2022 (5) TMI 216 - AT - Income Tax

Characterization of receipt - treatment of the damages received as revenue or capital receipt - HELD THAT - Whether the receipt is capital or income/revenue receipt, the receipt has to be examined from a commercial point of view and also has to be examined what character of the receipt is in the hands of the receiver. One test for ascertaining as to whether what was received was a capital receipt or a revenue receipt is to find out whether the assessee suddenly changed the link of income/receipt with the profit making apparatus, that was transferred. In commercial world, in respect of business exigencies the compensation specially in respect of damage to properties through fire or any other activities, the businessman ensures his business equipment as well as assets. While claiming the compensation, the assessee was very well aware about the business loss and has given a treatment of the receipts as revenue receipts. Thus, the colour of the receipts in respect of the interest received on compensation amounts to a revenue receipt and thus, the assessing officer as well as the CIT(A) has rightly given the finding of making the said additions to the income of the assessee. Thus, the appeal of the assessee is dismissed.

Summary

Issues:
1. Whether damages received by the assessee should be treated as revenue or capital receipt.
2. Taxability of interest received over and above the compensation amount.
3. Applicability of court decisions on compensation for deficiency of service.

Analysis:

Issue 1: Treatment of damages received
The assessee contended that damages received should be considered a capital receipt as they were compensatory in nature for deficiency of service. The National Consumer Redressal Forum's order highlighted that the damages were for service deficiency. The appellant argued that compensation for service deficiency is a capital receipt, supported by legal precedents. However, the assessing officer and CIT(A) deemed the damages as revenue receipts based on the nature of the receipt and the initial treatment by the assessee. The tribunal upheld this view, emphasizing that the receipts were linked to business activities and treated as revenue initially, leading to the dismissal of the appeal.

Issue 2: Taxability of interest received
The interest received over and above the compensation amount was a point of contention. The assessee claimed it as a capital receipt, not subject to tax, as it compensated for the time taken to determine the loss and money value. The appellant cited legal cases to support this argument. In contrast, the assessing officer and CIT(A) considered the interest as a revenue receipt, separate from the compensation. The tribunal agreed with this view, stating that the interest was rightly treated as revenue by the authorities, leading to the dismissal of the appeal.

Issue 3: Applicability of court decisions
The appellant cited court decisions to support the capital nature of the receipts. However, the tribunal distinguished those cases, emphasizing that the compensation in this case was related to business activities and treated as revenue initially. The tribunal highlighted the importance of assessing the character of the receipt from a commercial standpoint. Ultimately, the tribunal upheld the assessing officer and CIT(A)'s decision, dismissing the appeal based on the revenue nature of the receipts.

In conclusion, the tribunal upheld the treating of damages and interest received by the assessee as revenue receipts, leading to their taxability. The appeal was dismissed, affirming the authorities' stance on the nature of the receipts and the tax treatment applied.