S. 4 of the Income-tax Act, 1961 — If goodwill of business is damaged and later on some compensation is awarded in lieu of that, it would fall in category of loss to source of income and such receipt would be a capital receipt.

The assessee was importing gold bars from Union Bank of
Switzerland (UBS). In one consignment shipped by UBS there was excess supply of
some gold bars. The customs authorities seized the excess quantity and also took
legal action against the assessee-company. UBS accepted its mistake and admitted
the human error at their end. The appellate customs authority absolved and
acquitted the company. The company filed a suit against UBS in the High Court of
London. Finally, an out-of-court settlement was reached between UBS and the
company and UBS paid Rs.41.58 lacs as compensation against loss of reputation
and goodwill and Rs.14.46 lacs towards legal expenses, etc. The assessee offered
the sum of Rs.14.46 lacs for taxation voluntarily by including it in the
miscellaneous income and claimed the amount of Rs.41.58 lacs as capital receipt
not chargeable to tax in the computation of income. The Assessing Officer held
that the amount of Rs.41.58 lacs representing compensation received by the
assessee was a revenue receipt chargeable to tax. On appeal, the CIT(A) upheld
the action of the Assessing Officer.

The Tribunal, relying on the decisions in the following
cases, ruled in favour of the assessee :

(1) CIT v. A.R.J. Security Printers, (2003) 264 ITR
206/131 Taxman 297 (Delhi)

(2) Oberoi Hotel (P.) Ltd. v. CIT, (1999) 236 ITR 903/103
Taxman 236 (SC)

(3) CIT v. Bombay Burmah Trading Corpn. Ltd., (1986) 161
ITR 386/27 Taxman 314 (SC)

(4) Rohitasava Chand v. CIT, (2008) 306 ITR 242/ 171
Taxman 147 (Delhi)

(5) Serum Institute of India v. Dy. CIT, (2008) 111 ITD
259 (Pune)

While treating the amount of Rs.41.58 lacs as a capital
receipt, the Tribunal noted as under :

(1) The word ‘income’ has to be understood in the generic
sense. If a receipt bears the traits of income as per the plain and natural
meaning, the same will still be included within the scope of S. 2(24) even
if there is no specific mention of such item in the definition clause.

(2) It is trite law that any receipt in the nature of
compensation, costs, damage, etc., by whatever name called, towards loss of
income is a revenue receipt. However, any receipt to compensate for the loss
of source of income is a capital receipt.

(3) Loss of source of income does not necessarily mean
that the source must be absolutely extinguished. If the source of income has
been severely beaten, thereby causing serious damage to the income-earning
apparatus itself, it will also be construed as the loss of source of income.

(4) As in this case, if goodwill of the business is
damaged and later on some compensation is awarded in lieu of that, it will
also fall in the same category of loss to the source of income and,
consequently, such a receipt will also qualify to be characterised as a
capital receipt.