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Income Tax Appellate Tribunal, DELHI BENCH “G”, NEW DELHI
The present appeal has been sent back by Hon’ble Delhi High Court vide order dated 19.03.2013 to this Tribunal to decide whether loss incurred by assessee is speculative in nature or was by way of damages for breach of contract as claimed by assessee.
Brief facts of the case are as under: Assessee during year under consideration was trading in pulses for which it had entered into agreements with foreign party vide memorandum of understanding dated 10.05.2006 and 07.08.2006 with JK International Pvt. Ltd. and Agro Corp International Pvt. Ltd., respectively. Due to unavoidable circumstances assessee was not in a position to honour contractual obligation in respect of contract entered into between the parties. Assessee had to pay to the party for breach of contract. This resulted in loss of Rs.3,08,75,218/-. Ld. AO treated the loss on account of breach of contract being a speculation loss. 3. Aggrieved by order of Ld. AO, assessee preferred appeal before Ld. CIT(A), who deleted the addition. 4. Aggrieved by order of Ld. CIT(A) revenue preferred appeal before this Tribunal. This Tribunal vide order dated 28.02.2011 set aside issue back to file of Ld. AO to examine claim of assessee for breach of contract in the light of observation made therein. 5. Aggrieved by order of this Tribunal, revenue preferred an appeal before Hon’ble High Court, who observed as under: “We have also heard the learned counsel for the revenue who was present on advance notice. After having heard the counsel on both sides, we are of the view that the Tribunal ought not to have remitted the matter to the Assessing Officer for a consideration afresh on the issue of the said loss claim of Rs. 3,12,90,375/-. The only issue that was to be decided by the Tribunal was whether the said loss was speculative or was towards damages for breach of contract in respect of two contracts. The factum of the loss being genuine was not is issue. Therefore, no useful purpose would be served by remitting the matter to the Assessing Officer. In these circumstances, we feel that the impugned order to the extent that it remits the matter to the Assessing Officer for a consideration afresh needs to be set aside. It is ordered accordingly. The matter is restored to the Tribunal for deciding the question as to whether the loss was speculative in nature or whether it was towards damages for breach of contract as claimed by the assessee.”
We are, accordingly, concerned only to decide if loss was speculative or towards damage of breach.
Ld. AR submitted that assessee had entered into contracts, with foreign party, who send shipment by the agreed due dates. He submitted that assessee had completed several purchase contracts during year’s, however, it could not honour the contract with one of the party by due date, and said contracts came to an end due to non-performance. Ld. AR referred to written submission filed in the paper book’s which tabulates particulars of contracts as under: S. Name of party Date of Due date Date of Date of contract of breach of settlement No. shipment contract 1. J.K International Pvt. Ltd. 10/05/06 30/07/06 30/07/06 05/07/06 2. Agro Corp International Pvt. Ltd. 07/08/06 31/08/06 31/08/06 08/09/06
He submitted that as assessee could not honour contract with J. K. International due to lower demand in local market, to which supplier did not agree. It has been submitted that assessee was under the business obligation to pay damages for breach of contract in order to avoid litigation, and save its business reputation. Ld. AR submitted that it is normal business practice to receive or to pay damages to foreign parties upon breach of contract. He further submitted that issue raised has been decided by a number of judgments as per which, if a breach occurs due to non-performance of contract by actual delivery system and thereafter, parties to contract settle amount by being difference between contract price and market price that will not amount in law to settling a contract. What is settled in such a case is settling damages consequent upon the breach.
Ld. AR submitted that fact of loss being not genuine was not an issue before the authorities below. Ld. Counsel placed reliance upon decision of this Tribunal dated 29.07.2015 in the case of ACIT versus Ramji Lal and Sons (HUF) in for assessment year 2007-08. 10. On the contrary, Ld. DR relied upon order of assessing officer and reiterated contentions raised by revenue and grounds and requested that appeal of revenue may be allowed. 11. We have perused submissions advanced by both sides in the light of records placed before us and decisions relied upon by them. 12. It is pertinent to note that assessing officer has recorded a finding that payment of Rs.3,08,75,218/-, has been paid by assessee for breach of contract. For the sake of convenience the observations of Ld. AO are reproduced here: “This loss was not by sale of such pulses at prices lower than what they were bought by indemnification it had to pay for cancelling the contract.”
