|CORAM:||I. C. Sudhir (JM), Sudhakar Reddy (AM)|
|CATCH WORDS:||capital vs. revenue receipt|
|COUNSEL:||Prakash Chand Yadav|
|DATE:||August 12, 2016 (Date of pronouncement)|
|DATE:||September 2, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Compensation for breach of promise to provide land to the assessee is not compensation for loss of profits but is for injury caused to the profit making apparatus. Such compensation is a capital receipt not chargeable to tax|
The assessee company engaged in the business of real estate had entered into a consortium agreement dated 02.03.2005 amounts its associates defining their roles, rights and responsibilities along with their respective shares in the consortium. Thereafter, the consortium companies through their lead company, namely, A.R. Developers (P) Ltd. entered into an agreement to sell dated 02.03.2005 with GMA Buildcom (P) Ltd. to purchase 10 acres of land for a consideration of Rs.15 crores in village Bhattian, Tehsil and District Ludhiana (Punjab). Since GMA Buildcom (P) Ltd. failed to transfer minimum land of 10 acres within the prescribed and extended time limits as per the terms of the agreement. The matter was settled through arbitration award dated 11.8.2006 wherein compensations were awarded to the entities involved. The assessee company credited the amount of compensation so received in its books of account more particularly in the audited profit and loss account. In the notes of accounts, the auditor commented that the said income was earned by the assessee in pursuance to an agreement dated 05.03.2006, executed with JMA Buildcom (P) Ltd. towards non-fulfillment of terms and conditions of the earlier agreement, however, in the computation of income the assessee claimed this income as exempt and reduced this income while computing its taxable profit. The Assessing Officer held that the compensation received was on account of breach of agreement in the normal course of business of the assessee and, therefore, the same is a Revenue receipts. The CIT(Appeals) upheld this action of the Assessing Officer. On appeal by the assessee to the Tribunal HELD allowing the appeal:
(i) The issue involved in the grounds is as to whether the compensation received by the assessee through award on breach of the contract is a Revenue or capital receipts in the hands of the assessee. 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 receipt depends on facts of each case. The claim of the assessee remained that it is capital in nature and the Assessing Officer has held it as revenue in nature. In support of its claim, the assessee contended that the agreement with JMA Buildcom (P) Ltd. to arrange land was entered into normal course of business observed by the Assessing Officer has no relevance as the consortium between some entities as one part and JMA Buildcom (P) Ltd. as other part of the agreement had for the first time joined hands together to carry on business in the state of Punjab. However, before the business of the consortium would have commenced the deal got spoiled and the business was demolished completely even before the setting up of the business. Their contentions remained that the assessee had not entered into agreement to sell with JMA Buildcom in its individual capacity and thus the entire business of the consortium got demolished even prior to the setting up of the new projects. It was submitted that business of the assessee is not to form consortium day in and day out therefore normal course of business proposition by the Assessing Officer does not stand. It was contended that under taxing provisions, every step of a transaction would have to be seen carefully before reaching to any conclusion.
(ii) Heavy reliance has been placed by the Learned AR on the decision of Pune Bench of the ITAT in the case of Aquapharm Chemical Co. Ltd. vs. JCIT ITA No. 372/Pune/2002 dated 29.2.2012. Having gone through that decision, we find that in that case the assessee company was incorporated in 1974 with its primary object of manufacturing sea water desalting it for the 17 Indian Air Force and Indian Navy. In early 1980, it diversify its operation by entering into the manufacturing of non-toxic, non-pollutant water treatment chemicals. The assessee company entered into an agreement with AIK-Germany, for supply of technical knowhow for manufacture of fire retardant chemicals. The company decided to set up the project at Prangude. As per the agreement with AIK-Germany, the assessee company paid first installment of technical knowhow fees and it received certain technical information and drawing from AIK. Since the information provided by AIK was not sufficient, the assessee could not start its manufacturing activity of fire retardant chemicals. Despite repeated requests by it, AIK refused to divulge any further information and took the stand that it had supplied all the necessary information. The assessee company left with no alternative but to go into arbitration as per technical knowhow agreement and to claim compensation. An award of Rs.4,53,86,124 was awarded during the year to the assessee as compensation for settlement of dispute. The authorities below treated the receipts as Revenue in nature against the claim of the assessee as capital receipts. Before the ITAT, the assessee argued that the previous year relevant to the assessment year under consideration was first year of manufacturing of anti-fire chemicals and compensation received was an award for non-fulfilling of their part of the contract by AIK. It was damaged for non-performance of the contractual obligation by the AIK. It was contended that the authorities below while deciding the issue against the assessee have not appreciated the injury caused to the profit making apparatus and that the knowhow was foundation of the business of the assessee. Appreciating the same, huge compensation was awarded by the arbitrator. The basis of award remained the lost profit due to non-supply of the knowhow and not on loss of profit and that newly installed machinery in absence of supply of knowhow have gone completely wasted. Reliance was placed on several decisions. After dealing with the issue in detail, the ITAT has decided the issue in favour of the assessee.
(iii) When we examine the facts of the present case in view of the above cited decision of Pune Bench of the ITAT, we find 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 by way of reward due to non-supply of land by JMA Buildcom (P) Ltd. under the agreement was capital receipt.