[CIT v. Saurashtra Cement Ltd., (2010) 325 ITR 422
(SC)]
The assessee, engaged in the manufacture of
cement, etc., entered into an agreement with M/s. Walchandnagar Industries
Limited, Mumbai, (hereinafter referred to as ‘the supplier’) on September 1,
1967 for purchase of additional cement plant from them for a total consideration
of Rs. 1,70,00,000. As per the terms of contract, the amount of consideration
was to be paid by the assessee in four instalments.
The agreement contained a condition with regard to the manner
in which the machinery was to be delivered and the consequences of delay in
delivery.
As per clause 6 of the agreement, in the event of delay
caused in delivery of the machinery, the assessee was to be compensated at the
rate of 0.5% of the price of the respective portion of the machinery, for delay
of each month by way of liquidated damages by the supplier, without proof of
actual loss. However, the total amount of damages was not to exceed 5% of the
total price of the plant and machinery.
The supplier defaulted and failed to supply the plant and
machinery on the scheduled time and, therefore, as per the terms of contract,
the assessee received an amount of Rs. 8,50,000 from the supplier by way of
liquidated damages.
During the course of assessment proceedings for the relevant
assessment year, a question arose whether the said amount received by the
assessee as damages was a capital or a revenue receipt. The Assessing Officer
negated the claim of the assessee that the said amount should be treated
as a capital receipt. Accordingly, he included the said amount in the total
income of the assessee. Aggrieved, the assessee filed an appeal before the
Commissioner of Income-tax (Appeals), but without any success. The assessee
carried the matter further in an appeal to the Tribunal.
According to the Tribunal, the payment of liquidated damages
to the assessee by the supplier was intimately linked with the supply of
machinery, i.e., a fixed asset on capital account, which could be said to
be connected with the source of income or profit-making apparatus rather than a
receipt in course of profit-earning process and, therefore, it could not be
treated as part of receipt relating to a normal business activity of the
assessee. The Tribunal also observed that the said receipt had no connection
with loss or profit, because the very source of income, viz., the
machinery was yet to be installed. Accordingly, the Tribunal allowed the appeal
and deleted the addition made on
this account.
Being dissatisfied with the decision of the Tribunal, as
stated above, at the instance of the Revenue, the Tribunal referred the
questions of law on the above issue for the opinion of the High Court. The
reference having been answered against the Revenue and in favour of the
assessee, the Revenue filed an appeal before the Supreme Court.
The Supreme Court noted that It was clear from clause No. 6
of the agreement dated September 1, 1967, that the liquidated damages were to be
calculated at 0.5% of the price of the respective machinery and equipment to
which the items were delivered late, for each month of delay in delivery
completion, without proof of the actual damages the assessee would have suffered
on account of the delay. The delay in supply could be for the whole plant or a
part thereof but the determination of damages was not based upon the calculation
made in respect of loss of profit on account of supply of a particular part of
the plant. The Supreme Court observed that it was evident that the damages to
the assessee were directly and intimately linked with the procurement of a
capital asset, i.e., the cement plant, which would obviously lead to
delay in coming into existence of the profit-making apparatus, rather than a
receipt in the course of profit-earning process. The Supreme Court held that the
compensation paid for the delay in procurement of capital asset amounted to
sterilisation of the capital asset of the assessee as the supplier had failed to
supply the plant within time as stipulated in the agreement and clause No. 6
thereof came into play. The aforestated amount received by the assessee
toward compensation for sterilisation of the profit-earning source, not in the
ordinary course of their business, was a capital receipt in the hands of the
assessee. The Supreme Court therefore was in agreement with the opinion recorded
by the High Court that the amount of Rs. 8,50,000 received by the assessee from
the suppliers of the plant was in the nature of a capital receipt.
