2016 (1) TMI 504 - HC - Income Tax

Compensation for cancelled contract deemed taxable business income, court affirms decision.

Avantor Performance Materials India Limited, (Formerly known as RFCL Limited) Versus Commissioner of Income Tax, Shimla & another

Avantor Performance Materials India Limited, (Formerly known as RFCL Limited) Versus Commissioner of Income Tax, Shimla & another - [2016] 383 ITR 685 Issues Involved:1. Whether the compensation received by the appellant towards the cancellation of the SPA was a revenue receipt taxable in the hands of the appellant.Detailed Analysis:Issue 1: Whether the compensation received by the appellant towards the cancellation of the SPA was a revenue receipt taxable in the hands of the appellant.The appeal was admitted on the substantial question of law regarding the nature of the compensation received by the appellant, specifically whether it should be treated as a revenue receipt taxable in the hands of the appellant.In the assessment year 2008-09, the assessee filed a return with the Income Tax Department. The case was selected for scrutiny, and notices were issued under Sections 143(2) and 142(1) of the Income Tax Act, 1961. The Assessing Officer reassessed the income by disallowing the depreciation of goodwill and the claim of capital receipt. This order was affirmed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT).The primary issue in the appeal was whether the compensation received by the assessee should be treated as a capital or revenue receipt. It is a settled position of law that the burden to establish whether the character of the amount received is a revenue receipt lies with the revenue. However, once established, it is for the assessee to prove if it falls under an exemption clause.The court referred to several precedents to determine the nature of the receipt. In Commissioner of Income Tax, Gujarat vs. Saurashtra Cement Ltd., it was held that the question of whether a receipt is capital or revenue must depend on the facts of each case. The Supreme Court in CIT vs. Rai Bahadur Jairam Valji also emphasized that the determination must be based on the specific circumstances of each case.Further, in Shri P.H. Divecha vs. The Commissioner of Income-tax, Bombay City I, Bombay, the Supreme Court held that the nature and quality of the payment must be considered to determine if it is a return for loss of a capital asset or income. The court also referred to Kettlewell Bullen and Co. Ltd. vs. Commissioner of Income-tax, Calcutta, which stated that compensation for loss of capital is a capital receipt, while compensation for profit in a trading transaction is taxable income.The court noted that the SPA provided for the consequences of termination, including repayment of the earnest deposit amount, interest, and penalty. However, compensation for termination was not explicitly mentioned in the SPA. The compensation received by the assessee was claimed as a capital receipt but assessed by the revenue as a revenue receipt.The authorities below held that the compensation was not for any injury to the capital assets of the assessee. The assessee was exploring business expansion, and the compensation was for the termination of a conditional SPA. The court agreed with this assessment, noting that the termination did not impair the assessee's business or revenue.In conclusion, the court held that the compensation received by the assessee was a revenue receipt taxable as business income. The authorities below did not err in their judgment, and the appeal was disposed of accordingly.