March 2011
Section 4 — Compensation awarded for loss of income earning apparatus is in the nature of capital receipt. However interest awarded on delay in receipt of compensation is revenue in nature and is to be treated as income.
By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Bhadresh Doshi
Chartered Accountants
Reading Time 3 mins
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41 (2010) 127 ITD 153 (Mum.)
Spaco Carburettors (I) (P.) Ltd. v. Addl. CIT,
Range 5(3) Mum.
A.Y. : 2003-2004. Dated : 16-3-2009
Section 4 — Compensation awarded for loss of income earning
apparatus is in the nature of capital receipt. However interest awarded on delay
in receipt of compensation is revenue in nature and is to be treated as income.
Facts:
1. The assessee-company was engaged in the business of
manufacturing different types of carburettors. It entered in a Technical
Collaboration Agreement (TCA) with a Japanese company. As per the relevant
clause of the TCA, the assessee was entitled to use any improvement made in
technology of carburettors by the Japanese company. The Japanese company
developed a new product, in respect of which they refused to give any advice
to the assessee company.
2. Subsequently the matter was referred to the
International Court of Arbitration and the said Court awarded compensation and
interest in favour of the assessee-company.
3. The assessee-company claimed the same as capital receipt
and therefore not taxable. However the Assessing Officer treated the same as
revenue and charged to tax.
4. On appeal, the CIT(A) held that the compensation was in
the nature of capital receipt, hence out of the purview of tax. However
interest received on the compensation is revenue in nature and therefore
chargeable to tax.
5. The Ld. AR of the assessee submitted before the Tribunal
that the compensation awarded was in respect of the extinction of a source of
income and profit-earning apparatus and was not awarded for breach of a
contract of revenue nature. Hence it was capital in nature. Similarly interest
on compensation received by the assessee-company was attached to the
compensation awarded by the Court, hence it partakes the character of the
compensation.
6. Whereas Ld. DR argued that compensation was awarded for
non-existing income i.e., for future loss which is nothing but revenue in
nature.
Held:
1. The Tribunal upheld the decision of the CIT(A) in
respect of the compensation awarded to the assessee-company and treated the
same as capital receipt.
2. In respect of interest, the Tribunal held that it is a
well-settled principle that interest always bears the character of revenue
unless it is awarded as profit. Since interest received is for the loss to the
assessee for delay in receipt of compensation which the assessee was entitled
to receive in the year in which the breach occurred, it was of revenue nature
and consequently the Tribunal upheld the decision of the CIT(A) in respect of
interest on compensation.
