2004 (5) TMI 522 - AT - Income Tax

Summary

Issues:
Interpretation of damages received by the assessee - Whether capital or revenue income?
Taxability of damages received by the assessee.

Analysis:
The appeal involved the question of whether damages received by the assessee, amounting to Rs. 2,51,250, should be treated as capital or revenue income for taxation purposes. The assessee had sold an immovable property, but due to lapses on the part of the buyer, the property could not be registered as per the agreement. The assessee received damages as compensation for the buyer's default before the conclusion of the sale contract. The lower authorities treated the damages as revenue income, considering them as interest paid by the buyers for belated payment of consideration.

The Tribunal analyzed the nature of the damages received, emphasizing that there was no outstanding amount against the buyers receivable by the assessee. The damages were paid for the ad hoc breach of contract, not for delay in paying consideration. The Tribunal concluded that the damages were capital in nature, not revenue income, as they were not related to interest on belated payment. Therefore, the Assessing Officer was not justified in including the entire amount in the taxable income.

However, the Tribunal also held that while the damages were capital in nature, they were still part of the consideration for the sale of the immovable property. Therefore, the damages of Rs. 2,51,250 were liable for levy of long-term capital gain tax. The Assessing Officer was directed to exclude this amount from the revenue account and subject it to long-term capital gain tax after providing the assessee with the benefit of indexation and special tax rates.

In conclusion, the appeal was partly allowed, with the Tribunal ruling that the damages received by the assessee were capital in nature but should be considered as part of the consideration for the sale of the property, thus subject to long-term capital gain tax treatment.