Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing the deductions of Rs. 95,012 and Rs. 43,808 in the computation of the assessee’s income from business for the asst. yrs. 1972-73 and 1973-74 respectively ?

High Court Of Delhi

CIT vs. Hans Machoo & Co.

Sections 37(1), 43(5)

Asst. Years 1972-73, 1973-74

Arijit Pasayat, C.J. & D.K. Jain, J.

IT Refs. Nos. 354 & 355 of 1979

11th September, 2000

Counsel Appeared

R.D. Jolly with Ajay Jha, for the Petitioner : S.K. Aggarwal, for the Respondent



These two applications involve identical question and are, therefore, being disposed of by this common order. At the instance of Revenue following question has been referred under s. 256(1) of the IT Act, 1961 (in short the ‘Act’), by Income-tax Appellate Tribunal, Delhi Bench ‘D’ (in short the Tribunal) for opinion of this Court : “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing the deductions of Rs. 95,012 and Rs. 43,808 in the computation of the assessee’s income from business for the asst. yrs. 1972-73 and 1973-74 respectively ?

2. Factual position as set out in the statement of case is as follows. For the asst. yrs. 1972-73 and 1973-74 disallowances were made while computing assessee’s income from business in respect of damages paid. Assessee was a sole selling agent for sale of sugar of Ajudhya Sugar Mills, a concern of M/s Lakshmi Ji Sugar Mills Co. (P). Ltd. Agency agreement was executed on 1st Jan., 1968. Clauses 5 to 7 of the agreement, which have some relevance for present dispute, read as follows : “5. That the agent shall, keep in daily touch with the principals to know the quality and quantity of sugar to be sold and the rate at which that sugar can be sold as the sale programme to be dictated by the principals will change with the changes in the market conditions and the Government policy. Such sale programme may be indicated by the principals by telephone conversation. In the event of any dispute regarding the sale programme, the decision of the principals shall be final. That the sole selling agent shall sell sugar in wagon load/truck load quantities at prices indicated to him by the principals and submit despatching instructions in duplicate to the principals for workable destinations unless priority of movement or prior permission of the principals in writing has been obtained. The principal’s factory will then in due course despatch sugar in accordance with the despatching instructions. Provided that the principals shall not be responsible for any loss or damage to the sole selling agent on account of entering into contracts of sale at prices not confirmed by the principals.”

Assessee’s stand was that for carrying on its agency business it had to enter into transactions for sale of sugar with various parties on behalf of its principal. Transactions used to be subsequently confirmed by the principal and the goods were also supplied to concerned parties. Some of the transactions were not honoured by the principal because of price rise of sugar and assessee had to honour them and to suffer damages as per cl. (7) of agreement reproduced above. Such damages amounted to Rs. 95,012 and Rs. 43,808 for two assessment years, respectively.

These were claimed as allowable deductions in the respective years. These were also allowed by the AO. For asst. yr. 1972-73 assessee went in appeal before the AAC on certain other grounds. Said authority examined the above matter and was of the view that assessee was a regular speculator in the past and above transactions were speculative transactions within the meaning of s. 43(5) of the Act. They constituted a separate and distinct business as per Expln. 2 to s. 28 of the Act. Therefore, a view was taken that AO was not justified in allowing deduction which was otherwise inadmissible under s. 73(1) of the Act. Enhancement to the extent of Rs. 95,012 for asst. yr. 1972-73 was made. Claim of assessee for sum of Rs. 43,808 which was allowed as a deduction for 1973-74 was set aside by the CIT exercising power under s. 263 of the Act. Orders of AAC and CIT were assailed before the Tribunal by assessee. Assessee’s stand was that there was no speculative profit or speculative loss involved. Loss had been suffered by assessee in the course of agency business, was incidental to it and should have been allowed as a normal business loss. The plea found acceptance by the Tribunal. On being moved, Tribunal has referred common question for two assessment years as noted above.

Learned counsel for Revenue submitted that the case clearly involved speculative transactions and therefore, s. 43(5) was applicable and consequently s. 73(1) also had application. Learned counsel for assessee, on the other hand, submitted that a finding of fact has been recorded by the Tribunal that damages were paid for breach of contract and there was no settlement of transaction before the breach. That being the position, it is submitted Tribunal was justified in its conclusion. Sec. 43(5) at the relevant time read : “A transaction in which a contract for the purpose 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………. to be speculative transaction”.

A transaction cannot be described as a “speculative transaction” within the meaning of s. 43(5) of the Act where there is a breach of contract and on a dispute between the parties damages are awarded as compensation e.g., by an arbitration award. What is really settled by the award of such damages and their acceptance by aggrieved party is the dispute between the parties. Sec. 43(5) however, speaks of settlement of 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. 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, any satisfaction which he thinks fit. It is quite another matter when 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 Indian Contract Act, 1872 (in short 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. 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. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. This position was highlighted by the apex Court in CIT vs. Shantilal (P) Ltd. (1983) 35 CTR (SC) 395 : (1983) 144 ITR 57 (SC) : TC 19R.493. In CIT vs. Bhagwan Dass Rameshwar Dayal (1984) 42 CTR (Del) 200 : (1984) 149 ITR 387 (Del) : TC 19R.497, the scope and ambit of s. 43(5) of the Act was examined. It was observed that s. 43(5) of the Act only covers cases where a contract is settled without breach and not cases where there is a breach followed by settlement of quantum of damages. A 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.

5. The word “settled’ or “settlement” in connection with contract has not been defined in the Act, or in the contract Act or the Sale of Goods Act or in any other statute. Following are some of the meanings attributed to the word “settled” in dictionaries : “Determined, deal effectively: dispose of: conclude money or other transactions” (Concise Oxford Dictionary). “To come to terms or agreement with a person” (Shorter Oxford Dictionary). “To arrange matters in dispute : to come to terms with a person” (Oxford Dictionary)

The proper meaning to be given to the words “to contract, settled” in the definition clause would be “a contract or determined or concluded or disposed of”. By use of the expression “settled”, what is intended to be dealt with is a case of performance of contract and not non-performance.

In the case at hand Tribunal has recorded a finding that there was breach of contract and therefore, damages had to be paid. When a contract is broken there can be no cause of action founded on the contract itself which can be said to be capable of settlement. Above being the factual position, Tribunal was justified in its conclusions. Accordingly, the question referred is answered in the affirmative, in favour of assessee and against the Revenue.

The reference applications stand disposed of.

[Citation :247 ITR 79]

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