1981 (10) TMI 102 - AT - Income Tax

Tax Tribunal: Compensation & Interest for Non-Supply Taxable as Revenue

KS. KRISHNAMOORTHY. Versus INCOME TAX OFFICER.

The Tribunal upheld the decision that the compensation received for non-supply of tippers and the interest awarded by the Arbitrator were taxable revenue ... - Issues Involved:1. Taxability of compensation received for non-supply of tippers.2. Nature of interest awarded by the Arbitrator.3. Classification of the payment as capital or revenue receipt.Detailed Analysis:1. Taxability of Compensation Received for Non-Supply of Tippers:The assessee, an engineering contractor, claimed that the compensation of Rs. 7,66,242 awarded by the Arbitrator for the non-supply of tippers was a capital receipt. The Arbitrator found that there was a legal obligation to supply departmental tippers, and only ten out of thirty were supplied. The Arbitrator ruled that the substituted obligation of supplying earth-moving machinery did not extinguish the pre-existing right to compensation for the breach of the original obligation. The compensation was awarded for the extra expenditure and proportionate profit the assessee would have made. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) held that this amount was a business receipt of a revenue nature, rejecting the claim that it was an ex gratia payment. The Tribunal upheld this view, stating that the compensation was for the additional cost incurred due to the delay caused by the Government and was thus a revenue receipt.2. Nature of Interest Awarded by the Arbitrator:The Arbitrator awarded interest of Rs. 2,67,170 on the compensation amount. The assessee argued that the interest was a measure of damages and should follow the nature of the principal amount, which he claimed was a capital receipt. The Tribunal, however, held that the interest was related to the recovery of dues for work done and was stipulated by the Arbitrator. The Tribunal distinguished this case from the Orissa High Court decision in Govinda Chowdhury & Sons vs. CIT, where interest was held to be a capital receipt. The Tribunal concluded that the interest in this case was akin to what a trader receives from a customer for delayed payment and was thus of a revenue nature.3. Classification of the Payment as Capital or Revenue Receipt:The assessee contended that the compensation was for the collapse of the business due to the Government's default and was thus a capital receipt. The Tribunal, however, found that the Pochampad contract was one of many contracts undertaken by the assessee in his business as a contractor and could not be considered a capital asset. The Tribunal cited several Supreme Court decisions, including CIT vs. South India Pictures and CIT vs. Rai Bhadur Jairam Valji, which held that compensation for termination of contracts in the ordinary course of business is a revenue receipt. The Tribunal concluded that the compensation was for the escalation of costs due to the delay in the supply of tippers and was thus a revenue receipt.Conclusion:The Tribunal dismissed the appeal, upholding the inclusion of the compensation and interest as taxable revenue receipts. The Tribunal found that the compensation was for additional costs incurred due to the delay caused by the Government and that the interest was for the delayed receipt of contract amounts, both of which were of a revenue nature.