the dispute between the parties. [473 A, C-G]      Commissioner of  Income-Tax,  West  Bengal  v.  Pioneer Trading Company  Private Ltd.,  70 ITR  347; Bhandari Rajmal Kushiraj v.  Commissioner of  Income Tax, Mysore, 96 ITR 401 approved.      R. Chinnaswami  Chettiar v. Commissioner of Income-Tax, Madras, 96 ITR 353 overruled.      P.L. KN.  Meenakshi Achi v. Commissioner of Income-Tax, Madras, 96 ITR 375; A. Muthukumara Pillai v. Commissioner of Income-Tax, Madras,  96 ITR  557 and Devenport & Co. P. Ltd. v. Commissioner  of Income-Tax,  West Bengal  11, (1975) 100 ITR 715 not relevant to the point raised.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Tax Reference Case No. 4 of 1978.      Tax Reference  Under Section 257 of the Income Tax Act, 1961 made  by the  Income  Tax  Appellate  Tribunal,  Bombay (Bench ’C’).      D. V.  Patel, T.  A. Ramachandran  & Miss A. Subhashini for the Appellant.      The Judgment of the Court was delivered by      PATHAKJ, J.  In this tax reference made under S. 257 of the income  Tax Act, 1961, we are called upon to express our opinion on the following question of law:           "Whether,   on   the   facts   and   in   the      circumstances of  the case, the Tribunal was right      in confirming the order of the Appellate Assistant      Commissioner  that   the  loss   suffered  by  the      assessee was  not a loss incurred in a speculative      transaction within  the meaning  of Sec. 43 (5) of      the Income-tax Act, 1961 ?"      The assessee,  M/s Shantilal  Pvt. Ltd.,  Bombay, is  a private limited  company. In  the assessment proceedings for the assessment year 1971-72 it claimed a sum of Rs. 1,50,000 paid by  it as  damages to  M/s Medical  Service Centre as a business loss. During the previous year relevant to the said assessment year  the assessee  had contracted  to  sell  200 Kilograms of  Folic Acid  USP at  the rate  of Rs.  440  per Kilogram to M/s. Medical Service Centre and the delivery was to be  effected on  or before November 1, 1969, within about three months of the date of entering into the contract. The 472 case of  the assessee  is that as the price of the commodity rose very  sharply to  as high  as Rs.  2,000  per  Kilogram during the  period when the delivery was to be effected, the assessee was unable to fulfil the contract, giving rise to a dispute in regard to the payment of compensation between the parties. The  dispute was  referred to arbitration and by an award dated  August  25,1970  the  arbitrator  directed  the assessee to pay Rs. 1,50,000 as compensation to M/s. Medical Service Centre.  A consent  decree in terms of the award was made by the High Court.      In the  assessment proceedings,  the Income Tax officer rejected the  claim of  the assessee  that  the  payment  of

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compensation  was   a  business  loss.  He  found  that  the transaction was  a speculative  transactions as  defined  by Sub-s. (5)  of s.  43. Income  Tax Act,  1961. The Appellate Assistant Commissioner  allowed the assessee’s appeal on the view that the payment made by it represented a settlement of damages on breach of the contract, which was distinct from a settlement of  the contract.  Accordingly, he found that the loss must  be regarded  as a  business loss  and  not  as  a speculation  loss.  The  Income  Tax  officer’s  appeal  was dismissed by  the Income Tax Appellate Tribunal by its order dated February  18, 1976.  The Commissioner  of  Income  Tax applied in  reference for  a decision on the question of law set out earlier, and in view of an apparent conflict between different High  Courts on  the point  the Tribunal  has made this reference.      There is  no doubt  that the arbitration award granting compensation to  M/s. Medical Service Centre proceeds on the footing that  there was  a breach  of contract. The Tribunal took the  view that  the award  of damages  for breach  of a contract did not bring the transaction within the definition of "speculative  transaction" set  forth in sub-s. (5) of s. 43, Income  Tax Act,  1961.  