2005 (8) TMI 330 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received as business income.
2. Nature of compensation received (capital or revenue receipt).
3. Allocation of compensation between capital and revenue receipts.

Detailed Analysis:

1. Taxability of Compensation Received as Business Income:
The core issue in this appeal is whether the compensation amounting to Rs. 1.50 crore received by the assessee from Hoechst India Ltd. should be treated as business income. The Assessing Officer (AO) treated this amount as business income, while the assessee contended that it was a capital receipt and not liable to tax.

The AO argued that the compensation was received due to the destruction of blood products caused by defective ELISA Test Kits supplied by BWAG and Hoechst. Since the loss of Rs. 2.04 crore was allowed as a revenue loss in earlier years, the compensation received should also be treated as a revenue receipt.

2. Nature of Compensation Received (Capital or Revenue Receipt):
The assessee argued that the compensation was for the discontinuance of its business in certain blood products and for the loss of reputation and goodwill, thus making it a capital receipt. The CIT(A) upheld the AO's decision, stating that the compensation was for the loss of business or profit and not for the destruction of the profit-making apparatus.

The Tribunal examined the facts and circumstances, including the compromise agreement and the reasons for the compensation. It was noted that the compensation was paid to avoid prolonged litigation, prevent damage to the reputation of BWAG and Hoechst, and maintain good business relations. The Tribunal concluded that the compensation was not solely for the loss of reputation and goodwill but also included claims for damages to the products and loss of business.

3. Allocation of Compensation Between Capital and Revenue Receipts:
The Tribunal recognized that the compensation included both capital and revenue elements. It was determined that 50% of the total damages on account of the destruction of stock worth Rs. 2.04 crore might be adjusted against the compensation received. Consequently, Rs. 1.02 crore out of the total compensation of Rs. 1.50 crore was allocated towards compensation for the loss of stock, profit, or business on revenue account, and the remaining Rs. 48 lakhs was allocated towards compensation for the loss of the assessee's name, fame, reputation, and goodwill, thus treated as capital receipts.

Conclusion:
The Tribunal concluded that the compensation received by the assessee was partly revenue and partly capital in nature. Rs. 1.02 crore was treated as revenue receipts and Rs. 48 lakhs as capital receipts. The appeal was partly allowed in this manner. The issue of whether the income should be assessed in the assessment year 1991-92 instead of 1992-93 was raised but not substantively argued or supported, and thus, it was rejected.