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Issues Involved:
1. Whether the sum of Rs. 9.5 lakhs received by the assessee was assessable as revenue receipt or capital receipt. Detailed Analysis: Issue 1: Nature of the Sum of Rs. 9.5 Lakhs Received by the Assessee Facts and Background: The assessee-company, engaged in manufacturing sugar, chemicals, and fertilizers, entered into an agreement with Mitsubishi for the expansion of its fertilizer factory. The agreement comprised two contracts: one for importing plant and equipment from Japan and another for procuring plant, machinery, and equipment in India, along with providing engineering services. Mitsubishi failed to complete the construction on time and to produce the guaranteed results, leading to a settlement where Mitsubishi agreed to pay Rs. 9.5 lakhs to the assessee. Assessee's Argument: The assessee contended that the sum of Rs. 9.5 lakhs was a capital receipt, arising from a settlement related to defects and delays in the installation of the plant, which impacted the quality warranty of the plant. This compensation was argued to be for the sterilization of capital assets, not for loss of production. Income-tax Officer's Decision: The Income-tax Officer (ITO) held that the sum of Rs. 9.5 lakhs was a revenue receipt, compensating for the loss of production due to the delay in the completion of the contract, thus impacting the profits. Appellate Assistant Commissioner's Decision: The Appellate Assistant Commissioner (AAC) noted that the compensation was calculated initially at Rs. 82 lakhs but settled at Rs. 9.5 lakhs. The AAC concluded that the sum represented damages for loss of production and was, therefore, taxable as revenue receipt. Appellate Tribunal's Decision: The Tribunal upheld the AAC's decision, considering the compensation as revenue receipt, relying on a previous order involving the same assessee. High Court's Analysis: The High Court examined the nature of the compensation, considering the clauses of the agreement and the memorandum of settlement. The court noted that the compensation was initially proposed at Rs. 16 lakhs for loss of production but was settled at Rs. 9.5 lakhs. The court emphasized that the compensation was not solely for loss of profit but also for delays in procurement and erection of capital assets. Key Findings: 1. Capital vs. Revenue Receipt: - The court differentiated between compensation for loss of profit (revenue receipt) and compensation for delays in procurement and erection of capital assets (capital receipt). - The compensation for delay in bringing the profit-making apparatus into existence was considered capital in nature. 2. Allocation of Compensation: - The court determined that 1/3rd of the compensation (Rs. 3.17 lakhs) was for the delay in procurement of capital assets, thus capital in nature. - The remaining 2/3rds (Rs. 6.33 lakhs) was for loss of production and other related factors, thus revenue in nature. Relevant Case Laws: - CIT v. Barium Chemicals Ltd. [1987] 168 ITR 164 (AP): The court held that compensation for sterilization of profit-earning source is capital receipt. - CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776 (SC): Compensation for damage to capital assets was held as capital receipt. - Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj): Compensation for delay in supply of machinery was held as revenue receipt. - CIT v. Manna Ramji and Co. [1972] 86 ITR 29 (SC): The court emphasized the binding nature of the Tribunal's fact-finding. - London and Thames Haven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) [1968] 70 ITR 460 (CA): Amount received for sterilization of a capital asset was held as capital receipt. - CIT v. Rohtas Industries Ltd. [1978] 112 ITR 798 (Cal): Payment for low output was held as revenue receipt. Conclusion: The High Court concluded that 1/3rd of the compensation amounting to Rs. 3.17 lakhs was capital in nature, and the remaining 2/3rds amounting to Rs. 6.33 lakhs was revenue in nature. The question was answered in the negative for the capital portion and in the affirmative for the revenue portion, partly in favor of the assessee and partly in favor of the Department. No costs were awarded.
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