Tax Reference Case No 4 of 1978
Tax Reference Under Section 257 of the Income Tax Act 1961 made by the Income Tax Appellate Tribunal Bombay Bench C 
D V Patel T A Ramachandran  Miss A Subhashini for the Appellant
The Judgment of the Court was delivered by PATHAKJ J
The Judgment of the Court was delivered by PATHAKJ
J
In this tax reference made under section 257 of the income Tax Act 1961 we are called upon to express our 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  The assessee Ms 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 150000 paid by it as damages to Ms Medical Service Centre as a business loss
During the previous year relevant to the said assessment year the assessee had contracted to sell 200 Kilograms of Folic Acid USP at the rate of Rs 440 per Kilogram to Ms Medical Service Centre 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 472 case of the assessee is that as the price of the commodity rose very sharply to as high as Rs 2000 per Kilogram during the period when the delivery was to be effected the assessee was unable to fulfil 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 251970 the arbitrator directed the assessee to pay Rs 150000 as compensation to Ms Medical Service Centre
A consent decree in terms of the award was made by the High Court
In the assessment proceedings the Income Tax officer rejected the claim of the assessee that the payment of compensation was a business loss
He found that the transaction was a speculative transactions 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
There is no doubt that the arbitration award granting compensation to Ms 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 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 Ltd1 Daulatram Rawatmull vs Commissioner of Income Tax Central Calcutta2 and by the Mysore High Court in Bhandari Rajmal Kushalroj vs Commissioner of Income tax Mysore9 which they preferred to the view expressed by the Madras High Court in R Chinnaswami Chettiar vs Commissioner of Income 473 Tax Madras1 PL KN
Meenakshi Achi vs Commissioner of Income Tax Madrasa and A Muthukumara Pillai vs Commis sioner of Income Tax Madras3 on cereful 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 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 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 an d no agreement 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 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 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 Chettiarsupra 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 vs Commissioner of Income Tax West Bengal II1 but this point did not arise there either
Accordingly we answer the question referred in the affirmative in favour of the assessee and against the Revenue
There is no order as to costs
HSK Question answered in affirmative


Summary:
The respondent assessee claimed that a sum of Rs 150000 paid by them as compensation for being unable to fulfil a contract was a business loss
The Income tax officer rejected the claim on the ground that the transaction was a speculative transaction as defined by sub section 5 of section 43 of the Income tax Act 1961
The Appellate Assistant Commissioner held that the loss was a business loss and not a speculative loss on the view that the payment made represented a settlement of damages on breach of the contract which was distinct from a settlement of the contract
The Income Tax Appellate Tribunal confirmed the order of the Appellate Assistant Commissioner
On the request of the Commissioner of Income tax the Appellate Tribunal has referred the question whether the loss suffered by the assessee was not a loss in a speculative transaction within the meaning of section 435 of the Income tax Act 1961
Answering the question in the affirmative  HELD A transaction cannot be described as a speculative trans action within the meaning of sub section
5 of section 43 where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation by an arbitration award
474 A B Sub section
5 of section 43 speaks of the settlement of a 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 agreement 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 What 471 is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties
473 A C G Commissioner of Income Tax West Bengal vs Pioneer Trading Company Private Ltd  Bhandari Rajmal Kushiraj vs Commissioner of Income Tax Mysore approved
R Chinnaswami Chettiar vs Commissioner of Income Tax Madras overruled
PL KN
Meenakshi Achi vs Commissioner of Income Tax Madras  A Muthukumara Pillai vs Commissioner of Income Tax Madras and Devenport  Co P Ltd vs Commissioner of Income Tax West Bengal 11 not relevant to the point raised