Commissioner of Income Tax vs Asian Chemical Co.

T.D. Sugla, J.—The Income Tax Appellate Tribunal has referred to this court u/s 256(1) of the Income Tax Act, 1961, the following question as a question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 30,000 paid by the assessee to M/s. N. Mansotta & Bros. was not loss on account of speculative transaction within the meaning of section 43(5) of the Income Tax Act, 1961 ?"

The proceedings relate to the assessee''s assessment year 1971-72. The assessee had on August 10, 1970, entered into a contract with M/s. N. Mansotta & Bros. for the purchase of 150 kgms. of Vitamin B-2 and 100 kgms. of Vitamin B-6, which the latter was to obtain by shipment in October, 1970. The price fixed under the contract was Rs. 540 per kg. for Vitamin B-2 and Rs. 440 per kg. for Vitamin B-6 ex-godown, Bombay. In October, 1970, when the assessee was to take delivery of the goods as per the contract, the price of these two goods had considerably gone down and the trend was for the price to slide down further. The assessee did not accept the delivery of the goods. Thereafter, the liability in regard to the breach of contract between the assessee and M/s. N. Mansotta and Bros. was settled by the assessee for a lump sum of Rs. 30,000 as damages.

The assessee claimed the aforesaid payment of Rs. 30,000 as a business loss. The Income Tax Officer, however, held that the goods not having been delivered in terms of the contract, the resultant loss was speculative in character and was, thus, not a business loss. The finding of the Income Tax Officer was confirmed by the Appellate Assistant Commissioner.

When the dispute came up before the Tribunal, it was seen that the Calcutta High Court in the case of COMMISSIONER OF Income Tax, WEST BENGAL Vs. PIONEER TRADING COMPANY PRIVATE LTD., and in the case of Daulatram Rawatmull Vs. Commissioner of Income Tax (Central), and the Mysore High Court in the case of Bhandari Rajmal Kushalraj Vs. Commissioner of Income Tax, Mysore, , had taken the view that sub-section (5) of section 43 of the Income Tax Act would be attracted only if the contract for purchase and sale was settled otherwise than by actual delivery and not where the settlement was for damages for the breach of contract. The Tribunal also noticed the Madras High Court decision in the case of R. Chinnaswami Chettiar Vs. Commissioner of Income Tax, , where a contrary view was taken. However, the Tribunal preferred to follow the Calcutta and Mysore High Court decisions and held that the payment herein being in the nature of damages for breach of contract, the payment was not a loss in speculative business.

Dr. Balasubramaniam, learned counsel for the Department, has invited our attention to the Supreme Court decision in the case of Davenport and Co. Pvt. Ltd. Vs. Commissioner of Income Tax, West Bengal-II, to show that, where the contract of purchase or sale of a commodity is settled otherwise than by actual delivery, the transaction must be held to be a speculative transaction. When Dr. Balasubramaniam was confronted with the subsequent Supreme Court decision in the case of Union of India and Others Vs. Filip Tiago De Gama of Vedem Vasco De Gama, , where the Calcutta High Court decision and the Mysore High Court decision relied upon by the Tribunal were approved and the Madras High Court view to the contrary was overruled, he stated that the case herein was not a case of damages for a breach of contract. It was a pure and simple payment of difference. He particularly referred to the fact that the dispute, unlike in the Supreme Court decision, was not referred to for arbitration and the settlement was between the parties themselves. Mr. Mehta, learned counsel for the assessee, on the other hand, submits that, in view of the Supreme Court decision in Union of India and Others Vs. Filip Tiago De Gama of Vedem Vasco De Gama, , the question must be answered in the assessee''s favour.

We have already set out the facts above. The Tribunal has given a finding that there was first a breach of contract. Thereafter, there was a settlement of liabilities arising out of the breach of contract and that the amount of Rs. 30,000 paid was in the nature of damages. It is not possible for this court to go into the correctness of this finding, particularly as no such question has been referred to us. Once this finding is accepted, it is evident from the record that the dispute before the Tribunal was whether to follow the Calcutta High Court decision and the Mysore High Court decision or to follow the Madras High Court decision where a contrary view was taken. The Supreme Court in Union of India and Others Vs. Filip Tiago De Gama of Vedem Vasco De Gama, , as stated earlier, has approved the Calcutta High Court decision and the Mysore High Court decision and has overruled the Madras High Court decision.

In the circumstances the answer to the question has to be in the affirmative and in favour of the assessee.

The question is so answered.

9.No order as to costs.