TMI Blog2001 (6) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt in the hands of the assessee? (ii) Whether the finding of the Tribunal that the receipt relating to liquidated damages cannot be treated as a revenue 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 while determining the capital employed for the purpose of claim under section 80J of the Income-tax Act, 1961?" The facts giving rise to the present reference in a nutshell are as under. The respondent-assessee had entered into an agreement with Walchandnagar Industries Ltd., Bombay, whereunder certain machinery was to be purchased by the respondent-assessee for Rs.1,70,00,000. As per the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is further agreed that the total amount of such agreed liquidated damages shall not exceed 5 per cent. of the total price of the plant and machinery." Thus, as per the terms incorporated in the agreement, the assessee was to be compensated in the event of delay caused in delivery of the machinery which was to be supplied to the assessee. As stated hereinabove, without any proof with regard to the damage suffered by the assessee, the damages were to be paid to the assessee by the supplier. Thus, for delay of each month, 0.5 per cent. of the price of the respective portion of the machinery, which was not delivered, was to be paid by way of damages by the supplier to the assessee. The total amount of damages was not to exceed 5 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause the assessee received the machinery in question late. On account of late delivery of the machinery, the plant could not be installed and commissioned as per the Schedule and, therefore, it resulted into loss in profit. So as to compensate the assessee, the said amount of liquidated damages was agreed to be paid by the supplier to the assessee and as the said amount was for compensating the loss in profit, according to the learned advocate, Mr. Nayak, the said amount should be treated as a revenue receipt. The learned advocate, Mr. Nayak, has drawn our attention to the second portion of the clause having the sub-title "delay in deliveries" and has submitted that it was agreed between the assessee and the supplier of the machinery t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g possession of the machinery. According to Mr. Karia, the said amount was lying with the supplier without giving any return to the assessee and the time was essence of the contract. As the delay in supply of the machinery had adversely affected the assessee, the amount of liquidated damages was given by the supplier to the assessee. It has been submitted by him that the delay caused in delivery of the plant and machinery had a nexus with the capital asset, and, therefore, the amount which had been received by the assessee was in the nature of a capital receipt and it was not a revenue receipt. He has also submitted that the assessee was not dealing in capital assets, viz., the machinery which was purchased by it from the supplier. The mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aused in supply of machinery. The machinery which the assessee had purchased was a capital asset so far as the assessee is concerned. As the amount of damages received by the assessee had a direct nexus to the delay caused in delivery of the capital asset, in our opinion, it cannot be said that the amount of compensation or damages, which was received by the assessee, was a revenue receipt. The learned advocate, Nr. Nayak, has made efforts to show that the amount of damages was paid because of delay in production but the said submission is not supported by the terms of the contract referred to hereinabove. If it can be established that the amount of damages was paid on account of the delay caused in initiating the process of manufacture and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the machinery any loss had been caused to the assessee and if the said loss had been compensated by payment of damages, liquidated or otherwise, the compensation so received could have been said to be a revenue receipt because in that event the assessee was to receive some amount so as to compensate its loss in profits but that is not the case here. For the foregoing reasons, we are of the view that the Tribunal was absolutely justified in coming to the conclusion that the amount of liquidated damages received by the assessee was not a revenue receipt and the Assessing Officer was in error in considering the said amount as a revenue receipt. For the aforesaid reasons, we answer the first two questions referred to this court in the affi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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