Commissioner of Income Tax vs Panachand Khemchand

M.B. Shah, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal, Ahmedabad, has referred the following two questions for our opinion u/s 256(1) of the Income Tax Act, 1961 :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that the loss of Rs. 36,192 was not a loss from speculative business as only one single transaction was involved?

(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to set off of loss of Rs. 36,192 against profit of business which was not of speculative nature?"

These questions arise in the background of the fact that the assessee, Messrs. Panachand Khemchand, submitted its Income Tax return for the assessment year 1975-76 and on scrutiny of the return, the Income Tax Officer held as under :

"On scrutiny of the books of account it is noticed that the firm has claimed a loss of Rs. 36,192. In this connection, details as to how this claim of loss has been made were filed. As per this letter, it is explained that the firm agreed for the purchases of oil from Krishna Oil Mill on December 15, 1973, through Rajkot Broker. This was sold to Panachand Khemchand, Derol, and the sale contract was dated December 18, 1973, for one tank and dated December 23, 1973, for another tank. On account of the Gujarat Government policy, the Government put a ban on the sale. As such Krishna Oil Mill cancelled the contract with the assessee-firm. After negotiations, the assessee-firm has to settle the contract by paying Rs. 36,192 to the purchaser and according to the assessee this was not a loss in the nature of speculation."

He arrived at the conclusion that whenever a contract for purchase or sale is not fulfilled by actual delivery of contracted goods, any payment is made by way of compensation for settlement of contract, such payment would be considered as a speculative transaction. He, therefore, held that payment of Rs. 36,192 is treated as speculation loss in the face of the assessee-firm and the same was disallowed by him.

Against that order, the assessee preferred an appeal before the Commissioner of Income Tax and the Commissioner of Income Tax took the view that the loss in the present case was not a loss in speculative business as per Explanation 2 to section 28 but it was a solitary transaction. That decision was confirmed by the Tribunal. Thereafter, at the instance of the Revenue, the Tribunal has referred the aforesaid two questions for our opinion.

In our view, considering the facts stated before the Income Tax Officer, it is apparent that the transaction in the present case cannot be said to be a speculative transaction as defined in section 43(5) of the Act. Admittedly, because of the ban imposed by the Gujarat Government on the sale of oil, the present transaction had to be cancelled. After cancellation of the transaction, damages of Rs. 36,192 were paid by settling the dispute. In such a case, applying the test laid down by the Supreme Court in the case of Commissioner of Income Tax, Bombay City-III Vs. Shantilal P. Ltd., it cannot be said that it was a speculative transaction. In that case, the court considered the relevant provisions of section 43(5) read with section 63 of the Contract Act and had held as under (at page 60) :

"A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract the promise, in terms of section 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 section 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 the 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 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 law, and it is that sense which must prevail in sub-section (5) of section 43. Accordingly, we hold that a transaction cannot be described as a ''speculative transaction'' within the meaning of sub-section (5) of section 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."

Hence, in the present case, the assessee is entitled to set off of loss of Rs. 36,192 against the profit of business which was not of speculative nature. Hence, question No. 2 is answered in the affirmative, in favour of the assessee and against the Revenue. With regard to question No. 1, in view of the aforesaid finding, it is not required to be dealt with in the facts and circumstances of the present case. Hence, question No. 1 is left unanswered.

In the result, the reference stands disposed of accordingly with no order as to costs.