2016 (12) TMI 499 - HC - Income Tax

Compensation received on account of the cancellation of contract - Held that - The assessee was having other sources of income and therefore the termination of the contract with BCCL was nothing but was normal incident of business. Other than that the assessee was free to carry on his trade because there was no restriction on the assessee that he would not be able to execute any other contract and therefore the tribunal came to the conclusion that the money received by the assessee from the cancellation of the contract was a revenue receipt and not a capital receipt. The income received from the cancellation of the contract and the interest thereon received would all constitute revenue receipt in the hands of the assessee. - Decided against assessee

Issues:
Interpretation of Income Tax Act - Charging section 4 and section 28
Taxability of sums received as trading receipts
Applicability of mercantile system of accounting
Taxability of interest received
Consideration of legal position regarding enforceable right to receive compensation

Interpretation of Income Tax Act - Charging section 4 and section 28:
The appeal under section 260A of the Income Tax Act, 1961 was against the tribunal's order dated 17.1.2005. The key issue was whether the sums received by the assessee were in the nature of trading receipts and taxable as such in the assessment year 1998-99. The tribunal found that the compensation received was due to the cancellation of a contract with BCCL, which could not provide a construction site. The assessing officer confirmed that the amount received was a business receipt for the relevant period, which the assessee did not dispute. The tribunal concluded that the cancellation did not affect the overall trading structure of the assessee's business, as there were other sources of income. Thus, the money received was deemed a revenue receipt, not a capital receipt.

Applicability of mercantile system of accounting:
The tribunal noted that even though the assessee followed the mercantile system of accounting, the income received from the cancelled contract was taxable in the year it was received, as directed by the Supreme Court. The tribunal emphasized that the actual receipt of income in the relevant assessment year, as per the court order, superseded the accounting method followed by the assessee. Therefore, the assessment for tax purposes was correctly done in the year of receipt, not the year of entitlement based on accounting principles.

Taxability of interest received:
Regarding the interest received, the tribunal referenced legal precedents, including the Supreme Court's decision in a similar case. The tribunal held that the interest awarded for delayed payments was part of the business receipts and could not be separated for taxation under a different category. The interest was considered an accretion to the original contract amount and was attributable to the business activities of the assessee. The tribunal rejected the argument that interest should be treated differently for tax purposes, emphasizing that interest could only be assessed separately if it did not fall under specific heads of charge.

Consideration of legal position regarding enforceable right to receive compensation:
The tribunal highlighted that the assessee admitted the Supreme Court's directive to BCCL for payment by a specific date, which was received in the assessment year under consideration. Despite following the mercantile system of accounting, the actual receipt in the relevant year was deemed taxable. The tribunal emphasized that the enforceable right to receive compensation by a certain date, as directed by the court, was a significant factor in determining the taxability of the amount received. The tribunal concluded that the income from the cancelled contract and the interest thereon constituted revenue receipts for tax purposes.

In conclusion, the questions of law were answered in favor of the department, and the appeals were dismissed without costs.

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