The case pertains to the taxability of compensation received by ...

Compensation for contract termination treated as non-taxable capital receipt, disallowance restricted to 10% for raw material purchases.

Case Laws     Income Tax

October 5, 2024

The case pertains to the taxability of compensation received by the assessee for termination of a contract. The key points are: The assessee received Rs. 4,30,88,084 as compensation for terminating a bottling contract with Hindustan Coca-Cola Beverages Pvt Ltd due to trade disputes. The Revenue contended that the amount was taxable u/ss 28(iv)/28(va) or 45, arguing it did not represent termination compensation exempt under Oberoi Hotels case. However, the Tribunal, after examining the settlement agreement and financial statements, upheld the CIT(A)'s finding that the source of income had ceased, making it a non-taxable capital receipt under Oberoi Hotels. Regarding disallowance of 20% of raw material purchases, the ITAT restricted it to 10%, observing that while the assessee must justify claims, the AO cannot make ad-hoc disallowances without scientific basis if documents are unavailable. The High Court upheld the ITAT's view.

View Source