Law:

Section:

Section 43(5) of the Income-tax Act, 1961 - Speculative transactions - Assessment year 1972-73 - Assessee, carrying on business of sale of cotton and cotton seeds and also as commission agents, entered into contract for sale of certain bales of cotton to two mills - For its failure to fulfil contractual obligation assessee eventually settled with them by paying them a certain amount - Whether said payment could not be branded as a speculative transaction in terms of section 43(5) - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1972-73 - Whether in view of facts mentioned under heading 'Speculative transactions', payment in question was allowable as a deduction - Held, yes Facts The assessee, carrying on business of sale of cotton and cotton seeds and also as commission agents, entered into a contract for the sale of certain bales of cotton to two mills. The assessee could not fulfil its contractual obligation of supplying this cotton to these mills and eventually settled with them by paying them a certain amount. The assessee claimed deduction for the said payment, but the ITO disallowed the assessee's claim on the ground that it was a speculative transaction. On appeal, the AAC upheld the order of the ITO. On second appeal, the Tribunal allowed the assessee's claim, holding that it was because of abnormal circumstances that the assessee had to flout the sale agreement to save itself from ruinous situation and because of the breach of contract that resulted compensation was paid in the shape of settlement. On reference : Held There is a thin line that divides what is to be termed as speculative transaction as envisaged by section 43(5) and payment made under a settlement which falls outside its ambit. It is well settled that a transaction cannot be described as a speculative transaction within the meaning of clause (5) of section 43 where there is a breach of contract and on a dispute between the parties damages are awarded as compensation by an arbitration award. In the present case, a finding of fact had been recorded by the Tribunal that the payment of the said amount in question was made by…

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