In  this,  the  Tribunal  found support in  the view expressed by the Calcutta High Court in Commissioner of  Income-Tax, West  Bengal v. Pioneer Trading Company Private Ltd.,(1) Daulatram Rawatmull v. Commissioner of Income-Tax  (Central), Calcutta(2) and by the Mysore High Court  in  Bhandari  Rajmal  Kushalroj  v.  Commissioner  of Income-tax, Mysore,(9)  which they  preferred  to  the  view expressed  by  the  Madras  High  Court  in  R.  Chinnaswami Chettiar v. Commissioner of Income 473 Tax, Madras.,(1)  P.L. KN. Meenakshi Achi v. Commissioner of Income-Tax, Madras(a)  and A.  Muthukumara Pillai v. Commis- sioner of Income-Tax, Madras.(3) on cereful consideration of the matter  we are  of opinion  that the  Tribunal is right. Sub-s. (5)  of s.  43 defines  "speculative transaction"  to mean:      "a  transaction   in  which  a  contract  for  the      purchase  or  sale  of  any  commodity,  including      stocks and  shares, is  periodically or ultimately      settled otherwise  than by  the actual delivery or      transfer of the commodity or scrips ...." Is a  contract for purchase or sale of any commodity settled when no  actual delivery  or transfer  of the  commodity  is effected, and  instead compensation  is  awarded  under  and arbitration award  as damages for breach of the contract ? A contract can  be said  to be settled if instead of effecting the delivery  or transfer  of the commodity envisaged by the contract the  promisee, in  terms of  s. 63  of the Contract Act, accepts  instead of it any satisfaction which he thinks fit. It  is quite  another  matter  where  instead  of  such acceptance the parties raise a dispute an d no agreement can be reached  for a  discharge of  the contract.  There  is  a breach of  the contract  and by  virtue  of  s.  73  of  the Contract Act  the party  suffering by  such  breach  becomes entitled to  receive from  the party  who broke the contract compensation for  any loss  or damage caused to him thereby. There is  no reason  why  the  sense  conveyed  by  the  law relating to  contracts  should  not  be  imported  into  the definition  of   "speculative  transaction".  The  award  of damages for  breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise  than   in  accordance  with  the  original  terms thereof. It  may be that in a general sense the layman would understand that  the contract  must be  regarded as  settled

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when damages are paid by way of compensation for its breach. What is  really settled  by the  award of  such damages  and their acceptance  by the  aggrieved  party  is  the  dispute between  the   parties.  The   law,  however,  speaks  of  a settlement of  the contract,  and a contract is settled when it is  either performed  or the  promisee dispenses  with or remits, wholly  or in  part, the  performance of the promise made to  him or accepts instead of it any satisfaction which he thinks  fit. We  are concerned with the sense of the law, and it is 474 that sense  which must  prevail in-  sub-s. (5)  of  s.  43. Accordingly, we  hold that a transaction cannot be described as a  "speculative transaction" within the meaning of sub-s. (5) of  s. 43,  Income Tax Act, 1961 where there is a breach of the contract and on a dispute between the parties damages are awarded  as compensation by an arbitration award. We are unable to  endorse the  view to  the contrary  taken by  the Madras High  Court in  R.  Chinnaswami  Chettiar(supra)  and approve of  the view  taken by  the Calcutta  High Court  in Pioneer Trading  Company Private  Ltd. (supra)  and  by  the Mysore High  Court in Bhandari Rajmal Kushalra; (supra). The decisions of  the Madras High Court in P. L. K. N. Meenakshi Achi (supra)  and A.  Muthukumara  Pillai  (supra)  are  not apposite and are not concerned with the point before us. Our attention was  invited by learned counsel for the Revenue to the decision  of this  Court in  Devenport  o.  P.  Ltd.  v. Commissioner of Income-Tax, West Bengal II(1) but this point did not arise there either.      Accordingly, we  answer the  question referred  in  the affirmative, in  favour of  the  assessee  and  against  the Revenue. There is no order as to costs. H.S.K.                     Question answered in affirmative. 475