Dr. B.P. Saraf J.
1. By this reference u/s 256(1) of the Income Tax Act, 1961, at the instance of the Revenue, the Income Tax Appellate Tribunal has referred the
following two questions of law for opinion :
1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in confirming the order of the Commissioner of
Income Tax (Appeals) deleting the disallowance of Rs. 29,334 u/s 40A(5) ?
2. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in upholding the decision of the Commissioner
of Income Tax (Appeals) deleting the addition of Rs. 5,85,093 on account of price difference paid for settlement of contract otherwise than by
actual delivery of goods ?
2. Learned counsel for the parties are agreed that the controversy involved in question No. 1 is covered by the decision of this court in
Commissioner of Income Tax, Bombay City-II Vs. Indokem Private Ltd., . In that view of the matter, we answer question No. 1 in the affirmative,
i.e., in favour of the assessee and against the Revenue.
3. As regards question No. 2, the submission of counsel for the assessee is that it is covered in favour of the assessee by the decision of the
Supreme Court in Commissioner of Income Tax, Bombay City-III Vs. Shantilal P. Ltd., and the decisions of this Court in Commissioner of
Income Tax Vs. Asian Chemical Co., and Commissioner of Income Tax Vs. Jaydwar Textiles, . Mr. G. S. Jetly, counsel for the Revenue,
however, does not agree with the above submission. He contends that the decisions relied upon by the assessee have no application to the facts of
the present case. According to him, in the instant case, the assessee had paid the difference between the agreed price of the goods and the market
price. It is not a case where any ""liquidated damages"" had been paid. The decisions of this court and the decision of the Supreme Court referred to
above are applicable only to cases ""where damages are paid for breach of contract and not to payments made in fulfilment of a contract
whereunder purchase or sale of goods is settled otherwise than by actual delivery of goods"". So far as the legal proposition advanced by Mr. Jetly
is concerned, we do not find any difficulty in accepting the same in view of section 43(5) of the Act which 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. The meaning and scope of this expression is no more res integra in
view of the decision of the Supreme Court in Commissioner of Income Tax, Bombay City-III Vs. Shantilal P. Ltd., . In that case, the Supreme
Court explained the distinction between ""a settlement of the contract otherwise than by actual delivery of the goods"" and ""breach of contract"". It
was observed (at page 60) :
.... A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract the promise, 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''. The award of damages for the 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 lay may 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 promise 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
law, and it is 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....
4. The above observation makes it abundantly clear that 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 the contract and on a dispute between the parties damages are awarded as compensation.
Section 73 of the Contract Act deals with the consequences of breach of contract and payment of compensation for loss or damage caused by
breach of contract. This section, so far as relevant, reads :
73. Compensation for loss or damage caused by breach of contract. - When a contract has been broken, the party how suffers by such breach is
entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose
in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. . . .
5. Some of the illustrations appended to section 73 are helpful in understanding what amounts to a breach of contract. Illustrations (a), (c), (d) and
(h) having a direct bearing on the controversy before us, are set out below :-
(a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled to
receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50
maunds of saltpetre of like quality at the time when the saltpetre ought to have been delivered. . . .
(c) A contracts to buy from B, at a stated price, 50 maunds of rice, no time being fixed for delivery. A afterwards informs B that he will not accept
the rice if tendered to him. B is entitled to receive from A by way of compensation, the amount, if any, by which the contract price exceeds that
which B can obtain for the rice at the time when A informs B that he will not accept it.
(d) A contracts to buy B''s ship for 60,000 rupees, but breaks his promise. A must pay to B, by way of compensation, the excess, if any, of the
contract price over the price which B can obtain for the ship at the time of the breach of promise. . . .
(h) A contracts to supply B a certain quantity of iron at a fixed price, being a higher price than that for which A could procure and deliver the iron.
B wrongfully refuses to receive the iron. B must pay to A, by way of compensation, the difference between the contract price of the iron and the
sum for which A could have obtained and delivered it. . . .
6. From a reading of section 73 and the above illustrations, more particularly illustration (c), it is abundantly clear that failure to accept the goods in
terms of the contract on the stipulated date amounts to a breach of contract and in such a case, the other party is entitled to receive compensation
for loss or damage caused by such breach. In the case of a contract for the sale of goods, the measure of damages upon a breach by the buyer is
the difference between the contract price and the market price at the date of the breach. Such payment cannot be termed as ""payment made on
periodical or ultimate settlement of the contract for purchase and sale of the commodity otherwise than by actual delivery or transfer of the
commodity"" contemplated by section 43(5) of the Act. That would happen only in cases falling u/s 63 of the Contract Act which provides :
63. Promise may dispense with or remit performance of promise. - Every promise may dispense with or remit, wholly or in part, the performance
of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.
