INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Contract cancellation charges paid in terms of regular export business - AO treated contract cancellation charges as speculation loss -

Assessee-company was engaged in the business of trading of agricultural products, building construction and generation of power/energy paid Rs. 2 crores as contract cancellation charges to various foreign parties for non-fulfillment of the contractual terms and conditions resulting in settlement of contracts at a price, which is lower than pre-determined price, as a result of which the assessee had to make payment in terms of the contract. AO held that cancellation of transactions caused on account of non-delivery within secified time and deficit so generated leading to payment or receipt of money acquired the colour of specualtion loss and therefore, same could not be allowed as deductible. Assessee's case was that as assessee exported of cotton and other agricultural products to various countries, while procuring the export orders assessee entered into contract proforma invoice with proposed purchasers of foreign country specifying therein the terms of the contract of goods, the time period of supply and the rate. Failure of terms of contract though resulted in more loss, the same dispute was settled with proposed buyer by paying the cancellation charges. Held:Cancellation of the contract was in respect of supply of goods in which assessee dealt. It was the assessee who knew its business as to when to enter into a contract and when to exit. Cancellation of contracs by assessee was a part and parcel of regular export business, therefore, disallowance of such contract cancellation charges by AO holding it speculative in nature was not justified.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2012-13

INCOME TAX ACT, 1961

Section 195

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