S.K. Mal Lodha, J. - (1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), has referred the following two questions for the opinion of this court, which are said to arise oat of its order dated September 12, 1979, passed in ITA. No. 934/JP/1978-79 : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the order of the Appellate Assistant Commissioner holding that the amount of compensation of Rs. 31,500 was paid by the assessee towards the breach of contract and that the same is allowable as trading loss ? (2) Whether, on the facts and in the circumstances of the case, the amount of compensation paid by the assesses for the breach of contract, without undertaking any business activity, can be allowed as business loss?" THE assessee-firm entered into a contract for the supply of wool to M/s. S. A. Paul and Co., Belgium. THEre were three contracts. Contract No. 3099 was for supply of 100 bales; contract No. 3101 was for 200 bales and contract No. 3102 was for supply of 100 bales. THE aforesaid three contracts were confirmed by the buyer-firm, vide its letters dated June 12, 1973, and June 22, 1973. Export duty at the rate of 25% was levied by the Government through the issue of an ordinance and the said duty became leviable with effect from June 26, 1973. On account of the imposition of export duty, the assessee-firm would have incurred a huge loss on the supply of raw wool. THE assessee-firm did not supply goods regarding contracts No. 3099 and 3101 and agreed to pay damages/compensation for the breach of the contract. THE assessee-firm agreed to pay to the foreign buyer-firm Rs. 9,000 and Rs. 22,500, respectively, for the first and the second contracts. As regards the third contract, the foreign buyer did not claim any compensation. According to the assessee-firm, if supplies were made, it would have incurred a heavy loss as the export duty at the rate of 25% was levied with effect from June 26, 1973. It, therefore, in the interest of the business, agreed to pay compensation/damages for the breach of the contract. THE assessment year involved is 1974-75. THE Income-tax Officer, vide assessment order dated October 17, 1977, did not allow the claim of the assessee. An appeal was filed. THE Appellate Assistant Commissioner was of the opinion that the payment of the damages to the foreign buyer-firm was a trading loss and so, by his order dated October 10, 1978, he allowed the same. THE Appellate Assistant Commissioner observed as under: "THE above facts clearly show that the payment has been made for non-performance of the contract and further the payment has been made in the interest of business... " THE Revenue went in appeal and the Tribunal dismissed the same by its order dated September 2, 1979. In coming to this conclusion, it relied on Daulatram Rawatmull v. CIT [1970] 78 ITR 503 (Cal) and distinguished Davenport & Co. P. Ltd. v. CIT [1975] 100 ITR 715 (SC). An application under Section 254(2) of the Income-tax Act, 1961 (No. XLIII of 1961) (hereinafter referred to as "the Act"), was filed by the Income-tax Officer, B-Ward, Bikaner. By order dated September 12, 1979, the application was rejected. On an application being made under Section 256(1) of the Act, the Tribunal has referred the aforesaid two questions for the opinion of this court. It may be stated that it has been stated by the Tribunal in the statement of the case that for the reasons which it recorded in paras 5 and 6 of its order dated May 2, 1979, it agreed with the finding of the Appellate Assistant Commissioner. In para. 7 of the statement of the case, it referred to its judgment in ITO v. Rajasthan Wool Agencies [1986] 160 ITR 358, relating to the assessment year 1974-75 and held that the provisions, of Section 43(5) of the Act are not attracted.
