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Issues Involved:
1. Whether the receipt of Rs. 6,95,418 from Union Carbide India Limited (UCIL) is a capital receipt or a revenue receipt. Issue-wise Detailed Analysis: 1. Nature of Receipt: Capital vs. Revenue Facts and Background: The assessee, a private limited company, engaged in manufacturing industrial gases, received Rs. 6,95,418 from UCIL. This amount was initially shown as other income in the profit and loss account but later claimed as a capital receipt during the assessment. The Assessing Officer treated it as a revenue receipt, a decision upheld by the Commissioner of Income-tax (Appeals) and the Tribunal. Assessee's Argument: The assessee argued that UCIL was a regular purchaser, and an agreement required UCIL to purchase a minimum quantity of gases worth Rs. 20 lakhs annually. Due to the Bhopal gas tragedy, UCIL could not meet this requirement, and the differential amount was paid. The assessee claimed this payment was for the destruction of a capital asset, as the plant was established exclusively for UCIL and became defunct after UCIL's closure. Revenue's Argument: The Revenue contended that the payment was made as per the agreement's terms for short supply and not as compensation for capital loss. They argued that the amount received was a revenue receipt as it did not impair the trading structure or the profit-making apparatus of the assessee. Legal Precedents and Analysis: The court referred to several precedents, including: - Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC): Compensation for termination of an agency that does not affect the trading structure or source of income is a revenue receipt. - Bombay Burmah Trading Corporation [1986] 161 ITR 386 (SC): Payments for sterilization of rights under a lease, affecting the profit-making apparatus, are capital receipts. - Oberoi Hotel P. Ltd. v. CIT [1999] 236 ITR 903 (SC): Compensation for giving up a contractual right affecting the source of income is a capital receipt. Court's Conclusion: The court scrutinized the agreement and noted: - The agreement stipulated UCIL to purchase a minimum quantity of gases, with a clause for differential payment if not met, barring force majeure. - The disaster led to UCIL's inability to purchase the minimum quantity, and the differential amount was claimed by the assessee through a debit note. - The agreement was terminated by mutual consent, and a new agreement was entered into for a short term. The court found no clause in the agreement for compensation on termination and noted that the amount received was precisely the differential sum, not compensation for capital loss. The assessee's books initially recorded it as a revenue receipt. The court emphasized that the payment did not impair the profit-making apparatus or the source of income. Final Judgment: The court held that the amount received was a revenue receipt and not a capital receipt. The reference was answered in the affirmative, in favor of the Revenue and against the assessee.
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