C/TAXAP/115/2020 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 115 of 2020 PRINCIPAL COMMISSIONER OF INCOME TAX-3 Versus M/S RAJSHRI PACKAGERS LTD. Appearance: MRS MAUNA M BHATT(174) for Appellant(s) No. 1 for Opponent(s) No. 1 CORAM: HONOURABLE MR. JUSTICE J. B. PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 02/03/2020 ORAL ORDER (PER : HONOURABLE MR.JUSTICE J. B. PARDIWALA) 1. This tax appeal under Section 260A of Income Tax Act, 1961 (for short Act, 1961) is at instance of Revenue and is directed against order passed by Income Tax Appellate Tribunal, Ahmedabad Bench B , Ahmedabad dated 4th October, 2019 in ITA No.2241/Ahd/2017 for A.Y. 2011-12. 2. facts, giving rise to this appeal, may be summarized as under; 2.1 respondent-assessee is engaged in business of refining of edible oil and related products. assessee filed its return of income declaring total income at Nil. During course of assessment proceedings, Assessing Officer noticed that assessee had claimed contract settlement loss of Rs.62,34,974/- and Rs.3,20,77,500/- respectively. Page 1 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 C/TAXAP/115/2020 ORDER Assessing Officer took view that transactions were entered into by assessee with various parties and those were settled without delivery of goods by making payment of difference of price. According to Assessing Officer, it was nothing but speculative transaction. In such circumstances, Assessing Officer took view that loss incurred due to speculative transaction cannot be allowed as revenue expenditure. Accordingly, Assessing Officer made addition of Rs.3,83,12,474/- under Section 43(5) of Act towards speculation loss incurred on purchase and sale of contracts which was claimed by assessee as business loss in return of income and adjusted against business income under Section 73 of Act. 2.2 assessee, being dissatisfied with assessment order, went in appeal before CIT (A). CIT (A) allowed appeal of assessee holding that payment of damages made by assessee represents monetary loss for breach of contract and settlement of contract would not fall within purview of Section 43(5) of Act. 2.3 Revenue, being dissatisfied with order passed by CIT (A) went in appeal before Appellate Tribunal. Appellate Tribunal dismissed appeal and thereby affirmed order passed by CIT (A). Appellate Tribunal took view that transaction cannot be described as Speculative Transaction within purview of Section 43(5) of Act in cases where there is breach of contract. Tribunal took notice of fact that dispute between parties was referred for arbitration and, ultimately, damages were awarded by way of compensation. award of damages Page 2 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 C/TAXAP/115/2020 ORDER for breach of contract is not same thing as party to contract had intended to settle contract following breach or non-performance of contract. 2.4 Revenue, being dissatisfied with impugned order passed by Appellate Tribunal is here before this Court with present appeal. 3. Revenue has proposed following three questions of law for consideration of this Court; (A) Whether Appellate Tribunal has erred in law and on facts in upholding order of CIT (A) deleting addition of speculation loss of Rs.3,83,12,474/-? (B) Whether income or loss on account of compensation received or paid in case of breach of contract for speculative transaction would be speculative income or loss? (C ) Whether nature of compensation for breach of contract, whether speculation or otherwise can be determined irrespective of nature of contract breached? 4. CIT (A), while allowing appeal filed by assessee, observed as under; 5.3 During appellate proceedings appellant has submitted working of contract settlement loss, original contract for which such loss had incurred and contract settlement note. It further submitted that appellant is engaged in manufacturing and trading of edible oils. It regularly enters into sale contract with various persons for refined Palm Kernel oil and Refined Pamoline which are required to be delivered in goods on specified date as per every contract. In two contracts, it had failed to honor delivery of contracted goods within stipulated time as market conditions i.e. prevailing market price as on date of delivery were not favourable to appellant. Page 3 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 C/TAXAP/115/2020 ORDER Thus, in order to minimize loss, appellant decided not to honor contracts i.e. to deliver oil but paid differential amount i.e. price at which oil was sold and market price on date of settlement through monetary consideration. It further mentioned that its contract was settled i.e. consideration for breach of contract at price lesser than prevailing market rate as per Solvent Extractor Association (SEA). Appellant also submitted rates published by SEA reflecting price at which appellant has settled contract. Appellant has relied upon various judgments such as decision of Hon ble Kolkata ITAT in case of Ambo Agro Products Ltd. v/s. DCIT 46 taxmann.com 105 which in turn has further relied upon judgment of Hon ble Delhi High Court in case of CIT v/s. Gora Mal Han Ram Ltd. 191 taxman 94, decision of Hon'ble Bombay High Court in case of CIT vs. Kamani Tubres Ltd 207 ITR 298. decision of Hon'ble Madras High Court in case of CIT v/s Sri Ramalinga Choodambilgai Mills Ltd. 239 [TR 120, decision of