Speculative transaction

Is a contractContract An agreement enforceable by law is a contract. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Indian Contract Act. 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 an arbitration award as damages for breach of the contract?

(1983) AIR(SC) 952 : (1983) 2 CompLJ 305 : (1983) 35 CurTR 395 : (1983) 144 ITR 57 : (1983) KLT(SN) 57 : (1983) 2 SCALE 37 : (1983) 3 SCC 561 : (1983) SCC(Tax) 237 : (1983) 3 SCR 470 : (1983) TaxLR 1190

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FULL BENCH

( Before : R. S. Pathak, J; E. S. Venkataramiah, J; A. N. Sen, J )

COMMISSIONER OF INCOME TAX, BOMBAY CITY-III Vs. SHANTILAL P. LTD.

Tax. Reference Case No. 4 of 1978

Decided on : 21-07-1983

Income Tax Act, 1961 – Section 43(5)

Cases Referred

COMMISSIONER OF Income Tax, WEST BENGAL Vs. PIONEER TRADING COMPANY PRIVATE LTD., (1968) 70 ITR 347
P.L.KN. Meenakshi Achi Vs. Commissioner of Income Tax, Madras., (1974) 96 ITR 375
A. Muthukumara Pillai Vs. Commissioner of Income Tax, (1974) 96 ITR 557
R. Chinnaswami Chettiar Vs. Commissioner of Income Tax, (1974) 96 ITR 353
Davenport and Co. Pvt. Ltd. Vs. Commissioner of Income Tax, West Bengal-II, AIR 1975 SC 1996 : (1975) 100 ITR 715 : (1975) 2 SCC 399 : (1976) 1 SCR 180 : (1975) 7 UJ 621
Daulatram Rawatmull Vs. Commissioner of Income Tax (Central), (1970) 78 ITR 503
Bhandari Rajmal Kushalraj Vs. Commissioner of Income Tax, Mysore, (1974) 96 ITR 401 : (1973) 2 MysLJ 276

Counsel for Appearing Parties

D.V. Patel, T.A. Ramachandran and Subhashini, for the Appellant;

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1. In this tax reference made u/s 257 of the Income Tax Act, 1961, we are called upon to express our opinionOpinion A judge's written explanation of a decision of the court. In an appeal, multiple opinions may be written. The court’s ruling comes from a majority of judges and forms the majority opinion. A dissenting opinion disagrees with the majority because of the reasoning and/or the principles of law on which the decision is based. A concurring opinion agrees with the end result of the court but offers further comment possibly because they disagree with how the court reached its conclusion. 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 Section 43(5) of the Income Tax Act, 1961?

2. 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 center as a business loss. During the previous year relevant to the said assessment year the assessee had contracted to sell 200 Kilograms of Folic acidAcid A chemical that gives off hydrogen ions in water and forms salts by combining with certain metals. Acids have a sour taste and turn certain dyes red. Some acids made by the body, such as gastric acid, can help organs work the way they should. An example of an acid is hydrochloric acid. Acidity is measured on a scale called the pH scale. On this scale, a value of 7 is neutral, and a pH value of less than 7 to 0 shows increasing acidity. USP at the rate of Rs. 440/- per Kilogram to M/s. Medical Service center 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 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 fulfill 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 center. A consent decree in terms of the award was made by the High Court.

3. In the assessment proceedings, the income tax Officer rejected the claimA Claim A claim is “factually unsustainable” where it could be said with confidence before trial that the factual basis for the claim is entirely without substance, which can be the case if it were clear beyond question that the facts pleaded are contradicted by all the documents or other material on which it is based. of the assessee that the payment of compensation was a business loss. He found that the transaction was a speculative transaction as defined by Sub-section (5) of Section 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.

4. There is no doubt that the arbitration award granting compensation to M/s. Medical Service center 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-section (5) of Section 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 Vs. PIONEER TRADING COMPANY PRIVATE LTD., ., Daulatram Rawatmull Vs. Commissioner of Income Tax (Central), and by the Mysore High Court in Bhandari Rajmal Kushalraj Vs. Commissioner of Income Tax, Mysore, , which they preferred to the view expressed by the Madras High Court in R. Chinnaswami Chettiar Vs. Commissioner of Income Tax, P. L. KN, P.L.KN. Meenakshi Achi Vs. Commissioner of Income Tax, Madras., and A. Muthukumara Pillai Vs. Commissioner of Income Tax,. On careful consideration of the matter we are of opinion that the Tribunal is right. Sub-section (5) of Section 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 an 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 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 agreementContract An agreement enforceable by law is a contract. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Indian Contract Act. 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 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 (he 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 the 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. 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 Kushalraj (supra). The decisions of the Madras High Court in P. L. KN. 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 Davenport and Co. Pvt. Ltd. Vs. Commissioner of Income Tax, West Bengal-II, but this point did not arise there either.

5. Accordingly, we answer the question referred in the affirmative, in favour of the assessee and against the Revenue. There is no order as to costsCosts Subject to any written law, costs are at the discretion of the Court, and the Court has the power to determine all issues relating to the costs of or incidental to all proceedings, including by whom and to what extent the costs are to be paid, at any stage of the proceedings or after the conclusion of the proceedings. Generally “Costs” includes charges, disbursements, expenses, fees, and remuneration. Costs in any matter are payable from the date of the order of the Court unless the parties otherwise agree. The costs of a third-party funding contract are not recoverable as part of the costs of, or costs..