TMI Blog1996 (10) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... nd construct the works and put the same into operation called "Indian plant and work contract", of the value of Rs. 60,83,000. According to the above agreement, Mitsubishi undertook to complete the construction of the works within 673 days after the effective date of contract. In the execution of this contract, the contractor, viz., Mitsubishi, failed in two respects (1) delay in the completion of work, and (2) failure to produce the guaranteed results. The completion of the plant was delayed by 40 days and the guarantee tests were completed 128 days late. There was correspondence between the assessee and Mitsubishi. Finally, they agreed to settle the issue in terms of clause 52 of the agreement dated July 14, 1965. The settlement was incorporated in the memorandum of settlement dated July 25, 1968, under which Mitsubishi had to pay Rs. 9.5 lakhs to the assessee in full settlement of the assessee's claim for compensation arising out of the various clauses of the agreement between the assessee and Mitsubishi. The assessee contended before the Income-tax Officer that Rs. 9.5 lakhs represented compensation arising out of a settlement between the assessee and Mitsubishi, Japan, hereina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and 40 of the Indian plant contract and the ultimate settlement under which the Japanese company had agreed to pay Rs. 9.5 lakhs, held that a sum of Rs. 9.5 lakhs received by the assessee should be assessed as revenue receipt. In this respect, the Tribunal relying upon its earlier order in the case of the same assessee with regard to the compensation received from Simon Carves in the assessment year 1965-66, agreed with the view taken by the Appellate Assistant Commissioner in considering the sum of Rs. 9.5 lakhs received by the assessee as revenue receipt. Before us, learned counsel appearing for the assessee submitted that the compensation of Rs. 9.5 lakhs received by the assessee was a capital receipt, since it related to the defect and delay in the installation of the plant and in effect related to the warranty of the quality of the plant, though the payment was measured in terms of loss of production. Counsel further submitted that the decision rendered by the Tribunal with regard to the compensation received from Simon Carves in I. T. A. No. 270/Mds. of 1977-78, dated October 15, 1979, against the assessee was not accepted by the assessee. According to learned counsel app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anteed results. The compensation was originally worked out at Rs. 16 lakhs with reference to the value of loss of production for 54 days. According to the Tribunal, the assessee agreed to receive Rs. 9.5 lakhs as a sort of reduction from Rs. 16 lakhs, which was calculated on the basis of loss of profit. In this context, a reading of the finally settled settlement for Rs. 9.5 lakhs regarding which the note signed by Mr. Featheratons, Special Director, assumes importance and it is as follows : "Work on the expansion of the Ennore factory has been satisfactorily concluded and the plant commissioned and guaranteed tests required under the contract fulfilled. The completion of the plant was, according to the strict reading of the contract, late by a matter of 40 days, which could have entitled us to a penalty of slightly less than Rs. 1 lakh, and on the same basis, the guarantee tests were completed 128 days late. There were, however, a number of delays due to strikes, etc., which were not attributable to the contractors. Nevertheless, on the strict reading of the contract, even one day's delay entitled us to damages of 30 per cent. of the contract value---approximately Rs. 70 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital assets. Delay in procurement of capital assets would lead to delay in coming into existence of the profit-making apparatus. Compensation paid for such delay in procurement of capital assets would amount to sterilisation of the capital assets of the assessee in that the Japanese company failed to erect the machinery and plant according to the agreement dated July 25, 1968. The sterilisation of assets need not be in toto in order to make a payment a capital receipt. In CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164, the Andhra Pradesh High Court held that in order to decide whether or not a payment is a revenue receipt, its true nature and substance must be looked into. If the payment is received in the ordinary course of the business of the assessee for loss of stock-in-trade, it is a revenue receipt. If, on the other hand, the payment received is towards compensation for extinction or sterilisation, partly or fully, of a profit-earning source, such receipt, not being in the ordinary course of the assessee's business, is a capital receipt. Thus, considering the final settlement arrived at between the assessee and the Japanese company dated July 25, 1968, and clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not paid for loss of capital goods. In order to support his contention, learned standing counsel appearing for the Department, relied upon the decision in Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj), wherein the Gujarat High Court held that the actual cost or price of the machinery and compensation payable to the assessee-company were two different and distinct things. Compensation was paid to set off or reduce the loss which the assessee suffered as a result of delay in supply of machinery. It had nothing to do with the cost of machinery. Though adjusted against the cost of machinery, it was none the less compensation. The actual cost of machinery could not be reduced by Rs. 5,72,216 and depreciation and development rebate had to be allowed on the entire cost of machinery as per the agreement. On the facts available in this case, this court came to the conclusion that a portion of the compensation paid related to delay in bringing into existence the profit-making apparatus. Therefore, a portion of the compensation paid should be considered as capital in nature. Accordingly, this court also kept in mind while deciding the issue arising in this case that actu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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