By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Bhadresh Doshi
Chartered Accountants
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Sections 4 and 28(i) of the Income-tax Act, 1961 — Compensation received for loss of goodwill/ reputation is a capital receipt.
The assessee received a sum of Rs.41.58 lakh from Union Bank of Switzerland (UBS) towards loss of reputation and goodwill and claimed the same as capital receipt not chargeable to tax. The Assessing Officer and the CIT(A) held the said amount as revenue receipt chargeable to tax.
The Tribunal, relying on the decision of the ITAT Pune in the case of Serum Institute of India Ltd. v. Dy. CIT, (2007) 12 TTJ (Pune) 174/111 ITD 259 (Pune), upheld the assessee’s claim.
The Tribunal noted as under:
(1) It is evident that the compensation was awarded to the assessee ‘against loss of reputation and goodwill’. It was not on account of the failure on the part of UBS to supply the quantity ordered or some loss caused to the assessee in a particular trading transaction.
(2) It was on account of injury caused to the reputation of the assessee, albeit such injury was caused due to some business transaction.
(3) Had the amount been awarded to make good the loss caused due to excess or short supply of the material or some other trading deficiency, it would certainly have been regarded as a revenue receipt.
(4) Since the nexus of the compensation is with reputation and goodwill and not with the trading operations, it cannot be held to be a revenue receipt.
(5) The main criterion to judge as to whether the compensation is capital or revenue is to ascertain the purpose for which such compensation is awarded. If the compensation is to recoup the loss suffered by the assessee in its business activity, then it will be a revenue receipt. If, however, the purpose is unrelated to the trading activity of the assessee, it will be in the nature of a capital receipt.
