Law:

Section:

Section 43(5) of the Income-tax Act, 1961 - Speculative transaction - Assessee contracted to supply wool tops to two firms within a particular period of time in installments - Assessee supplied part of agreed quantity but failed to supply full agreement quantity of wool tops because of continuous rise in market price - On account of breach of contract a dispute arose which was settled by compromise agreements and assessee paid Rs. 42,000 to those firms - Whether impugned amount paid by assessee was in course of speculative transaction and, hence, a speculation loss - Held, no Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Whether on facts mentioned under head 'Speculative transaction', loss suffered by assessee was a trading loss allowable as deduction under section 37(1) - Held, yes Facts The assessee-company agreed to supply 30,000 kgs. of wool tops to company M and that supply was to be made from December 1972 to June 1973 and that too in 5 or 6 instalments. The assessee was also to supply 22,600 kgs. of wool tops to another company S from December 1972 to June 1973 in 5 or 6 instalments. The assessee actually supplied 2,753 kgs. to company M and 9,140 kgs. to company S up to March 1973. Thereafter, the supply was not made as stipulated by the assessee to the aforesaid two firms. The firms were informed that the remaining wool tops would not be supplied. On account of breach of contract a dispute arose and that dispute was amicably settled by entering into the compromise agreements according to which Rs. 42,000 were paid by the assessee by cheque to the aforesaid two firms which it claimed as a deduction. The assessee submitted that a loss of about Rs. 4 lakhs would have been suffered by it had it supplied the remaining quantity of wool as the prices of wool tops by that time had shot up. The ITO held that the impugned amount was not an allowable deduction under section 37. However, the AAO allowed the impugned amount under section 37(1). The Tribunal held that the impugned amount was not a speculation loss but was a trading loss allowable under section 37(1). On reference: Held The payment of damages to the extent of…

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