7. We may now consider the facts of the present case in the light of the above discussion to determine whether the payments made by the assessee
can be held to be payments made in satisfaction of the contract as contemplated by section 63 of the Contract Act or these are payments by way
of compensation for breach of contract within the meaning of section 73 of the Contract Act. The assessee carried on the business of manufacture
and sale of metal tubes and rods. For that purpose, it used to purchase brass sheets from different parties for use as raw materials in the
manufacture of its products. During the accounting year relevant to the assessment year 1975-76, the assessee entered into contracts for supply of
brass sheets with four parties. The assessee took delivery of part of the goods, i.e., 23,116 kgs. in May, 1974, against orders for 61 metric tonnes
placed with one of the parties. It also took part delivery of a part of the goods in June-July, 1974, against the contract for supply with another
party. During the relevant period, in all, the assessee took part delivery of the goods from three out of the four parties. In the meanwhile, a strike
took place in the factory of the assessee resulting in dislocation of production. During the strike period, the assessee did neither have the resources
nor the need to purchase raw materials. By the time the strike ended, the price of those materials had fallen in the market. Situated thus, the
assessee refused to accept the goods and agreed to pay the difference between the agreed price and the market price at the date of refusal. Such
payment amounted to Rs. 5,85,093. The assessee claimed deduction of the above amount in computation of its income. The Income Tax Officer
disallowed the claim of the assessee on the ground that settlement of the contracts by payment of the price difference made the transaction
speculative in nature and, therefore, the loss that arose to the assessee on payment of the price difference was a loss from speculative transaction
which cannot be set off against other business income. The assessee appealed to the Commissioner of Income Tax (Appeals). It was contended
by the assessee that the payment was by way of damages for breach of contract income. The Commissioner (Appeals) accepted the contention of
the assessee and held that the amount was deductible in the computation of its income. The order of the Commissioner (Appeals) was upheld by
the Income Tax Appellate Tribunal. The Tribunal observed :
Once a contract is broken, there could be no cause of action founded on the contract itself which could be said to be capable of settlement. After
the breach of contract, what can be settled is only the right to damages resulting from the breach itself. Therefore, the amounts paid by the assessee
to the parties represented damages for the breach of contracts and did not represent payment of differences on the settlements made prior to or on
the date of delivery.
8. Hence this reference at the instance of the Revenue.
9. Learned counsel for the Revenue contends that it is a case of fulfilment of the contract by payment of the difference between the contracted
price and the market price on the due of delivery within the meaning of section 63 of the Contract Act. On the other hand, the contention on behalf
of the assessee is that it is a case of breach of contract for which compensation had been paid by the assessee. On a careful consideration of the
rival submissions in the light of the provisions of sections 63 and 73 of the Contract Act and the ratio of the decision of the Supreme Court in
Commissioner of Income Tax, Bombay City-III Vs. Shantilal P. Ltd., , we are of the clear opinion that it is a case of breach of contract and the
payments made by the assessee are by way of damages caused thereby. It clearly falls in illustration (c) of section 73 set out above. It is not a case
of performance of the contract within the meaning of section 63 of the Act. The payment of Rs. 5,85,093 by the assessee, therefore, cannot be
termed as a ""speculative transaction"" within the meaning of section 43(5) of the Act.
10. The controversy may be examined from one more angle. Even if in a given case, a particular transaction is held to be a speculative transaction
within the meaning of section 43(5) of the Act, such a finding would not resolve the controversy regarding the applicability of Explanation 2 to
section 28 and section 73 of the Act without a further finding that the assessee carried on business in such speculative transactions. It is only where
the speculative transactions carried on by an assessee are of such a nature as to constitute business that Explanation 2 to section 28 gets attracted
and such business, which is referred to as ""speculative business"", is deemed to be distinct and separate from other business and section 73 of the
Income Tax Act becomes applicable to the set off and carry forward of loss from such business. This is evident from sections 70, 71, 72 and 73 of
the Act.
11. Section 70 of the Act provides for set off of loss against income under the same head. Section 71 provides for set off of loss against income
under another head. Section 72 contains provisions for carry forward of business losses to the following assessment year and set off thereof against
the income of that year. All these sections do not apply to loss in a speculation business which, u/s 73, can be set off only against the profits of
another speculative business. Sections 72 and 73, so far as relevant, read :
72. Carry forward and set off of business losses. - (1) Where for any assessment year, the net result of the computation under the head ''Profits
and gains of business or profession'' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not
wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set
off or, where the assessee has income only under the head ''Capital gains'' relating to capital assets other than short-term capital assets and has
exercised the option under sub-section (2) of that section or where he has no income under any other head, the whole loss shall, subject to the
other provisions of this Chapter, be carried forward to the following assessment year, and -
(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year :
Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant
for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on : . . .
.
73. Losses in speculation business. - (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off
against profits and gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so
much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the
other provisions of this Chapter, be carried forward to the following assessment year, and -
(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. . . .
Speculation business"" has been defined in Explanation 2 to section 28 of the Act as under :
Explanation 2. - Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business
(hereinafter referred to as ''speculation business'') shall be deemed to be distinct and separate from any other business.
12. From the above definition, it is clear that there is a clear distinction between ""speculative transaction"" and ""speculation business"". Only those
speculative transactions carried on by an assessee are deemed to be distinct and separate from any other business which are of such a nature as to
constitute ""business"" (which is referred to as ""speculation business"").
