2018 (5) TMI 261 - HC - Income Tax

Treatment of damages and compensation awarded to the assessee - Dispute Settlement Arbitration award - AO rejected the assessee s claim that these were towards capital receipts and ruled that they have fallen in the revenue stream - Held that - The purpose of the ultimate use of the assessee s land when acquired was rendered irrelevant on account of the seller/JMA Buildcom Private Ltd. defaulting in its commitment. This rendered the amount expanded by the assessee immobile. The eventual receipt of the amounts determined as compensation/damages, therefore, clearly fell into the capital stream and not revenue as was contended by the Revenue/appellant in this case.

Summary

Issues:
1. Treatment of damages and compensation as revenue or capital receipt.

Analysis:
1. The main issue in this case was the treatment of damages and compensation awarded to the assessee as revenue or capital receipts. The ITAT order was challenged by the Revenue, arguing that the amounts should be considered revenue in nature. The AO and CIT(A) had ruled in favor of the Revenue, stating that the amounts were revenue as the land would have been part of the stock-in-trade. However, the ITAT, referring to the Supreme Court's judgment in Universal Radiators case, held that the amounts, intended for stock-in-trade purposes, were immobile and sterilized, thus falling into the capital stream. The ITAT emphasized that the compensation was awarded due to the non-supply of the land, the profit-making apparatus for the assessee, making it a capital receipt.

2. The judgment in Universal Radiators case was crucial in determining the nature of the amounts received by the assessee. It highlighted the significance of the direct link between the products or ultimate purpose intended by the assessee and the eventual income. The observations made in the Universal Radiators case were cited to support the conclusion that the compensation received due to the non-supply of the land was a capital receipt, not a revenue one. The judgment also referred to the Canara Bank case, emphasizing that if stock-in-trade gets blocked and sterilized, any surplus arising would be considered a capital receipt.

3. Further support for considering the compensation as a capital receipt was drawn from the Supreme Court's decision in Commissioner of Income Tax vs. Bombay Burmah Trading Corporation. This case emphasized that payments made for sterilization of the source of profit-making apparatus or a capital asset would be considered capital receipts. It differentiated between capital assets and stock-in-trade, stating that payments for taking over stock-in-trade would be of revenue nature, while compensation for immobilization or sterilization of a capital asset would be capital receipt.

4. The ultimate use of the land by the assessee was deemed irrelevant due to the default by the seller, rendering the land immobile. This immobility of the asset led to the conclusion that the compensation received was a capital receipt. The ITAT's findings were considered well-reasoned and based on a proper understanding of the law, leading to the dismissal of the appeals. As a result, no question of law was deemed to arise from the ITAT's decision, and the appeals were dismissed accordingly.