Then Ld. AO goes on to say that contract was cancelled with a speculation that assessee may incur loss, as the purchase price had fallen. Ld. AO was of the opinion that assessee in the regular course of business sold goods which were not even in its hands and therefore, we considered as it was a sort of loss on trading in future option. In our view, Ld. AO cannot blow hot and cold at same time. On one breath he’s admitting that assessee had indemnified party by paying for cancelling of contract, on the other hand he holds that assessee sold goods which were not in its hands. There is nothing on record which supports that assessee sold goods without taking delivery, or that assessee was into trading in future options. Ld. AR placed reliance upon decision of this Tribunal in ACIT versus Ramji Lal and Sons (HUF) (supra). An identical situation had arisen in the said case and this Tribunal had observed as under: “Ld. CIT (appeals) has taken a stand, which is supported by several decisions cited before it, including the decisions of Hon’ble Delhi High Court in the case of CIT versus Bhagavan Das Rameswaram the (1984) 149 ITR 387 (Del.) and CIT vs. Hans Machoo & company (2001) to 47 ITR 79 (Delhi.) Stop in the case of Bhagavan Das Rameswaram Dyalpur (supra), Hon’ble Delhi High Court has been pleased to hold that if the contract is settled otherwise than by actual delivery or transfer of the commodity, it is a speculative transaction but if there is a settlement after the breach, it is a case of settling the quantum of damages and the loss is incidental to business are allowable as business loss. Again in the case of CIT vs. Hans Machoo & company (supra), Hon’ble Delhi High Court has been pleased to hold that the ITAT
having recorded a finding that there was a breach of contracts and the assessee had to pay damages it was justified in allowing deduction of amounts paid, such a transaction cannot be described as a speculative transactions within the meaning of section 43 (5) of the act.”
It is observed from the paper book at page 11 wherein details of claim/damages paid against breach of import contracts has been placed. According to this chart, assessee had paid damages against cancellation of two import contracts dated 15/06/06 and 10/07/06 placed at pages 17-19 and 20 22 along with credit note at page 23 and 24 respectively. Further from the letter of understanding executed on 05/04/04 placed at page 12-16 of paper book, between the Assessee and Agrocorp International PTE Ltd deals with breach of contract by buyer as under: "3, Breach of Contract by the Buyer The timely compliance of the contract is the essence of this letter of understanding and the buyer shall be deemed to have breached the contract when he fails to submit the required documents and to accept the deliveries of goods within the agreed period. The seller has the right to claim all losses and damages from the buyer at the prevailing market price."
On refusal to accepting the goods imported by assessee, Agro Corp issued claim note placed at page 23 -25 of paper book. In our considered view there is a thin line that divides what is termed as speculative transaction as envisaged under section 43 (5) of the act and the payments made under settlement which falls outside its ambit. A transaction cannot be described as a speculative transaction 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 are awarded as compensation. 16. On perusal of the above clause of contract it appears that timely compliance with the required documents and acceptance of the goods is the essence of the letter of understanding entered into between the buyer and the seller. As assessee has deemed to have breached the contract by not accepting the deliveries of the goods within the agreed period, the seller has the right to claim all losses and damages from the buyer at the prevailing market price. There is a categorical finding by Hon’ble High Court that the fact of loss being genuine was not in dispute. In the facts of the present case, assessing officer himself is recording that assessee made payments to these parties for indemnifying damages caused due to cancellation of contract. As the sale has not taken place at all it cannot be considered as speculative transaction. 17. We are, therefore, inclined to follow decision of this Tribunal in the case of Ramji Lal & Sons (HUF) (supra) and uphold the findings of Ld. CIT(A) on this issue. Accordingly, ground raised by revenue stands dismissed.
Ground No. 2 does not arise out of order of Hon’ble Delhi High Court and stands settled vide order of this Tribunal dated 12.10.10 therefore, it do not require any interference. In the result appeal filed by department stands dismissed. Order pronounced in the open court on 11th May, 2017.