1993 (10) TMI 111 - AT - Income Tax

Damages for Non-Performance in Sale Agreement Taxable as Revenue Receipt

The Tribunal held that damages received for non-performance of a sale agreement were taxable as a revenue receipt, overturning the CIT(A)'s decision that ... Business Income, Assessable As Issues Involved:1. Taxability of damages received for non-performance of a sale agreement.2. Classification of the assessee's activities as business or investment.3. Applicability of Land Reforms Act provisions.4. Nature of the damages received (capital receipt vs. revenue receipt).Issue-wise Detailed Analysis:1. Taxability of Damages Received for Non-Performance of a Sale Agreement:The assessee claimed that the damages amounting to Rs. 5,10,562 received due to the non-performance of an agreement to purchase agricultural lands were not taxable. The Income-tax Officer (ITO) rejected this plea, but the Commissioner of Income-tax (Appeals) [CIT(A)] held that the compensation was towards agricultural lands and thus not taxable as either business profit or capital gain. The Tribunal disagreed with the CIT(A), stating that the damages received were in the nature of compensation for the assessee relinquishing his rights under the agreement, and therefore, should be considered taxable as a revenue receipt.2. Classification of the Assessee's Activities as Business or Investment:The ITO presented evidence of the assessee's history of purchasing agricultural lands, converting them for non-agricultural purposes, and selling them, suggesting that these activities were part of his trading occupation. The CIT(A) disagreed, considering many transactions as investments. However, the Tribunal found that the pattern of frequent purchases and conversions indicated that the assessee was engaged in trading as a developer, and the transaction in question was part of his business activities.3. Applicability of Land Reforms Act Provisions:The Tribunal noted that the assessee was not an agriculturist and his principal source of income was from business. The provisions of the Land Reforms Act, which restrict non-agriculturists from holding agricultural land, were applicable. The agreement included a clause allowing the purchaser to develop the land for non-agricultural or industrial use, contradicting the CIT(A)'s conclusion that the intention was to keep the land as agricultural.4. Nature of the Damages Received (Capital Receipt vs. Revenue Receipt):The CIT(A) relied on the case of CIT v. Ashok Marketing Ltd. to support the view that the damages were a capital receipt. However, the Tribunal referred to the Supreme Court's decision in CIT v. Rai Bahadur Jairam Valji, which held that compensation received for termination of a contract in the ordinary course of business is a trading receipt. The Tribunal concluded that the compensation received by the assessee was a revenue receipt because it was linked to his trading activities and not to any capital asset.Conclusion:The Tribunal reversed the order of the CIT(A) and held that the compensation received by the assessee was taxable as a revenue receipt. The appeal by the revenue was allowed.