Commnr. Of Income Tax, Gujarat vs M/S. Saurashtra Cement Limited

2.At the outset, we may note that insofar as question No.(iii) is

concerned, it was conceded on behalf of the Revenue before the

High Court that answer to the said question stood concluded in

favour of the assessee by the decision of this Court in C.I.T.,

2 Gujarat Vs. M/s Elecon Engineering Co. Ltd.1. Relying on the

said decision, the High Court answered the question in favour

of the assessee. Therefore, only question Nos. (i) and (ii), which

in effect involve only one issue, survive for our consideration.

3. The reference pertains to the Assessment Year 1974-75 for

which the relevant previous year ended on 30th June, 1973. The

factual background in which the issue, covering both the

questions, has arisen, is as follows :

The assessee, engaged in the manufacture of cement etc;

entered into an agreement with M/s Walchandnagar Industries

Limited, Bombay, (hereinafter referred to as "the supplier") on

1st September, 1967 for purchase of additional cement plant

from them for a total consideration of Rs.1,70,00,000/-. As per

the terms of contract, the amount of consideration was to be

paid by the assessee in four instalments.

The agreement contained a condition with regard to the

manner in which the machinery was to be delivered and the

consequences of delay in delivery. Insofar as the present appeal

1 (1987) 4 SCC 530

3 is concerned, clause No.6 of the agreement is relevant and it

reads as follows:

"6. xxx xxx xxx Delayed Deliveries:

In the event of delays in deliveries except the reason of Force Majeure at para 5 mentioned above, the Suppliers shall pay the Purchasers an agreed amount by way of liquidated damages without proof of damages actually suffered at the rate of 0.5% of the price of the respective machinery and equipment to which the items were delivered late (sic), for each month of delay in delivery completion. It is further agreed that the total amount of such agreed liquidated damages shall not exceed 5% of the total price of the plant and machinery."

As per the said clause in the agreement, in the event of

delay caused in delivery of the machinery, the assessee was to

be compensated at the rate of 0.5% of the price of the respective

portion of the machinery for delay of each month by way of

liquidated damages by the supplier, without proof of actual loss.

However, the total amount of damages was not to exceed 5% of

the total price of the plant and machinery.

4.The supplier defaulted and failed to supply the plant and

machinery on the scheduled time and, therefore, as per the

terms of contract, the assessee received an amount of

Rs.8,50,000/- from the supplier by way of liquidated damages.

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5.During the course of assessment proceedings for the relevant

assessment Year, a question arose whether the said amount

received by the assessee as damages was a capital or a revenue

receipt. The Assessing Officer negatived the claim of the

assessee that the said amount should be treated as a capital

receipt. Accordingly, he included the said amount in the total

income of the assessee. Aggrieved, the assessee filed an appeal

before the Commissioner of Income Tax (Appeals), but without

any success. The assessee carried the matter further in appeal

to the Tribunal. Relying on the ratio of the decisions of this

Court in Commissioner of Income Tax, Nagpur Vs. Rai

Bahadur Jairam Valji and Others2 and Kettlewell Bullen and

Co. Ltd. Vs. Commissioner of Income-Tax, Calcutta3, the

Tribunal came to the conclusion that the said amount could not

be treated as a revenue receipt. According to the Tribunal, the

payment of liquidated damages to the assessee by the supplier

was intimately linked with the supply of machinery i.e. a fixed

asset on capital account, which could be said to be connected

with the source of income or profit making apparatus rather

than a receipt in course of profit earning process and, therefore, 2 (1959) 35 ITR 148 (SC) 3 AIR 1965 SC 65

5 it could not be treated as part of receipt relating to a normal

business activity of the assessee. The Tribunal also observed

that the said receipt had no connection with loss or profit

because the very source of income viz., the machinery was yet

to be installed. Accordingly, the Tribunal allowed the appeal

and deleted the addition made on this account.

6.Being dissatisfied with the decision of the Tribunal, as stated

above, at the instance of the Revenue, the Tribunal referred the

afore-noted questions of law for the opinion of the High Court.

The reference having been answered against the Revenue and

in favour of the assessee, the Revenue is before us in this

appeal.

