Liquidated damages received for delay in supply of assets are capital receipts: ITAT Kolkata

Itc Limited, Kolkata vs Acit, Range-8, Kolkata (I.T.A. No. 1222 & 1223/Kol/2017)

Facts:

1.  The assessee has credited a sum of Rs. 1,49,54,059/- to the profit and loss account which represented the liquidated damages received from various suppliers.

2.  According to assessee these damages were received on account of capital assets upon failure of the suppliers to supply machineries/complete construction of building etc within the stipulated period. According to assessee these liquidated damages received by way of compensation for delay in the delivery and installation of plant and machineries/construction of building and they are to be treated as capital receipts and not liable to tax.

3.  According to AO, these liquidated damages were received from suppliers in lieu of their violations/not honoring the terms agreed upon in the contracts which were entered into in the course of business for supply/installation of machinery/construction of building and therefore the liquidated damages are intimately and intrinsically linked to the business of the assessee.

4.  The AO held that these damages received has no nexus with the cost of fixed assets and therefore these damages cannot be said to have any relation to capital asset owned by the assessee and thus constitute a regular nature of business income and was added to the income of the assessee.

ITAT Kolkata held as below:

1.  The assessee relied on the decision of Hon’ble Apex Court in the case of CIT vs. Saurashtra Cement Ltd. [2010]192 Taxman 300 (SC) wherein it was held that the damages to the assessee was directly and intimately linked with the procurement of a capital asset. These are not in the ordinary course of their business, and so was a capital receipt in the hands of the assessee.

2.  So the liquidated damages are capital in nature and are not arising out of regular course of business of assessee.

 

The copy of the order is as under:

1715335584-ITA No.1068 & 1166-2017 & ITA No1222 & 1223-2017-ITC Limited