Taxability of compensation received on delayed del ayed possession
1.
Facts of the case
1.1 Mr. A, an individua individual, l, booked booked premises premises in in a mall, mall, while while under construct construction. ion. The premises were not purchased for business purposes. 1.2 As per the agreement agreement between between the builder builder and Mr. A, the the possessio possession n of the the premises in the mall was to be provided by a particular date. 1.3 The builder builder did did not give posses possession sion of of the premises premises in the the mall within within the date specified in the agreement. To compensate for the delay, the builder builder paid Mr. A Rs 30 lakhs as damages. 1.4 The builder builder did did not withhold withhold taxes taxes at source source while making making the the payment payment to Mr. A. 1.5 Currently, Currently, the the builder builder has given possessio possession n of the the premises premises and and Mr. A has given the premises on rent. 2.
Query Taxability of the compensation paid to Mr. A by the builder on account of delayed possession under the provisions of the Indian Income-tax Act, 1961 (‘Act’)
3.
Our comments
3.1 As per the provisio provisions ns of the Act, Act, revenue revenue receipts receipts are are taxable taxable and and capital capital receipts are not taxable. 3.2 Accordingly Accordingly,, at the the outset, outset, it would would be be pertinent pertinent to to determine determine the the nature nature of the compensation ie whether revenue or capital receipt. 3.3 Contrary Contrary views views have have been been express expressed ed by various various judicial judicial precedents precedents on taxability of compensation and hence is a debatable issue. 3.4 Relian Reliance ce has has been been placed placed on on the the follow following ing case case laws: laws: 3.4.1CIT vs M/s Saurashtra Cement Limited 2010-TIOL-49-SC-IT Supreme Court (Full text of the judgement reproduced in Annexure 1) Facts of the case ⇒
The Taxpayer, engaged in the manufacture of cement etc, entered into an agreement with a supplier supplier for purchase of additional additional cement plant. The agreement contained a condition that in case of delay in delivery of the plant, the supplier would be required to pay liquidated damages.
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The supplier defaulted and failed to supply the plant on the scheduled time and, therefore, as per the terms of contract, the Taxpayer received an amount of Rs.8,50,000 from the supplier by way of liquidated damages.
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Taxability of compensation received on delayed possession
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The Taxpayer claimed the above as a capital receipt and did not offer the above to tax. During the course of assessment proceedings, the Assessing Officer negatived the claim of the Taxpayer that the said amount should be treated as a revenue receipt and included the said amount in the total income of the Taxpayer.
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Aggrieved, the Taxpayer filed an appeal before the CIT (A), but without any success. The Taxpayer 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 Others (1959) 35 ITR 148 (SC) and Kettlewell Bullen and Co. Ltd. Vs. Commissioner of Income-Tax, Calcutta AIR 1965 SC 65, the Tribunal came to the conclusion that the said amount could not be treated as a revenue receipt.
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According to the Tribunal, the payment of liquidated damages to the Taxpayer 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, it could not be treated as part of receipt relating to a normal business activity of the Taxpayer. 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.
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Being dissatisfied with the decision of the Tribunal, the Revenue preferred an appeal before the High Court, which was answered in favour of the Taxpayer.
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The Revenue then preferred an appeal before the Supreme Court. Issue before the Supreme Court
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Whether the liquidated damages of Rs 8,50,000 received by the Taxpayer from the supplier of the plant on account of delay in the supply of plant is a capital or a revenue receipt? Observation and Ruling of the Supreme Court
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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.
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The Supreme Court discussed the rulings in the cases of Rai Bahadur Jairam Valji and Kettlewell Bullen and Co. Ltd.
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Taxability of compensation received on delayed possession
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It is evident that the damages to the Taxpayer 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.
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Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the Taxpayer as supplier had failed to supply the plant within time as stipulated in the agreement.
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The afore- stated amount received by the Taxpayer 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 Taxpayer. We are, therefore, in agreement with the opinion recorded by the High Court and hold that the amount of Rs.8,50,000/- received by the Taxpayer from the suppliers of the plant was in the nature of a capital receipt . 3.4.2Income-tax Officer vs Shri Ram Lal Arora 2007-TIOL-183-ITAT-DEL Delhi Tribunal (Full text of the judgement reproduced in Annexure 2) Facts of the case
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The Taxpayer received a payment from the Haryana Urban Development Authority (HUDA) following the HUDA's failure to give possession of plot despite payment of its cost by the Taxpayer, which made the Taxpayer to move consumer forum.
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The Taxpayer treated this amount as a capital receipt and did not offer the same to tax.
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The Assessing Officer treated the above amount received by the Taxpayer from HUDA as a revenue receipt.
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Being aggrieved, the Taxpayer preferred an appeal before the CIT(A) decided the matter in favour of the Taxpayer by treating the above amount as a capital receipt and not liable to tax. The Revenue preferred an appeal before the Tribunal. Issue before the Tribunal
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Whether the payment received by the Taxpayer from HUDA is a capital receipt or a revenue receipt? Observation and Ruling of the Tribunal
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The Tribunal relied on the case of the Delhi Development Authority vs. ITO 53 ITD 19 whereby the interest granted to the assessee for delayed construction of flat by DDA was held to be compensation and not interest. Consequently, it was held to be a capital receipt. In this case, interest was granted for delayed Draft for discussion purposes Strictly private and confidential
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Taxability of compensation received on delayed possession
construction whereas in the present case it is granted for delayed possession. Thus, these is no material difference in the facts of the two cases. ⇒
It may be mentioned that in the said order the Tribunal has held that the decision in the case reported in 33 ITR 245, 87 ITR 22, 165 ITR 231 (SC) and 81 ITR 440 (SC) are distinguished. We, therefore, respectfully following the order in the case of Delhi Development Authority (supra) uphold the order passed by the CIT(A). 4.
Conclusion The following should be noted: The premises were purchased as a capital asset of Mr. A. The transaction was not in the ordinary course of business. The builder has not withheld taxes at source on such payment (in case appropriate taxes are not withheld by the builder, the builder would not get a deduction of those expenses). In view of the above and the various rulings on this subject, it could be concluded that since the compensation received by Mr. A is in relation to purchase of capital asset and not in the ordinary course of business, it should be treated as a capital receipt, not liable to tax.
Others SHYAM TELELINK LTD Vs INCOME TAX OFFICER In Favour Of :
Date of decision - 30 December 2005
Compensation received for failure to honour contractual obligations is capital receipt...
Others THE INCOME-TAX OFFICER Vs GOVINDBHAI MAMAIYA In Favour Of :
Date of decision - 22 December 2005
Acquisition of land by the State - Compensation paid - Plea for more compensation Compensation awarded along with interest - Such interest income is revenue in nature and the total income is capital receipt in nature and the same to be taxed as capital gains as per provisions of sec.45(5)(b)...
Assessee PAYAL KAPUR Vs ACIT In Favour Of :
Date of decision - 18 November 2005
Compensation received for breach of rights or waiver of rights is capital receipt...
In Favour Of :
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Taxability of compensation received on delayed possession
ACIT, NEW DELHI Vs MADAN MOHAN LAL SHRIRAM PVT LTD Date of decision - 12 December 2004
When no transfer of property took place it is not liable to capital gains tax...
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