(2.) WE have heard Mr. C. R. Mehta, learned counsel for the Revenue, and Mr. Rajesh Balia, learned counsel for the assessee. Question No. (1): A similar question was referred to this court by the Tribunal in CIT v. Rajasthan Wool Agencies [1986] 160 ITR 358. After considering the facts leading to Davenport & Co.'s case [1975] 100 ITR 715 (SC) and the provisions of Section 37(1)of the Act, it was held in Rajasthan Wool Agencies' case [1986] 160 ITR 358 (Raj), that the payment of damages by the assessee was an expenditure wholly and exclusively for the purpose of the business which the assessee was carrying on and thus it was an allowable deduction under Section 37(1) of the Act and that too was in the interest of the business and commercial exigency. It was further held that the loss that had arisen to the assessee was in the course of business and as such the claim for damages was admissible under Section 37(1) of the Act. Having considered Rajasthan Wool Agencies' case [1986] 160 ITR 358 (Raj) and the reasons given therein, we are of the opinion that the Tribunal was justified in confirming the order dated October 10, 1978, of the Appellate Assistant Commissioner holding that the amount of compensation of Rs. 31,500 was paid by the assessee towards the breach of contract and that the same is allowable as a trading loss under Section 37(1) of the Act. Question No. (2) : Question No. (2) is more or less overlapping with question No. (1). The Tribunal has sought the opinion of this court on the question whether the amount of compensation which was paid by the assessee for the breach of contract without undertaking any business activity can be a business loss. WE have already held on the basis of the decision in Rajasthan Wool Agencies' case [1986] 160 ITR 358 (Raj), that the amount of Rs. 31,500 paid by the assessee to the foreign buyer on account of the non-fulfilment of the contract No. 3099 and contract No. 3101 was a trading loss and as such it was an allowable deduction under Section 37(1) of the Act. In other words, the assessee did not fulfil the contract No. 3099 and contract No. 3101 for the supply of 100 bales and 200 bales, respectively, and, for that, it agreed to pay to the foreign buyer-firm Rs. 9,000 and Rs. 22,500 as damages in respect of the first and the second contracts. As the assessee-firm was carrying on the business of supply of wool, this expenditure (payment of damages/compensation to the foreign buyer) was wholly and exclusively for the purpose of business and it was in the interest of the business and commercial exigency. For the same reasons, we hold that the amount of compensation paid by the assessee for the breach of contract without undertaking any business activity was a business loss. It appears that before the Tribunal, on behalf of the assessee, the order of the Appellate Assistant Commissioner was sought to be justified on the ground that the provisions of Section 43(5) of the Act are not attracted. The Appellate Assistant Commissioner, on the basis of the order of the Division Bench of the Tribunal in ITO v. Rajasthan Wool Agencies' case [1986] 160 ITR 358 (Raj), took the view that the provisions of Section 43(5) of the Act are not attracted. The Judicial Member of the Tribunal has observed that he was bound by the decision of the Division Bench of the Tribunal. In the statement of the case, in para. 7, as stated above, reference to ITO v. Rajasthan Wood Agencies' case [1986] 160 ITR 358 (Raj) has been made. However, in question No. (2), which has been referred by the Tribunal for the opinion of this court, reference to Section 43(5) of the Act, has not been made. Even this question does not incorporate the conditions necessary for the applicability of Section 43(5) of the Act. Learned counsel for the Revenue, on the basis of the contentions raised by learned counsel for the assessee before the Tribunal, as is evident from para. 4 and para. 7 of the order of the Tribunal, submitted that the applicability or non-applicability of Section 43(5) of the Act is implicit in question No. (2). Before entering into a debate on the question whether question No. (2) refers to the applicability or otherwise of Section 43(5) of the Act, we may observe that in Rajasthan Wool Agencies' case [1986] 160 ITR 358 (Raj), the provisions of Section 43(5) of the Act as well as CIT v. Pioneer Trading Co. Pvt. Ltd. [1968] 70 ITR 347 (Cal), Daulatram Rawatmull's case [1970] 78 ITR 503 (Cal), Bhandari Rajmal Kushalraj v. CIT [1974] 96 ITR 401 (Mys), CIT v. Shantilal Pvt. Ltd. [1983] 144 ITR 57 (SC) and Davenport & Co.'s case [1975] 100 ITR 715 (SC) were considered and it was held that the transactions in that case, which were similar to the transactions involved in the case on hand, could not be described as speculation transaction in the sense in which speculation is understood under the Contract Act and in the general sense of the word. It was held in CIT v. Rajasthan Wool Agencies [1986] 160 ITR 358 (Raj), in agreement with the Tribunal, that the transactions did not fall under Section 43(5) of the Act and so the loss was a trading loss and not a speculation loss. For the reasons in Rajasthan Wool Agencies' case [1986] 160 ITR 358 (Raj), Section 43(5) of the Act is not attracted and the view taken by the Tribunal is correct. We, therefore, answer question No. (1) in the affirmative, i.e., in favour of the assessee and against the Revenue. In connection with question No. (2), it was held that the amount of compensation paid by the assessee for the breach of contract without undertaking any business activity is a business loss and Section 43(5) of the Act is not attracted. Question No. (2) is also answered accordingly in favour of the assessee and against the Revenue. In the circumstances of the case, the parties are left to bear their own costs of this reference. Let a copy of this order be sent to the Tribunal under Section 260(1) of the Act.;