2016 (5) TMI 1265 - HC - Income Tax

Liquidated damages received for delay in supply of a boiler - whether was in the nature of a capital receipt or revenue receipt - Held that - Determination of liquidated damages was not based upon the calculation made in respect of loss of profit on account of supply of the boiler, but was directly linked with the procurement of a capital asset. Delay in supply would result in delay in the coming into existence of a profit making apparatus, rather than a receipt in the course of profit earning process. See Commissioner of Income Tax vs. Saurashtra Cements and Chemicals India Limited 2010 (7) TMI 11 - SUPREME COURT Tribunal correctly held that the liquidated damages received by the respondent-assessee, for delay in supply of a boiler, was in the nature of a capital receipt.

Summary

Issues:
1. Nature of liquidated damages received by the respondent-assessee - capital or revenue receipt.

Analysis:
The appeal under Section 260-A of the Income Tax Act, 1961 was filed against the order of the Income Tax Appellate Tribunal, Hyderabad, which held that the liquidated damages received by the respondent-assessee for delay in the supply of a boiler were in the nature of a capital receipt. The Assessing Authority argued that the delay caused a loss of profits to the assessee, and the damages received were compensation for this loss, constituting a revenue receipt. The Tribunal, relying on a Supreme Court judgment, concluded that the damages were capital receipts, not taxable in the hands of the assessee.

The Assessing Authority's observation highlighted that failure to supply the machinery within the agreed timeframe resulted in the assessee losing profits, making the liquidated damages a revenue receipt. However, the Tribunal, following the Supreme Court's decision in a similar case, emphasized that the damages were directly linked to the procurement of a capital asset, leading to a delay in the profit-making apparatus's existence. This connection with a capital asset rendered the damages a capital receipt, exempt from taxation.

The Supreme Court's ruling in the case of Saurashtra Cement Limited was pivotal in determining the nature of the liquidated damages. The Court emphasized that the damages were compensation for the delay in procuring a capital asset, sterilizing the profit-earning source. This decision guided the Tribunal's judgment in the present case, where the damages were intricately linked to the procurement of a capital asset, justifying their classification as a capital receipt. As the High Court found the Supreme Court's decision applicable to the current scenario, it upheld the Tribunal's order, dismissing the appeal.

In conclusion, the High Court affirmed the Tribunal's decision, considering the liquidated damages received by the assessee as a capital receipt, not subject to taxation. The judgment underscored the importance of the connection between damages and the procurement of a capital asset in determining the nature of receipts for tax purposes.