Hon'ble Delhi High Court in case of CIT v/s Hans Machoo & Co. 247 ITR 79 etc. All these decisions have discussed provisions of section 43(5) of Act that deals with definition of speculation transactions. These decisions have also dwelved upon provisions of section 72 and 73 and explanation 2 to section 28 of Act. They have differentiated between speculative transaction and speculative business. These decisions have made it very clear that in speculative business intention from beginning is not to take delivery but only to settle account for price difference. Whereas in cases where intention of assessee is to take or give delivery which is evident from conduct of assessee in respect of other contracts with same parties and assessee is not able to deliver goods and paid monetary differential amount by way of damages, according to these decisions, such transactions cannot be considered as speculative transaction. Appellant has submitted further that settlement of such disputes allowing payment of damages is termed as washed out contracts in International market. According to appellant provisions of section 43(5) of Act contemplates transaction in which contract for purchase or sale of any commodity is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity. In present case, intention of Page 4 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 C/TAXAP/115/2020 ORDER appellant that it was to give delivery was evident from contract of appellant in respect of various contracts for same parties. However, due to market conditions i.e. prevailing market price, appellant has decided not to deliver certain quantity in pursuance of contracts due to business expediency i.e. to minimize loss and payments were made by way of damages. Hon ble Supreme Court has observed in case of CIT v/s. Shantilal Pvt. Ltd. 144 ITR 57 that if there is breach of contract then party suffering from such breach become entitled to receive compensation for any loss or damages, cost, as per section 73 of Indian Contracts Act. Thus, payment of such damages is nothing as party to contract accepting satisfaction of contract otherwise not agreeing in original terms thereof. What is really settled by award of such damages and their acceptance of aggrieved party is dispute between parties. According to Hon ble Delhi High Court in case of CIT v/s. Bhagwan Das Rameshwar Dayal 149 ITR 387, it was held that section 43(5) of Act only covers cases where there is breath followed by settlement of quantum of damage. transaction is considered to be speculative If It is settled without actual delivery but it does not follow that all contracts which are settled or adjusted without delivery are speculative. It was seen from contracts undertaken by appellant that losses were incurred with two parties namely Amreshwara & Co. and NVP Associates. That too in respect of two contacts only. It was seen from details submitted by appellant that only in these two contracts, appellant has tried to minimize damages by settling contract through monetary compensation. It has entered into many other contracts with same two persons for more larger amount than two contracts in which it has resorted to settle by payment in monetary terms. Otherwise in all rest of contracts appellant has delivered goods as per contract. Considering all these facts in mind, I am of considered opinion that payment of damages made by appellant represents monetary loss for breach of contract and settlement of contract does not fall within purview of section 43(5) of Act. It is not only actual non delivery of goods but it is coupled with settlement of contract in transaction for which payment is made as per standard practice. As these payments were by way of damages, these damages reflect non Page 5 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 C/TAXAP/115/2020 ORDER performance of contract in order to minimize loss. Thus, I am of considered opinion that A.O was not justified in treating amount of Rs.3,83,12,474/- as speculative transaction. Accordingly, stand taken by A.O that said amount reflects speculation loss is incorrect. ground No.2 is hereby allowed. 5. aforesaid findings recorded by CIT (A) came to be affirmed by Appellate Tribunal holding as under; We have carefully considered rival submissions. limited question that arises for consideration is whether loss arising on breach of contracts would fall within definition of speculative transaction as defined in Section 43(5) of Act or such loss is to be regarded as ordinary business loss. assessee in instant case has paid sum of Rs.3,83,12,474/- towards compensation for breach of contract and claimed it as business loss. A0 held it as speculative loss by treating transaction as speculative transaction within meaning of Section 43(5) of Act. CIT(A) however held that contract resulting in payment of compensation did not amount to speculative transaction and directed AO to allow amount as business loss. We straightway notice that Hon ble Supreme Court in CIT vs. Shantilal (P.) Ltd. (1983) 144 ITR 57 (SC) held that transaction cannot be described as speculative transactions within meaning of Section 43(5) of Act where there is breach of contract and on dispute between parties, damages were awarded as compensation by arbitration award. award of damages for breach of contract is not same thing as party to contract has intended to settle contract following breach or nonperformance of contract. Such payment towards breach is not akin to word settled used in Section 43(5) of Act. In view of decision of Hon ble Supreme Court and decision of various High Courts following principles laid down by Hon ble Supreme Court, we do not see any error in conclusion drawn by CIT(A). We thus decline to interfere. 