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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER:
Captioned appeal has been filed at the instance of the Revenue against order of the CIT(A)-6, Ahmedabad dated 5.3.2015 arising in the assessment order dated 27.2.2014 passed by the Assessing Officer under section 143(3) of the Income Tax Act concerning assessment year 2011-12. Assessee has also filed cross-objection in the captioned appeal of Revenue.
Solitary grievance of the Revenue is maintainability of action of the CIT(A) in deleting disallowance of Rs.45 lakhs made by the AO as
ITA No.1438/Ahd/2015 2 speculation loss. It is the case of the Revenue that in view of the fact that the assessee has settled contract of purchases by making payment of rate difference without obtaining delivery of commodities, the loss arising on payment of rate difference to the proposed seller is covered by section 43(5) of the Income Tax Act. In its cross objection, the assessee has merely supported the action of the CIT(A).
Briefly stated, assessee, a private limited company filed its return of income for the Asstt.Year 2011-12 declaring total income amounting to Rs.2,06,20,640/-. Return filed by the assessee was subject to scrutiny. In the course of scrutiny assessment, the AO on verification of profit & loss account, interalia found that the assessee has claimed expenses of Rs.45 lakhs on account of compensation paid to supplier (Oswal Extrusion Ltd.), owing to failure of the assessee to lift material on contracted date. The assessee claims to have paid Rs.45 lakhs on account of difference between purchase rate and current rate of supply of material which was worked out to Rs.45 lakhs by the supplier as detailed in the assessment order. The assessee claimed aforesaid loss towards settlement of quantum of damages. The AO however did not agree with the claim of the assessee and held that loss arising on account of settlement of contract by making payment of difference of rate falls within the provision of section 43(5) of the Act having regard to the fact that transaction has been settled without delivery of commodities named in the purchase contract. The AO accordingly declined to allow business loss of Rs.45 lakhs claimed towards payment of damages against its ordinary business income.
Aggrieved, assessee preferred appeal before the CIT(A). The CIT(A) revisited facts noted above and observed that the assessee while having entered into the contract of purchase with its supplier and corresponding contract with its client for supply of identical material on the same date i.e.
ITA No.1438/Ahd/2015 3 9.5.2010, it ultimately failed to execute the purchase transaction and consequently paid damages of Rs.45 lakhs for breach of contract of purchase. The CIT(A) in these facts found merit in the plea of the assessee that loss so saddled on the assessee is ordinary business loss arising in the ordinary course of business. The CIT(A) accordingly reversed action of the AO and deleted the disallowance earlier made by the AO with aid of section 43(5) of the Act.
Aggrieved Revenue preferred appeal before the Tribunal.
At the time of hearing, none appeared on behalf of the assessee. The matter was accordingly proceeded exparte in the absence of assessee. The ld.DR for the Revenue was accordingly heard to support its appeal.
We have taken note of arguments put forth on behalf of the Revenue as well as orders of authorities below. Sole issue in controversy is whether loss arising on account of cancellation of contract due to compelling circumstances can be treated as business loss or falls within deeming fiction of section 43(5) of the Act or not. As noted above, the loss of Rs.45 lakhs has arisen to the assessee on account of damages paid to the supplier due to failure of the assessee to lift the supply in the course of carrying its business. The assessee has claimed the loss so arisen as a normal incidence of the business and thus claimed as ordinary business loss. The AO, on the other hand, is of the view that transaction of purchase was settled without delivery, and therefore it is a speculative transaction within the meaning of section 43(5) of the Act. It is the case of the Revenue that loss being speculative in nature is not a permissible deduction against ordinary business income. Accordingly, claim of loss was denied to the assessee. Thus, short issue for our consideration is whether payment towards damages on account of breach of contract is speculative loss or a business loss.
ITA No.1438/Ahd/2015 4 8. We find at the first instance of that issue is squarely covered in favour of the assessee by the decision of Hon’ble Supreme Court in the case of CIT Vs. Shantilal P.Ltd., 144 ITR 57 (SC) and also decision of Full Bench in the case of Jamna Auto Industries Vs. CIT, (2008) 299 ITR 92 (P&H)(FB). It is clearly discernible from these two judgments that a transaction cannot be described as a speculative transaction within the meaning of section 43(5) of the Act where the transaction is foreclosed owing to breach of contract and damages were paid as compensation for closure of contract. In light of aforesaid judgments, the assessee is entitled to claim expenditure incurred towards damages for breach of contract under section 37(1) of the Act. The contract in the instant case is not settled by a cross contract, but by a breach of agreement. Such transaction does not fall within the definition of speculative transaction as envisaged under section 43(5) of the Act. Therefore, we do not find any error in the conclusion drawn by the CIT(A). Thus, we decline to interfere with order of the CIT(A).
Accordingly, appeal of the Revenue is dismissed.
Assessee in its CO has merely supported order of the CIT(A) and is not aggrieved per se by the order of the CIT(A). Since, the Revenue’s appeal stands dismissed, CO is rendered infructous, and thus dismissed.
In the result, appeal of Revenue in ITA No.1438/Ahd/2015 is dismissed and CO no.100/Ahd/2015 is dismissed ex parte as infructous.
Order pronounced in the Court on 2nd May, 2018 at Ahmedabad.
Sd/- Sd/- (Ms.MADHUMITA ROY) (PRADIP KUMAR KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 02/05/2018