THE PRINCIPAL COMMISSIONER OF INCOME TAX-3 vs. M/S RAJSHRI PACKAGERS LTD.

C/TAXAP/115/2020 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 115 of 2020 ================================================================ THE PRINCIPAL COMMISSIONER OF INCOME TAX-3 Versus M/S RAJSHRI PACKAGERS LTD. ================================================================ Appearance: MRS MAUNA M BHATT(174) for the Appellant(s) No. 1 for the 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 the Income Tax Act, 1961 (for short “the Act, 1961”) is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench “B”, Ahmedabad dated 4th October, 2019 in the ITA No.2241/Ahd/2017 for the A.Y. 2011-12. 2. The facts, giving rise to this appeal, may be summarized as under; 2.1 The respondent-assessee is engaged in the business of refining of edible oil and related products. The assessee filed its return of income declaring total income at Nil. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee had claimed contract settlement loss of Rs.62,34,974/- and Rs.3,20,77,500/- respectively. The Page 1 of 9

C/TAXAP/115/2020 ORDER Assessing Officer took the view that the transactions were entered into by the assessee with various parties and those were settled without the delivery of goods by making payment of the difference of the price. According to the Assessing Officer, it was nothing but a speculative transaction. In such circumstances, the Assessing Officer took the view that the loss incurred due to the speculative transaction cannot be allowed as the revenue expenditure. Accordingly, the Assessing Officer made addition of Rs.3,83,12,474/- under Section 43(5) of the Act towards the speculation loss incurred on the purchase and sale of contracts which was claimed by the assessee as a business loss in the return of income and adjusted against the business income under Section 73 of the Act. 2.2 The assessee, being dissatisfied with the assessment order, went in appeal before the CIT (A). The CIT (A) allowed the appeal of the assessee holding that the payment of damages made by the assessee represents monetary loss for the breach of contract and the settlement of the contract would not fall within the purview of Section 43(5) of the Act. 2.3 The Revenue, being dissatisfied with the order passed by the CIT (A) went in appeal before the Appellate Tribunal. The Appellate Tribunal dismissed the appeal and thereby affirmed the order passed by the CIT (A). The Appellate Tribunal took the view that the transaction cannot be described as a “Speculative Transaction” within the purview of Section 43(5) of the Act in cases where there is a breach of contract. The Tribunal took notice of the fact that the dispute between the parties was referred for arbitration and, ultimately, damages were awarded by way of compensation. The award of damages Page 2 of 9

C/TAXAP/115/2020 ORDER for breach of contract is not the same thing as the party to the contract had intended to settle the contract following a breach or non-performance of the contract. 2.4 The Revenue, being dissatisfied with the impugned order passed by the Appellate Tribunal is here before this Court with the present appeal. 3. The Revenue has proposed the following three questions of law for the consideration of this Court; “(A) Whether the Appellate Tribunal has erred in law and on facts in upholding the order of CIT (A) deleting the addition of speculation loss of Rs.3,83,12,474/-? (B) Whether the income or loss on account of compensation received or paid in case of breach of contract for a speculative transaction would be speculative income or loss? (C ) Whether the nature of compensation for breach of contract, whether speculation or otherwise can be determined irrespective of the nature of contract breached?” 4. The CIT (A), while allowing the appeal filed by the assessee, observed as under; “5.3 During the 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 a specified date as per every contract. In two contracts, it had failed to honor delivery of contracted goods within the stipulated time as market conditions i.e. prevailing market price as on date of delivery were not favourable to the appellant. Page 3 of 9

C/TAXAP/115/2020 ORDER Thus, in order to minimize the loss, appellant decided not to honor contracts i.e. to deliver the oil but paid differential amount i.e. price at which oil was sold and the market price on the date of settlement through monetary consideration. It further mentioned that its contract was settled i.e. consideration for breach of contract at the price lesser than the prevailing market rate as per Solvent Extractor Association (SEA). Appellant also submitted the rates published by SEA reflecting the price at which appellant has settled the contract. Appellant has relied upon various judgments such as decision of Hon’ble Kolkata ITAT in the case of Ambo Agro Products Ltd. v/s. DCIT 46 taxmann.com 105 which in turn has further relied upon the judgment of Hon’ble Delhi High Court in the case of CIT v/s. Gora Mal Han Ram Ltd. 191 taxman 94, decision of Hon'ble Bombay High Court in the case of CIT vs. Kamani Tubres Ltd 207 ITR 298. decision of Hon'ble Madras High Court in the case of CIT v/s Sri Ramalinga Choodambilgai Mills Ltd. 239 [TR 120, decision of Hon'ble Delhi High Court in the case of CIT v/s Hans Machoo & Co. 247 ITR 79 etc. All these decisions have discussed provisions of section 43(5) of the 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 the Act. They have differentiated between speculative transaction and speculative business. These decisions have made it very clear that in the speculative business intention from the beginning is not to take delivery but only to settle the account for a price difference. Whereas in the cases where intention of the assessee is to take or give delivery which is evident from the conduct of the assessee in respect of other contracts with the same parties and assessee is not able to deliver the goods and paid the 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 the appellant provisions of section 43(5) of the Act contemplates a transaction in which a contract for purchase or sale of any commodity is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity. In the present case, intention of the Page 4 of 9