7.We have heard Mr. R.P. Bhatt, learned Senior Counsel

appearing for the Revenue and Mr. Bhargava V. Desai on

behalf of the assessee.

8.Mr. Bhatt submitted that although the said amount of

damages had been received by the assessee under clause 6 of

the agreement for breach of contract, yet the said amount had

been received as compensation for the loss of profit, and

therefore, it is in the nature of a revenue receipt. According to

6 the learned counsel, it was on account of late commissioning of

the plant that the assessee could not commence production as

per its schedule and thereby suffered loss in its profits, which

was compensated by the supplier and, therefore, the said

amount should have been considered as revenue receipt.

9.Per contra, Mr. Desai, learned counsel appearing for the

assessee, while supporting the decision of the High Court

submitted that the amount received by the assessee was by way

of compensation for delay in the delivery and installation of the

plant and had a direct nexus with the capital asset and

therefore, it was in the nature of a capital receipt. Learned

counsel also argued that answer to the questions stands

concluded in favour of the assessee by the decision of the High

court of Madras in E.I.D. Parry Ltd. Vs. Commissioner of

Income Tax4, which has attained finality on account of

dismissal of the Civil Appeal preferred by the Revenue against

the said judgment.

10.Thus, the short question for determination is whether the

liquidated damages received by the assessee from the supplier

4 [1998] 233 ITR 335 (Mad)

7 of the plant and machinery on account of delay in the supply of

plant is a capital or a revenue receipt?

11.The question whether a particular receipt is capital or

revenue has frequently engaged the attention of the Courts but

it has not been possible to lay down any single criterion as

decisive in the determination of the question. Time and again,

it has been reiterated that answer to the question must

ultimately depend on the facts of a particular case, and the

authorities bearing on the question are valuable only as

indicating the matters that have to be taken into account in

reaching a conclusion. In Rai Bahadur Jairam Valji (supra), it

was observed thus:

"The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van Den Berghs Ltd. v. Clark5. That, however, is not to say that the question is one of fact, for, as observed in Davies

5 (1935) 3 I.T.R. (Eng. Cas.) 17

8 (H.M. Inspector of Taxes) v. Shell Company of China Ltd.6, "these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts."

12.In Kettlewell Bullen and Co. Ltd. (supra), dealing with the

question whether compensation received by an agent for

premature determination of the contract of agency is a capital

or a revenue receipt, echoing the views expressed in Rai

Bahadur Jairam Valji (supra) and analysing numerous

judgments on the point, this Court laid down the following

broad principle, which may be taken into account in reaching a

decision on the issue :

"Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt."

6 (1952) 22 I.T.R. (Suppl.) 1

9

13.We have considered the matter in the light of the afore-

noted broad principle. It is clear from clause No.6 of the

agreement dated 1st September 1967, extracted above, that the

liquidated damages were to be calculated at 0.5% of the price of

the respective machinery and equipment to which the items

were delivered late, for each month of delay in delivery

completion, without proof of the actual damages the assessee

would have suffered on account of the delay. The delay in

supply could be of the whole plant or a part thereof but the

determination of damages was not based upon the calculation

made in respect of loss of profit on account of supply of a

particular part of the plant. It is evident that the damages to

the assessee was directly and intimately linked with the

procurement of a capital asset i.e. the cement plant, which

would obviously lead to delay in coming into existence of the

profit making apparatus, rather than a receipt in the course of

profit earning process. Compensation paid for the delay in

procurement of capital asset amounted to sterilization of the

capital asset of the assessee as supplier had failed to supply the

plant within time as stipulated in the agreement and clause

10 No.6 thereof came into play. The afore-stated amount received

by the assessee towards compensation for sterilization of the

profit earning source, not in the ordinary course of their

business, in our opinion, was a capital receipt in the hands of

the assessee. We are, therefore, in agreement with the opinion

recorded by the High Court on question Nos. (i) and (ii)

extracted in Para 1 (supra) and hold that the amount of

Rs.8,50,000/- received by the assessee from the suppliers of the

plant was in the nature of a capital receipt.

14.We, therefore, dismiss the appeal with no order as to costs.

..................................

J. (D.K. JAIN)

..................................J. (C.K. PRASAD) NEW DELHI;

JULY 9, 2010.

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