Compensation received through award on breach of the contract is a ‘capital receipt’, says ITAT.
The delhi bench of the Income Tax Appellate Tribunal, in a recent decision held that, the compensation received by the assessee for breach of contract promising the assessee to transfer the land is a ‘capital receipt’ within the meaning of the Income Tax Act, 1961. Therefore, the assessee cannot be held liable to pay income tax.
The factual settings of the case are that the assessee-company entered into an agreement to sale with another company promising the assessee to sell the land owned by them. On default of the agreement, the assessee received compensation in terms with the arbitration award through which the matter was settled.The assessee claimed exemption in respect of the amount received by it as compensation. However, the Assessing Officer rejected the claim of exemption on ground that it is a revenue receipt since the compensation received was on account of breach of agreement in the normal course of business of the assessee.
While deciding the issue, i.e, whether the said amount is in the nature of capital or revenue receipt, the Tribunal observed that “It is an established proposition of law that there cannot be a standard test to determine the nature of receipt as to whether it is capital or Revenue in nature. The nature of receipts depend on facts of each case.”
The Tribunal, while while relying up on the decision of Pune ITAT in the case Aquapharm Chemical Co. Ltd. vs. JCIT, held that “in the present case before us also the injury was caused to the profit making apparatus as the land which was profit making apparatus for the assessee was not supplied by JMA Buildcom (P) Ltd. as per the agreement entered into between the assessee and associates, and JMA Buildcom (P) Ltd. Appreciating the same, compensation was awarded in the arbitration proceedings initiated against JMA Buildcom.(P) Ltd. In other words, the basis of award remained the lost profit due to non-supply of the land i.e. profit making apparatus and not on loss of profit. We thus find that the only inference can be drawn is that the compensation received byway of reward due to non-supply of land by JMA Buildcom (P) Ltd. under the agreement was capital receipt.”
Read the full text of the order below.
