S.K. Mal Lodha, J. - (1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur ("the Tribunal" herein), has referred the following question of law for the opinion of this court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the loss of Rs. 42,000 claimed by the assessee was a trading loss and not a speculation loss ?"
(2.) THE assessee is a partnership concern. THE assessment year under consideration is 1974-75. THE relevant previous year ended on March 31, 1974. In the previous year, the assessee derived income from adat and dealing on own account in wool. THE assessee's income in commission account was Rs. 1,23,222. A gross profit of Rs. 8,431 was shown from the dealings on account of sale of Rs. 11,93,226. THE Income-tax Officer at the time of the scrutiny noticed a payment of Rs. 42,000 to : (1) M/s. Minerva Hosiery Mill Pvt. Ltd., and (1) M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd. THE amount of Rs. 42,000 represented the amount paid as damages for non-performance of contracts which are said to have been orally entered into with the aforesaid parties for supply of wool tops. THE details of the aforesaid oral contracts were supplied by the assessee to the Income-tax Officer. According to the contracts, the assessee had agreed to supply 30,000 kgs. of wool tops to M/s. Minerva Hosiery Mills Pvt. Ltd. and 22,000 kgs. of wool tops to M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd. in December, 1972. THE supply was to be made from December, 1972, to June, 1973, in 5 or 6 instalments at the fixed rate of Rs. 24.47 per kg. THE assessee, in fact, supplied 2,753 kgs. to M/s. Minerva Hosiery Mills Pvt. Ltd. and 9,140 kgs. to M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd., up to March, 1973. In April, 1973, both the aforesaid parties were informed by the assessee that it will not be possible for it to supply the remaining contracted quantity. That gave rise to a dispute between the parties. THE dispute, however, was amicably settled in March, 1974, and the compromise agreements were drawn up according to which the assessee paid a sum of Rs. 42,000 by cheque to the aforesaid two parties. THE Income-tax Officer by his order dated November 30, 1976, disallowed the sum of Rs. 42,000 on the ground that it is not an allowable deduction under Section 37 of the Income-tax Act, 1961 ("the Act" hereinafter). He also opined that the nature of the transactions appeared to be colourable in view of the fact that the profit and loss did not belong to the assessee but to the parties to whom goods were supplied by the assessee. He observed as under : "THErefore, it is doubtful that the alleged claim of deduction represents compensation for failure for non-performance of a contract alleged to have been entered into between the assessee-firm and the Ludhiana parties. Since the assessee-firm failed to establish that it had at all entered into agreement for supply of wool tops in such circumstances of the case and that the amount of Rs. 42,000 was paid for the purpose of earning profits of business of the firm, the deduction claimed under Section 37 of the Income-tax Act, 1961, is not allowed." In this connection, he relied on Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 65 (SC). The assessee lodged an appeal and the Appellate Assistant Commissioner by his order dated July 12, 1977, found that the claim of damages is allowable as deduction under Section 37(1) of the Act. He, therefore, allowed the claim of the assessee which was disallowed by the Income-tax Officer. He also granted certain other reliefs to the assessee with which we are not concerned in this reference. The Income-tax Officer, "C" Ward, Bikaner, filed an appeal before the Tribunal contesting the allowance of Rs. 42,000 paid by the assessee to the two Ludhiana firms which were allowed by the Appellate Assistant Commissioner to be an allowable expenditure under Section 37 of the Act. The assessee also filed a cross-objection in respect of Rs. 2,000 with which also we are not concerned in the reference. Before the Tribunal, a contention was raised on behalf of the Income-tax Officer, "C" Ward, Bikaner, that the amount of Rs. 42,000 in question relates to speculation loss within the meaning of Section 43(5) of the Act which could not be set off against the trading profits of the assessee in view of Section 73(1) of the Act. It was pressed before the Tribunal that the decision of the Appellate Assistant Commissioner that the amount in question was an admissible deduction from the trading profits was erroneous. The Tribunal after taking into consideration the relevant provisions of the Act as well as the case law bearing on the question which was agitated before it came to the following conclusion : "The assessee has filed before us a statement which shows that a loss of nearly Rs. 4 lakhs would have been suffered by the assessee, if it had supplied the remaining quantity of wool at the prevailing rate of Rs. 34.47 per kg., and, therefore, the assessee agreed to pay by way of damages Rs. 42,000. The payment obviously was in the interest of the assessee's business and was dictated by commercial expediency. It was, thus, a loss which had arisen to the assessee in the course of the business and the learned Appellate Assistant Commissioner rightly held that the same was allowable......" It is clear from the aforesaid extracted portion that the amount of Rs. 42,000 was held by the Tribunal to be an allowable deduction under Section 37(1) of the Act. While dealing with the question whether the payment of Rs. 42,000 was a speculation loss under Section 43(5) of the Act, the Tribunal held that the transactions in the case on hand did not fall under Section 43(5) of the Act. It, therefore, concluded that the loss of Rs. 42,000 was a trading loss and not a speculation loss. In view of the aforesaid conclusions, it upheld the order of the Appellate Assistant Commissioner in this respect and dismissed the appeal. On an application under Section 256(1) of the Act, the Tribunal has referred the above question for the opinion of this court as aforesaid.
(3.) WE have heard Mr. B.R. Arora, learned counsel for the Revenue, and also Mr. B.L. Purohit, learned counsel for the assessee. The only question which we are called upon to determine is whether, on the facts and circumstances of the case, the amount of Rs. 42,000 paid by the assessee to the two Ludhiana firms as compensation on account of non-fulfilment of the terms of the contracts entered into by the assessee with them for not supplying the full quantity of wool tops stipulated to to be supplied from April, 1973, to June, 1973, was an allowable deduction under Section 37(1) of the Act. In order to enable us to answer this question, we may notice Sections 37(1) and Section 43(5) of the Act which are as under: " 37. (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 (and Section 80W) and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively Joy the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession'. 43. (5) 'speculative transaction' means 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." ;