Why can't you use cat to read a file line by line where each line has delimiters

The problem is not in cat, nor in the for loop per se; it is in the use of back quotes. When you write either:

for i in `cat file`

or (better):

for i in $(cat file)

or (in bash):

for i in $(<file)

the shell executes the command and captures the output as a string, separating the words at the characters in $IFS. If you want lines input to $i, you either have to fiddle with IFS or use the while loop. The while loop is better if there's any danger that the files processed will be large; it doesn't have to read the whole file into memory all at once, unlike the versions using $(...).

IFS='
'
for i in $(<file)
do echo "$i"
done

The quotes around the "$i" are generally a good idea. In this context, with the modified $IFS, it actually isn't critical, but good habits are good habits even so. It matters in the following script:

old="$IFS"
IFS='
'
for i in $(<file)
do
   (
   IFS="$old"
   echo "$i"
   )
done

when the data file contains multiple spaces between words:

$ cat file
abc                  123,         comma
the   quick   brown   fox
jumped   over   the   lazy   dog
comma,   comma
$ 

Output:

$ sh bq.sh
abc                  123,         comma
the   quick   brown   fox
jumped   over   the   lazy   dog
comma,   comma
$

Without the double quotes:

$ cat bq.sh
old="$IFS"
IFS='
'
for i in $(<file)
do
   (
   IFS="$old"
   echo $i
   )
done
$ sh bq.sh
abc 123, comma
the quick brown fox
jumped over the lazy dog
comma, comma
$

You can use IFS variable to specific you want a newline as the field separator:

IFS=$'\n'
for i in `cat file`
do
   echo $i
done

the for loop coupled with a change of the internal field separator(IFS) will read file as intended

for an input

abc 123, comma
the quick brown fox
jumped over the lazy dog
comma, comma

For loop coupled with an IFS change

old_IFS=$IFS
IFS=$'\n'
for i in `cat file`
do
        echo $i
done
IFS=$old_IFS

results in

abc 123, comma
the quick brown fox
jumped over the lazy dog
comma, comma