6. We take notice of fact that Tribunal has relied upon decision of Supreme Court in case of CIT vs. Page 6 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 C/TAXAP/115/2020 ORDER Shantilal (P.) Ltd. (1983) 144 ITR 57 (SC). Shantilal (supra) was tax reference made under Section 257 of Act. Supreme Court was called upon to express its opinion on following question of law; "Whether, on facts and in circumstances of case, Tribunal was right in confirming order of Appellate Assistant Commissioner that loss suffered by assessee was not loss incurred in speculative transaction within meaning of Sec. 43 (5) of Income-tax Act, 1961 ?" 7. dictum as laid down in Shantilal (supra) is that award of damages for breach of contract is not same thing as party to contract except satisfaction of contract otherwise than in accordance with original terms thereof. We may quote relevant observations made by Supreme Court; 'There is no doubt that arbitration award granting compensation to M/s. Medical Service Centre proceeds on footing that there was breach of contract. Tribunal took view that award of damages for breach of contract did not bring transaction within definition of "speculative transaction" set forth in sub-s. (5) of s. 43, Income Tax Act, 1961. In this, Tribunal found support in view expressed by 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 Mysore High Court in Bhandari Rajmal Kushalroj v. Commissioner of Income- tax, Mysore,(9) which they preferred to view expressed by 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 matter we are of opinion that Tribunal is right. Sub-s. (5) of s. 43 defines "speculative transaction" to mean: Page 7 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 C/TAXAP/115/2020 ORDER "a transaction in which contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips" Is contract for purchase or sale of any commodity settled when no actual delivery or transfer of commodity is effected, and instead compensation is awarded under and arbitration award as damages for breach of contract ? contract can be said to be settled if instead of effecting delivery or transfer of commodity envisaged by contract promisee, in terms of s. 63 of Contract Act, accepts instead of it any satisfaction which he thinks fit. It is quite another matter where instead of such acceptance parties raise dispute d no agreement can be reached for discharge of contract. There is breach of contract and by virtue of s. 73 of Contract Act party suffering by such breach becomes entitled to receive from party who broke contract compensation for any loss or damage caused to him thereby. There is no reason why sense conveyed by law relating to contracts should not be imported into definition of "speculative transaction". award of damages for breach of contract is not same thing as party to contract accepting satisfaction of contract otherwise than in accordance with original terms thereof. It may be that in general sense layman would understand that contract must be regarded as settled when damages are paid by way of compensation for its breach. What is really settled by award of such damages and their acceptance by aggrieved party is dispute between parties. law, however, speaks of settlement of contract, and contract is settled when it is either performed or promisee dispenses with or remits, wholly or in part, performance of promise made to him or accepts instead of it any satisfaction which he thinks fit. We are concerned with sense of law, and it is 474 that sense which must prevail in- sub-s. (5) of s. 43. Accordingly, we hold that transaction cannot be described as "speculative transaction" within meaning of sub-s. (5) of s. 43, Income Tax Act, 1961 where there is breach of contract and on dispute between parties damages are awarded as compensation by arbitration award. We are unable to Page 8 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 C/TAXAP/115/2020 ORDER endorse view to contrary taken by Madras High Court in R. Chinnaswami Chettiar(supra) and approve of view taken by Calcutta High Court in Pioneer Trading Company Private Ltd. (supra) and by Mysore High Court in Bhandari Rajmal Kushalra; (supra). decisions of Madras High Court in P. L. K. N. Meenakshi Achi (supra) and A. Muthukumara Pillai (supra) are not apposite and are not concerned with point before us. Our attention was invited by learned counsel for Revenue to 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. 8. In view of aforesaid, it is difficult to accept submission of learned standing counsel appearing for Revenue that case is one of speculative transaction within meaning of Section 43(5) of Act. 9. In such circumstances, referred to above, none of three questions of law as proposed by Revenue could be termed as substantial questions of law involved in this appeal. 10. In result, this appeal fails and is hereby dismissed. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) Vahid Page 9 of 9 Downloaded on : Wed Mar 11 14:46:19 IST 2020 Principal Commissioner of Income-tax-3 v. Rajshri Packagers Ltd