C/TAXAP/115/2020 ORDER appellant that it was to give delivery was evident from the contract of the appellant in respect of various contracts for the same parties. However, due to market conditions i.e. prevailing market price, appellant has decided not to deliver certain quantity in pursuance of the contracts due to business expediency i.e. to minimize the loss and the payments were made by way of damages. Hon’ble Supreme Court has observed in the case of CIT v/s. Shantilal Pvt. Ltd. 144 ITR 57 that if there is a 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 the contract accepting satisfaction of the contract otherwise not agreeing in original terms thereof. What is really settled by the award of such damages and their acceptance of aggrieved party is dispute between the parties. According to Hon’ble Delhi High Court in the case of CIT v/s. Bhagwan Das Rameshwar Dayal 149 ITR 387, it was held that section 43(5) of the Act only covers cases where there is a breath followed by settlement of the quantum of damage. 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. It was seen from the contracts undertaken by the 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 the details submitted by the appellant that only in these two contracts, appellant has tried to minimize the damages by settling contract through monetary compensation. It has entered into many other contracts with the same two persons for more larger amount than the two contracts in which it has resorted to settle by payment in monetary terms. Otherwise in all the rest of the contracts appellant has delivered the goods as per the contract. Considering all these facts in mind, I am of the considered opinion that the payment of damages made by the appellant represents monetary loss for breach of contract and settlement of the contract does not fall within the purview of section 43(5) of the Act. It is not only actual non delivery of the goods but it is coupled with settlement of contract in a transaction for which payment is made as per the standard practice. As these payments were by way of damages, these damages reflect non Page 5 of 9

C/TAXAP/115/2020 ORDER performance of the contract in order to minimize the loss. Thus, I am of the considered opinion that A.O was not justified in treating the amount of Rs.3,83,12,474/- as speculative transaction. Accordingly, the stand taken by the A.O that the said amount reflects speculation loss is incorrect. The ground No.2 is hereby allowed.” 5. The aforesaid findings recorded by the CIT (A) came to be affirmed by the Appellate Tribunal holding as under; “We have carefully considered the rival submissions. The limited question that arises for consideration is whether the loss arising on breach of contracts would fall within the definition of speculative transaction as defined in Section 43(5) of the Act or such loss is to be regarded as ordinary business loss. The assessee in the instant case has paid the sum of Rs.3,83,12,474/- towards compensation for breach of contract and claimed it as business loss. The A0 held it as speculative loss by treating the transaction as speculative transaction within the meaning of Section 43(5) of the Act. The CIT(A) however held that the contract resulting in payment of compensation did not amount to speculative transaction and directed the AO to allow the amount as business loss. We straightway notice that the Hon’ble Supreme Court in CIT vs. Shantilal (P.) Ltd. (1983) 144 ITR 57 (SC) held that the transaction cannot be described as a “speculative transactions’ within the meaning of Section 43(5) of the Act where there is a breach of contract and on a dispute between the parties, damages were awarded as compensation by an arbitration award. The award of damages for breach of contract is not the same thing as the party to the contract has intended to settle the contract following a breach or nonperformance of the contract. Such payment towards breach is not akin to the word ‘settled’ used in Section 43(5) of the Act. In view of the decision of the Hon’ble Supreme Court and the decision of various High Courts following the principles laid down by the Hon’ble Supreme Court, we do not see any error in the conclusion drawn by the CIT(A). We thus decline to interfere.” 6. We take notice of the fact that the Tribunal has relied upon the decision of the Supreme Court in the case of CIT vs. Page 6 of 9

C/TAXAP/115/2020 ORDER Shantilal (P.) Ltd. (1983) 144 ITR 57 (SC). Shantilal (supra) was a tax reference made under Section 257 of the Act. The Supreme Court was called upon to express its opinion 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 Sec. 43 (5) of the Income-tax Act, 1961 ?" 7. The dictum as laid down in Shantilal (supra) is that the award of damages for the breach of a contract is not the same thing as a party to the contract except the satisfaction of the contract otherwise than in accordance with the original terms thereof. We may quote the relevant observations made by the Supreme Court; 'There is no doubt that the arbitration award granting compensation to M/s. Medical Service Centre 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-s. (5) of s. 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 v. Pioneer Trading Company Private Ltd.,(1) Daulatram Rawatmull v. Commissioner of Income-Tax (Central), Calcutta(2) and by the Mysore High Court in Bhandari Rajmal Kushalroj v. Commissioner of Income- tax, Mysore,(9) which they preferred to the view expressed by the 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 the matter we are of opinion that the Tribunal is right. Sub-s. (5) of s. 43 defines "speculative transaction" to mean: Page 7 of 9

C/TAXAP/115/2020 ORDER "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 and 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 s. 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 an d 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 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 the 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 474 that sense which must prevail in- sub-s. (5) of s. 43. Accordingly, we hold that a transaction cannot be described as a "speculative transaction" within the meaning of sub-s. (5) of s. 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 Page 8 of 9

C/TAXAP/115/2020 ORDER 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 Kushalra; (supra). The decisions of the Madras High Court in P. L. K. N. 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 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 the aforesaid, it is difficult to accept the submission of the learned standing counsel appearing for the Revenue that the case is one of a “speculative transaction” within the meaning of Section 43(5) of the Act. 9. In such circumstances, referred to above, none of the three questions of law as proposed by the Revenue could be termed as substantial questions of law involved in this appeal. 10. In the result, this appeal fails and is hereby dismissed. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) Vahid Page 9 of 9