Commnr. of
Income Tax, Gujarat Vs. M/S. Saurashtra Cement & Chem. Indus. Ltd. [2010] INSC
473 (9 July 2010)
Judgment
IN THE
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.3702 OF
2003 COMMISSIONER OF INCOME TAX, -- APPELLANT GUJARAT VERSUS
D.K.
JAIN, J.:
1.
This appeal, by special leave, at the instance of the Revenue is
directed against the judgment and order dated 27th June, 2001 delivered by the
High Court of Gujarat at Ahmedabad in Income Tax Reference No.44 of 1986. By
the impugned judgment, the High Court has answered the following questions,
referred to it by the Income Tax Appellate Tribunal, Ahmedabad (for short
"the Tribunal") under Section 256(1) of the Income Tax Act, 1961 (for
short "the Act"), in the affirmative and in favour of the assessee.
(i)
Whether the Tribunal has not erred in law on facts in holding that the amount
of Rs.8,50,000/- received by the assessee was not taxable as revenue receipt in
the hands of the assessee? (ii) Whether the finding of the Tribunal that the
receipt relating to liquidated damages cannot be treated as a revenue receipt
but must be held to be a capital receipt not exigible to tax is correct in law?
(iii) Whether the assessee is entitled to the addition made to the machinery
during the year thus determining the capital employed for the purpose of claim
under Section 80J of the Income Tax Act, 1961?
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 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 installments.
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.
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 Bahadur Jairam Valji and Others2 and Kettlewell Bullen
and 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 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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