V.K.SINGHAL, J. - (1.) THE Income -tax Appellate Tribunal has referred the following questions of law arising out of its order dated May 29, 1980, in respect of the assessment year 1974 -75, under Section 256(1) of the Income -tax Act, 1961 : '1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Commissioner of Income -tax (Appeals) reducing the disallowance made under Section 43(5) of the: Income -tax Act, from Rs. 1,86,764 to Rs. 4,500 and thereby allowing relief of Rs. 1,82,264? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in further holding that none of the transactions are in the nature of speculative transactions covered by Section 43(5) of the Income -tax Act, 1961? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Commissioner of Income -tax (Appeals) deleting the disallowance of Rs. 68,620 representing expenditure incurred upon celebration of 10th anniversary of the assessee -company?'
(2.) THE brief facts of the case are that in the assessment year 1974 -75, the assessee claimed Rs. 1,86,764 as damages paid for breach of contract which included a payment of Rs. 41,998 to Indo -Burma Trading Corporation, Bombay, Rs. 1,17,767 paid to Keshavlal Talakchand, Rs. 7,606.90 to Mitter Tax Fabrics, Bombay, Rs. 14,893 paid to Mangal Textiles, Bombay, and Rs. 4,500 to Cotton Textiles Export Promotion Council. The Income -tax Officer came to the conclusion that in view of the provisions of Section 43(5) of the Income -tax Act, the amount of Rs. 1,86,764 is a speculation loss and cannot be allowed as deduction from the business profits. The sum of Rs. 68,620 was incurred in connection with the 10th anniversary of the company for which the Income -tax Officer came to the conclusion that some of the items are purely of charitable nature and the others are in respect of presents like wrist watches given by the company to the staff members in excess of Rs. 50 which is not permissible under the rules. The other items like gold bangles, silver plaques, given were also exceeding the limits prescribed under the rules and, therefore, they were also held not allowable. In the appeal before the Commissioner of Income -tax (Appeals), it was contended that the payments have been made by way of compensation to other parties for non -fulfilment of part of the contract and the difference is not paid in respect of settlement of the contract without actual delivery of the goods before any breach of contract. In the matter of Indo -Burma Trading Corporation, it was found that the assessee could not supply goods within the stipulated time and the contract was cancelled on payment of Rs. 3 per 10 Ibs. In the case of Mitter Tax Fabrics, the goods were purchased by them from Indo -Burma Trading Corporation and the price difference of Rs. 3 per 10 Ibs paid was to be paid to them directly. In respect of Keshavlal Talakchand, the difference in the price was paid on account of non -delivery at Rs. 3 per 10 Ibs. Similarly, in respect of the contract with Keshavlal Talakchand, since the supply could not be made in time, the contract was cancelled on payment of Rs. 1.25 per kg. against the difference of Rs. 1.60 per kg. actually paid. The Commissioner of Income -tax (Appeals) came to the conclusion that the payments made by the assessee were in the nature of compensation for damages to other parties on account of non -performance of his obligation under the contract in full and, therefore, cannot be considered as speculation transactions. In respect of the contract with Mangal Textiles, it was found that goods were lying at Bombay and the assessee informed them that they did not need the goods on account of a change in their manufacturing programme and asked Mangal Textiles to sell the goods at the best price on their account and, therefore, that was also held to be not a speculative transaction. However, in respect of Rs. 4,500, it was found that the liability has not accrued in the year 1973 and pertained to earlier years and as such is not allowable.
(3.) IN respect of the claim of Rs. 68,620.94, the Commissioner of Income -tax (Appeals) came to the conclusion that the expenditure was not incurred on advertisement and observed that Rule 6(c) is not applicable and the gifts were made to the officers and staff on the 10th anniversary of the company and found that the expenditure was not in the nature of charity or otherwise not connected with the business. The addition was accordingly deleted.;