2009 (3) TMI 410 - HC - Income Tax

Amount received as compensation Business Income or Capital The assessee-firm owned a cinema building popularly known as Prem Prakash Talkies. It entered into an agreement of sale with M/s. Jaipur Mineral and Development Syndicate Private Limited ( JMDSPL ). The Agreement failed nd the terms and conditions thereof could not be performed, and therefore, the assessee-firm became entitled to realize a sum of Rs. 20,000 as compensation. In this case Rajasthan High Court in the light of the Judgment of D.P. Sandu Bros. Chembur P.Ltd. (2005) 273 ITR 1 (SC) held that the aforesaid amount of Rs. 20,000 can only be treated as capital receipts. Decision in favor of assessee against the revenue

Summary

Issues:
Interpretation of a sum received by the assessee as revenue or capital receipt for tax assessment.

Analysis:
The case involved the interpretation of a sum of Rs.20,000 received by the assessee under an agreement that failed to materialize. The core issue was whether this sum should be considered a revenue receipt liable for taxation or a capital receipt exempt from tax. The agreement between the assessee-firm and another party included a clause stating that if the transaction failed due to the purchaser's default, a sum of Rs.20,000 would be payable as compensation to the vendors. The assessee argued that since no capital asset was transferred, the amount should be treated as a non-taxable capital receipt. However, the tax authorities considered it as income from other sources and held it to be a revenue receipt subject to tax.

The Income-tax Officer, Inspecting Assistant Commissioner, Commissioner of Income-tax (Appeals), and the Tribunal all upheld the view that the sum of Rs.20,000 was a revenue receipt. The assessee contended that it should be treated as a capital receipt based on various sections of the Income-tax Act. The assessee relied on Supreme Court judgments in Travancore Rubber and Tea Co. Ltd. v. CIT and CIT v. D P. Sandu Bros. Chembur P. Ltd. to support their argument that the amount should be considered a capital receipt.

The High Court analyzed the Supreme Court judgments cited by the assessee and concluded that the sum of Rs.20,000 should indeed be treated as a capital receipt, not a revenue receipt. Referring to the principles laid down in the judgments, the High Court held that the compensation received by the assessee was akin to a capital receipt as it aimed to place the assessee in the same position as if the breach had not occurred. Therefore, the High Court ruled in favor of the assessee, stating that the amount in question was a capital receipt and not liable to tax as a revenue receipt.

In summary, the High Court's judgment clarified that the sum of Rs.20,000 received by the assessee was to be treated as a capital receipt, aligning with the principles established in relevant Supreme Court decisions. The court held that the amount was not a revenue receipt and should not be subject to taxation, ruling in favor of the assessee in the tax assessment matter.