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2010 (1) TMI 773 - AT - Income TaxWhether the compensation is capital or revenue - compensation received from a supplier against the loss of reputation and goodwill - held that - The main criteria to judge as to whether the compensation is capital or revenue is to ascertain the purpose for which such compensation is awarded. If the compensation is to recoup the loss suffered by the assessee in its business activity then it will be a revenue receipt. If however the purpose is unrelated to the trading activity of the assessee, as is the case before us in which it is for the loss of reputation and goodwill, it will be in the nature of a capital receipt. We find that similar view has been taken by the Pune Bench of the Tribunal in Serum Institute of India Ltd. v. Dy. CIT (2005 -TMI - 71292 - ITAT PUNE-B) - Since the amount of Rs. 41.58 lakhs was to make good the loss of reputation and goodwill of the assessee-company, in our considered opinion, the same constituted a capital receipt not liable to tax. - Decided in favor of assessee.
Issues Involved:
1. Exemption under section 10A on income derived from Unit-I. 2. Computation of deduction under section 80HHC on cancellation of forward exchange contracts. 3. Taxability of compensation received for loss of reputation and goodwill. Issue-wise Detailed Analysis: 1. Exemption under section 10A on income derived from Unit-I: The assessee appealed against the denial of exemption under section 10A on the income of Rs. 9,20,54,556 derived from Unit-I. The counsel for the assessee conceded that a similar issue was decided against the assessee in the previous assessment year (1997-98) by the Tribunal in Dy. CIT v. Inter Gold (India) Ltd. [2009] 124 TTJ (Mum.) 337. Given the similarity in facts and circumstances, the Tribunal upheld the impugned order, aligning with its previous decision. Consequently, this ground of appeal failed. 2. Computation of deduction under section 80HHC on cancellation of forward exchange contracts: Both the assessee and the revenue raised grievances regarding the computation of deduction under section 80HHC on the cancellation of forward exchange contracts amounting to Rs. 2,85,898. Both parties agreed that the facts were similar to those decided by the Tribunal in the previous year (1997-98). The Tribunal had held that the profit on cancellation of forward exchange contracts was business profit but not derived from export activity, as the amount was received from banks in India and not in convertible foreign exchange, as per clause (baa) of Explanation (1) to section 80HHC. The Tribunal remitted the matter to the Assessing Officer, directing that 90% of the same be reduced from the business profits as per clause (baa). Following these submissions, the Tribunal set aside the impugned order and remitted the matter to the Assessing Officer for fresh adjudication following the Tribunal's previous directions. 3. Taxability of compensation received for loss of reputation and goodwill: The assessee contested the addition of Rs. 41,58,688 as revenue income, representing compensation received from a supplier for loss of reputation and goodwill. The assessee received Rs. 41.58 lakhs from Union Bank of Switzerland (UBS) for loss of reputation and goodwill and Rs. 14,46,500 for legal fees and incidental expenses. The latter was offered for taxation voluntarily, while the former was claimed as a capital receipt not chargeable to tax. The Assessing Officer, referencing the inclusive definition of 'income' under section 2(24) and relying on the Supreme Court judgments in Travancore Rubber and Tea Co. Ltd. v. CIT [2000] 243 ITR 158 and CIT v. G.R. Karthikeyan [1993] 201 ITR 866, held the compensation as revenue receipt. The CIT(A) upheld this view. The Tribunal, however, disagreed. It noted that the compensation was for loss of reputation and goodwill, not for any specific trading transaction. The Tribunal emphasized the principle of consistency, citing cases like CIT v. A.R.J Security Printers [2003] 264 ITR 276 (Delhi) and the Supreme Court's affirmation in CIT v. Shivsagar Estate [2002] 257 ITR 59 (SC). The Tribunal independently examined whether the compensation could be considered a revenue or capital receipt. It referenced the Supreme Court's rulings in Oberoi Hotel (P.) Ltd. v. CIT [1999] 236 ITR 903 and CIT v. Bombay Burmah Trading Corpn. Ltd. [1986] 161 ITR 386, which distinguished between compensation for loss of income (revenue receipt) and loss of source of income (capital receipt). The Tribunal concluded that the compensation for loss of reputation and goodwill was a capital receipt, not liable to tax, as it was not related to any specific trading transaction but was for damage to the business's goodwill. The Tribunal overturned the impugned order on this issue, allowing this ground of appeal. Conclusion: The assessee's appeal was partly allowed, and the revenue's appeal was allowed for statistical purposes.
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