TMI Blog2010 (7) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ived an amount of Rs.8,50,000/- from the supplier by way of liquidated damages. – AO and CIT(A) included Rs. 8,50,000 in the total income as 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, 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 ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue 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., Gujarat Vs. M/s Elecon Engineering Co. Ltd.{(1987) 4 SCC 530} . Relying on the said decision, the High Court answered the question in favour of the assessee. Therefore, only question Nos. (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly, 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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." 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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