S.S Sodhi, J.:— The assessee-Messrs: Murari Lal Ahuja & Sons, Abohar, carry on business of sale of cotton and cotton seeds as also as commission agents. The assessee entered into contract for the sale of 925 bales of cotton to Messrs: Elgin Mills Company Limited and Messrs: Cawnpore Textile Mills Limited. The assessee could not fulfil its contractual obligation of supplying this cotton to these mills and eventually settled with them by paying them a sum of Rs. 48,158/-. The question now arises. Whether this amount was a payment in the nature of a speculative transaction in terms of Section 43(5) of the Income Tax Act, 1961?
2. The Income Tax Officer disallowed the payment of the said sum of Rs. 48,158/- holding it to be a speculative transaction. This order was up-held in appeal by the Appellate Assitant Commissioner of Income Tax, Bhatinda. The Tribunal, however, took a contrary view and the disallowance was consequently vacated by it. According to the Tribunal, it was “because of abnornmal circumstances it had to flout the sale agreement to save himself from ruinous situation and because of the breach of contract that resulted compensation was paid in the shape of settlement.”
3. It was in these circumstances that the following question of law came to be referred to this Court:—
“Whether on the facts and in the circumstances of the case, the Tribunal rightly vacated the Addition of Rs. 48,158/- on ground that payments for breach of contracts was an allowable deduction.”
4. There is a thin line that divides what is to be termed as “speculative transaction” as envisaged by sub section (5) of Section 43 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and payment made under a settlement which falls outside its ambit. The Supreme Court had occasion to consider this matter in Commissioner of Income Tax, Bombay City-III v. Shantilal P. Ltd. . 1983 144 I.T.R 57., where it was held “A transaction cannot be described as a “speculative transaction” with in the meaning of sub-section (5) of Section 43 of the Income Tax Act, 1961, where there is a breach of contract and on a dispute between the parties damages are awarded as compensation by an arbitration award.” It was further observed, the award of damages for the breach of 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.”
5. A similar view was taken up by our Court in Commissioner of Income Tax v. Maya Ram Jai Lal . 1986 162 I.T.R 520., where it was held, that ‘if the dispute is settled between the parties, then it is not a ‘speculative transaction,’ but if the contract is settled and under the settlement of the contract, damages are paid, it would be a ‘speculative transaction’.
6. In the present case, it will be seen that a finding of fact has been recorded by the Tribunal that the payment of the said sum of Rs. 48,158/- was made by the assessee for breach of contract. The transaction here cannot, therefore, in the circumstances, be branded as a ‘speculative transaction’ in terms of Section 43 of the Act.
7. The question referred is accordingly answered in affirmative in favour of the assessee and against revenue. There will, however, be no order as to costs.
Sd/- G.C Mital, J.
R.M.S
Reference answered affirmatively.