13. From a reading of the above provisions, it is clear that there is a departure from the scheme of the Act regarding set off of losses from business
(other than speculation business) against any income under the same head, set off against income from another head and carry forward and set off
of business losses (contained in sections 70, 71 and 72). u/s 73(1) losses from speculation business can be set off only against profits of another
speculative business. Similarly, a loss in speculative business can be carried forward to a subsequent year and set off only against the profits of any
speculation business carried on in that year [section 73(2)].
14. On a careful reading of the provisions of sections 72 and 73, Explanation 2 to section 28 of the Act, it is abundantly clear that all these
provisions are applicable only to treatment of profits and losses from a ""speculation business"". There is a perceptible difference between
speculative transaction"" and ""speculation business"". An isolated transaction of settlement of a contract otherwise than by actual delivery of the
goods might amount to ""speculative transaction"" within the meaning of section 43(5) of the Act but in the absence of something more to show that
the nature of the transactions was such as to constitute a business, it cannot be termed as ""speculation business"" which has been treated as distinct
and separate from other business. The expression ""business"" has been defined in clause (4) of section 2 of the Act to include :
any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
15. It is evident from the above definition, that ""an adventure in the nature of trade"" has also been included in the expression ""business"". Dealing
with the effect of inclusion of ""an adventure in the nature of trade"" in the definition of ""business"", the Supreme Court, in G. Venkataswami Naidu
and Co. Vs. The Commissioner of Income Tax, observed :
When section 2, sub-section (4), refers to an adventure in the nature of trade it clearly suggests that the transaction cannot properly be regarded
as trade business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of
the essential features that make up trade or business but not by all of them; and so, even an isolated transaction can satisfy the description of an
adventure in the nature of trade. Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the
nature of trade. This statement may be true; but in its application due regard must be shown to the requirement that the single plunge must be in the
waters of trade. In other words, at least some of the essential features of trade must be present in the isolated or single transaction. On the other
hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true if, in the metaphor, summer represents
trade; but it may not be true if summer represents an adventure in the nature of trade because, when the section refers to an adventure in the nature
of trade it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a
similar character that they are treated as in the nature of trade.
16. It was further observed (at page 609) :
.... [It] is impossible to evolve any formula which can be applied in determining the character of isolated transactions which come before the courts
in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be
difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty....
17. In deciding the character of transactions, what is important to consider is the distinctive character of such transactions. In each case, it is the
total effect of all the relevant facts and circumstances that the determines the character of the transactions. Reference may also be made to the
decision of this Court in Commissioner of Income Tax Vs. Principal Officer, Laxmi Surgical Pvt. Ltd, , where it was held that it is not possible to
evolve any legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer
to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein
which determine the character of the transaction.
18. The essential features of ""business"" are no more res integra. It was held by the Supreme Court in State of Andhra Pradesh Vs. Abdul Bakhi
and Bros., that the expression ""business"", though extensively used, is a word of indefinite import. In taxing statutes it is used in the sense of an
occupation or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity
as business, there must be a course of dealings either actually continued or contemplated to be continued with a profit motive.
19. In State of Gujarat Vs. Raipur Manufacturing Company Ltd., , the Supreme Court held that the whether a person carries on business in a
particular commodity must depend upon the volume, frequency, continuity and regularity of the transactions of purchase and sale in a class of
goods and the transactions must ordinarily be entered into with a profit-motive. By the use of the expression ""profit-motive"" it is not intended that
the profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of
transactions. It predicates a motive which pervades the whole series of the transactions effected by the person in the course of his activity.
Moreover, the burden of proving that the transactions carried on by an assessee were of such a nature as to the constitute ""speculation business"" is
on the taxing authorities. If the authorities come to a conclusion without the making necessary investigation in that regard, such an inference cannot
be sustained.
20. In the instant case, even if the transaction of payment of the sum of Rs. 5,85,093 by the assessee to the four suppliers for its failure to take
delivery of the goods in terms of the contract is held to be a ""speculative transaction"" within the meaning of section 43(5) of the Act, there is
nothing to justify its being described as ""speculation business"" within the meaning of Explanation 2 to section 28 of the Act. On a careful
consideration of the facts and circumstances of the case, it is obvious that it is not characterised by any of the features of trade or business. It
cannot, therefore, be described even as an adventure in the nature of trade. The transaction was not only an isolated transaction carried out by the
assessee in the peculiar facts and circumstances of the case including the occurrence to strike in the factory, but it is also in no way similar in
character to trade. It cannot, therefore, be treated as in the nature of trade.
21. That being so, we are of the clear opinion that the Tribunal was justified in affirming the order of the Commissioner of Income Tax (Appeals)
and holding that the Income Tax Officer was not justified in disallowing deduction of Rs. 5,85,093 by reference to section 43(5) of the Act. As
already observed, no such disallowance can be made in the absence of clear findings that : (i) the transactions in question were speculative
transactions, and (ii) that those transactions were of the such a nature as to constitute a business. There being no such finding, payment of the
above amount cannot be treated as loss from speculation business. Explanation 2 to section 28 and section 73 of the Act are, therefore, not
attracted.
22. Having regard to our above opinion, we answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Revenue.
23. We make no order as to costs.