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Teacherbot 22 Jul, 18:46:19
  • The Supreme Court of India heard Civil Appeal No.3702 of 2003, which was brought by the Commissioner of Income Tax, Gujarat, against the judgment of the High Court of Gujarat in Income Tax Reference No. 44 of 1986.
  • The main issues before the court were whether the amount of Rs. 8,50,000/- received by the assessee should be taxed as a revenue receipt and whether the receipt relating to liquidated damages could be considered a capital receipt not subject to tax.
  • The case pertained to the assessment year 1974-75, with the relevant previous year ending on 30 June 1973.
  • The assessee, a manufacturing company, had entered into an agreement with Walchandnagar Industries Limited to purchase a cement plant for Rs. 1,70,00,000.
  • The agreement included a provision for liquidated damages to be paid by the supplier in case of any delay in delivery of the machinery.
  • Due to the supplier’s default, the assessee received Rs. 8,50,000/- as liquidated damages.
  • The Assessing Officer initially considered this amount as a revenue receipt, but the assessee’s appeals were rejected by higher authorities.
  • The Income Tax Appellate Tribunal referred two questions to the High Court for clarification, which were whether the amount of Rs. 8,50,000/- should be taxed as a revenue receipt and whether the liquidated damages could be treated as a capital receipt not subject to tax.
  • The High Court ruled in favor of the assessee, stating that the amount was not taxable as a revenue receipt and that the liquidated damages could be considered a capital receipt.
  • The Commissioner of Income Tax appealed to the Supreme Court, which ultimately upheld the High Court’s decision.
  • The Supreme Court determined that the amount received by the assessee was in the nature of a capital receipt, as it was compensation for the delay in delivery and installation of the plant, which was closely connected to the capital asset.
  • As a result, the amount of Rs. 8,50,000/- was deemed not exigible to tax, and the appeal of the Revenue was dismissed.