2009 (12) TMI 19 - HC - Income Tax

Supreme Court: Copyright infringement payments are business income, not capital. Investment allowance eligibility confirmed.

Comissioner Of Incom Tax & Another Versus M/s. Eastern Book Company

The Supreme Court held that amounts received for copyright infringement were not capital receipts but compensation for business income loss. The Court ... Capital Receipt versus Revenue Receipt – Receipt on account of infringement of copy right - The assessing officer and the first appellate authority as well rejected the contention of the assessee that the said amounts were received as capital receipt. But the Tribunal in second appeals has held that the said amounts are not revenue receipts but are capital income and therefore, not liable to be taxed – held that - . The assessing authority has recorded that assessee's copyright in the relevant books has not been affected and has remained fully intact as capital asset. Certain publishers unauthorisedly infringed the copyright of assessee and the injuries received on account of such publishers have been redressed by paying compensation for the damages caused to the assessee's business of publication. On this factual scenario we are of the view that compensation amount received by the assessee is not towards the loss of capital but is towards the loss of its income Issues:1. Whether the receipt of amounts on account of infringement of copyright was a capital receipt.2. Whether the assessee's firm was engaged in production/manufacturing activity within the purview of Section 32-A of the Income Tax Act.Analysis:1. The appeals were filed under Section 260 A of the Income Tax Act against a common order by the Income Tax Appellate Tribunal related to assessment years 1985-1986 and 1986-1987. The Tribunal held that the amounts received by the assessee for infringement of copyright were capital income and not liable to be taxed, contrary to the assessing officer's view. The main question raised was whether the Tribunal was justified in holding the receipt as a capital receipt. The Supreme Court's observations on damages recovered for a hole in profits were cited. The Court noted that the compensation received by the assessee was for damages caused to its business of publication, indicating a loss of income, not capital. The judgment in favor of the assessee was supported by the case law and the factual scenario presented.2. An additional point was raised regarding the assessee's eligibility for investment allowance under Section 32-A of the Income Tax Act for a photo-composing machine. The Tribunal had allowed the investment allowance, and the judgment was in line with a previous case law. The Court found no illegality in the Tribunal's decision and allowed the appeal in part, modifying the order accordingly. The appeal related to the engagement in production/manufacturing activity was allowed, while the other appeal was also allowed.In conclusion, the Court analyzed the nature of the receipts for infringement of copyright, distinguishing between capital and income receipts based on the purpose of compensation. The eligibility of the assessee for investment allowance was also upheld, following relevant case law. The judgment provided clarity on the tax treatment of the receipts and affirmed the Tribunal's decision on investment allowance eligibility.