Whether liquidated damages received by a
company from the supplier of plant for failure to supply machinery to the
company within the stipulated time – a capital receipt or a revenue receipt?
Case: CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)
Facts
The assessee, a cement
manufacturing company, entered into an agreement with a supplier for purchase
of additional cement plant. One of the conditions in the agreement was that if
the supplier failed to supply the machinery within the stipulated time, the
assessee would be compensated at 5% of the price of the respective portion of
the machinery without proof of actual loss. The assessee received Rs.8.50 lakhs
from the supplier by way of liquidated damages on account of his failure to
supply the machinery within the stipulated time. The Department assessed the
amount of liquidated damages to income-tax. However, the Appellate Tribunal
held that the amount was a capital receipt and the High Court concurred with
this view.
The Apex Court affirmed the
decision of the High Court holding that the damages were directly and intimately linked with the procurement of
a capital asset i.e., the cement plant, which lead to delay in coming into
existence of the profit-making apparatus. It was not a receipt in the course of profit
earning process. Therefore,
the amount received by the assessee towards compensation for sterilization of
the profit earning source, not in the ordinary course of business, is a capital receipt in the
hands of the assessee.
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