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1.2 As per the agreement between the builder and Mr. A, the possession of the
premises in the mall was to be provided by a particular date.
1.3 The builder did not give possession of the premises in the mall within the
date specified in the agreement. To compensate for the delay, the builder
paid Mr. A Rs 30 lakhs as damages.
1.4 The builder did not withhold taxes at source while making the payment to
Mr. A.
1.5 Currently, the builder has given possession of the premises and Mr. A has
given the premises on rent.
2. Query
3. Our comments
3.1 As per the provisions of the Act, revenue receipts are taxable and capital
receipts are not taxable.
⇒ The supplier defaulted and failed to supply the plant on the scheduled time and,
therefore, as per the terms of contract, the Taxpayer received an amount of
Rs.8,50,000 from the supplier by way of liquidated damages.
⇒ The Taxpayer claimed the above as a capital receipt and did not offer the above
to tax.
⇒ Aggrieved, the Taxpayer filed an appeal before the CIT (A), but without any
success. The Taxpayer carried the matter further in appeal to the Tribunal.
Relying on the ratio of the decisions of this Court in Commissioner of Income Tax,
Nagpur Vs. Rai Bahadur Jairam Valji and Others (1959) 35 ITR 148 (SC) and
Kettlewell Bullen and Co. Ltd. Vs. Commissioner of Income-Tax, Calcutta AIR
1965 SC 65, the Tribunal came to the conclusion that the said amount could not
be treated as a revenue receipt.
⇒ Being dissatisfied with the decision of the Tribunal, the Revenue preferred an
appeal before the High Court, which was answered in favour of the Taxpayer.
⇒ The Supreme Court discussed the rulings in the cases of Rai Bahadur Jairam Valji
and Kettlewell Bullen and Co. Ltd.
⇒ It is evident that the damages to the Taxpayer was directly and intimately linked
with the procurement of a capital asset i.e. the cement plant, which would
obviously lead to delay in coming into existence of the profit making apparatus,
rather than a receipt in the course of profit earning process.
⇒ The afore- stated amount received by the Taxpayer towards compensation for
sterilization of the profit earning source, not in the ordinary course of their
business, in our opinion, was a capital receipt in the hands of the Taxpayer.
⇒ We are, therefore, in agreement with the opinion recorded by the High Court and
hold that the amount of Rs.8,50,000/- received by the Taxpayer from the
suppliers of the plant was in the nature of a capital receipt .
⇒ The Taxpayer treated this amount as a capital receipt and did not offer the same
to tax.
⇒ The Assessing Officer treated the above amount received by the Taxpayer from
HUDA as a revenue receipt.
⇒ Being aggrieved, the Taxpayer preferred an appeal before the CIT(A) decided the
matter in favour of the Taxpayer by treating the above amount as a capital
receipt and not liable to tax.
⇒ Whether the payment received by the Taxpayer from HUDA is a capital receipt or
a revenue receipt?
⇒ The Tribunal relied on the case of the Delhi Development Authority vs. ITO 53
ITD 19 whereby the interest granted to the assessee for delayed construction of
flat by DDA was held to be compensation and not interest. Consequently, it was
held to be a capital receipt. In this case, interest was granted for delayed
⇒ It may be mentioned that in the said order the Tribunal has held that the
decision in the case reported in 33 ITR 245, 87 ITR 22, 165 ITR 231 (SC) and 81
ITR 440 (SC) are distinguished. We, therefore, respectfully following the order in
the case of Delhi Development Authority (supra) uphold the order passed by the
CIT(A).
4. Conclusion
The builder has not withheld taxes at source on such payment (in case
appropriate taxes are not withheld by the builder, the builder would not get
a deduction of those expenses).
In view of the above and the various rulings on this subject, it could be
concluded that since the compensation received by Mr. A is in relation to
purchase of capital asset and not in the ordinary course of business, it
should be treated as a capital receipt, not liable to tax.
In Favour Of : Others
SHYAM TELELINK LTD Vs INCOME TAX OFFICER
Date of decision - 30 December 2005
Compensation received for failure to honour contractual obligations is capital receipt...
In Favour Of : Others
THE INCOME-TAX OFFICER Vs GOVINDBHAI MAMAIYA
Date of decision - 22 December 2005
Acquisition of land by the State - Compensation paid - Plea for more compensation -
Compensation awarded along with interest - Such interest income is revenue in nature and the
total income is capital receipt in nature and the same to be taxed as capital gains as per
provisions of sec.45(5)(b)...
In Favour Of : Assessee
PAYAL KAPUR Vs ACIT
Date of decision - 18 November 2005
Compensation received for breach of rights or waiver of rights is capital receipt...
In Favour Of : Others