Section 28 – Merely by initiating the compensation suit, the amount claimed therein cannot be treated as assessee’s income unless the other party admits the liability to pay compensation or there is a decree in favour of the assessee.

Section 28 – Merely by initiating the compensation suit, the amount claimed therein cannot be treated as assessee’s income unless the other party admits the liability to pay compensation or there is a decree in favour of the assessee.

The assessee, manufacturer and domestic seller of grey fabric, filed its return of income for the AY 2008-09 declaring a loss of Rs. 31,31,568. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had acquired a 1250 MW windmill, from M/s Suzlon Energy, for captive consumption. The purchase order contained compensation clause, which provided that the assessee was entitled to compensation in case of any loss of generation on account of non-availability of the machine below 95% @ 3.67/ KWH or as per the TNEB tariff during the warranty period. He also noticed that the generation of power unit did not touch the assured level of 37 lakh units. The assessee had filed a compensation case before the Jurisdictional High Court raising claim of Rs. 17,58,014 upto 15-9-2007 for shortfall in generation of power. Since the other party had not accepted the assessee’s claim for compensation and also the case was pending before the Court, the assessee had not declared the amount claimed as its income. The AO held that, since the assessee was entitled to compensation as per the agreement, he taxed the sum of Rs. 17,58,014 as the income of the assessee. Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the addition made by the AO. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the capacity assured was never achieved and the assessee had initiated compensation proceedings before the Honourable High Court. The High Court had referred the case to the Sole Arbitrator, who expired during the pendency of the arbitration proceedings. The Tribunal held that it is unable to concur with the stand of the Revenue that merely by initiating the compensation suit, the amount claimed therein is liable to be assessed as assessee’s income. It also noted that the other party has not admitted any compensation or its part as payable to the assessee nor there any decree in favour of the assessee so as to realise the amount. It held that once the arbitration proceedings are pending, the outcome of the assessee’s claim involved still hangs in balance. It observed that when there is no actual receipt of any amount or accrual, the same cannot be taken as income of the assessee. It held that the amount claimed by the assessee as compensation cannot be taken to be its income. The Tribunal upheld the order of CIT(A). The appeal filed by the Revenue was dismissed.