Delhi High Court
Principal Commissioner Of Income ... vs M/S Aeren R Infrstructure Ltd. on 25 April, 2018
$~5 & 6
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 25th April, 2018
+ ITA 235/2017
+ ITA 236/2017
PRINCIPAL COMMISSIONER OF INCOME TAX-(C)-2
..... Appellant
Through Mr.Sanjay Kumar and Mr.Rahul
Chaudhary, Standing Counsels.
versus
M/S AEREN R INFRSTRUCTURE LTD. ..... Respondent
Through Mr.Inder Paul Bansal and Mr.Vivek
Bansal, Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE VINOD GOEL
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
1 Revenue's appeals in these two cases question an order of the
ITAT. The issue concerns the treatment of damages and
compensation awarded to the assessee. The Assessment Officer (AO)
rejected the assessee's claim that these were towards capital receipts
and ruled that they have fallen in the revenue stream. The CIT(A)
rejected the assessee's appeal.
ITA 235/2017 & 236/2017 Page 1 of 7
2 The facts are that the assessee engages itself in the business of
real estate and had entered into a consortium agreement with its
associates which defines the role, rights and responsibilities. This
consortium entered into an agreement to sell with one JMA Buildcom
Private Limited for purchase of 10 acres of land for a consideration of
Rs.15 crores. The seller JMA Buildcom defaulted in its commitment
within the prescribed and extended time limit. Ultimately, upon
parties resorting to the Dispute Settlement Arbitration; a settlement
was arrived at and an award was made based upon the parties'
eventual settlement. The amount received by the assessee as a part of
its entitlement (as consortium) was credited in its books of accounts as
a capital stream. The AO and the CIT(A) held that the amounts were
revenue in nature as the land would have been part of the stock-in-
trade. The ITAT in its judgment after noticing the Supreme Court's
judgment in Universal Radiators Vs. Commissioner of Income Tax
[1993] 201 ITR 800(SC) held that in the facts of this case, the amount
which was intended to be ultimately used as stock-in-trade purposes
were immobile and sterilised, hence rendered non-offerable and
therefore when received, as part of the arbitration award, fell into the
capital stream. The relevant discussion in the impugned order of the
ITAT is as follows:-
"It was damaged for non-performance of the contractual
obligation by the AIK. It was contended that the
authorities below while deciding the issue against the
assessee have not appreciated the injury caused to the
profit making apparatus and that the knowhow was
foundation of the business of the assessee. Appreciating
ITA 235/2017 & 236/2017 Page 2 of 7
the same, huge compensation was awarded by the
arbitrator. The basis of award remained the lost profit
due to non-supply of the knowhow and not on loss of
profit and that newly installed machinery in absence of
supply of knowhow have gone completely wasted.
Reliance was placed on several decisions. After dealing
with the issue in detail, the ITAT has decided the issue in
favour of the assessee. When we examine the facts of the
present case in view of the above cited decisions of Pune
Bench of the ITAT, we find that in the present case
before us also the injury was caused to the profit making
apparatus as the land which was profit making apparatus
for the assessee was not supplied by JMA Buildcom (P)
Ltd. as per the agreement entered into between the
assessee and associates, and JMA Buildcom (P) Ltd.
Appreciating the same, compensation was awarded in the
arbitration proceedings initiated against JMA Buildcom
(P) Ltd. In other words, the basis of award remained the
lost profit due to non-supply of the land i.e. profit making
apparatus and not on loss of profit. We thus find that the
only inference can be drawn is that the compensation
received by way of reward due to non-supply of land by
JMA Buildcom (P) Ltd. under the agreement was capital
receipt. We hold as such. The ground No.2 is
accordingly allowed. In view of this finding, the
remaining grounds 5,6 7 and 9 have become academic
only and these grounds are accordingly disposed off."
3 The judgment in Universal Radiators (supra) pertinently
examines both situations first, where a direct link exists between the
products or the ultimate purpose which the assessee intends to put the
ITA 235/2017 & 236/2017 Page 3 of 7
equivalent and second, expanding the amounts and what is the
eventual income on one hand, and on the other hand, conclusions on
the stock-in-trade as well. The relevant observations are extracted as
follows:
"The assessee carried on business of manufacturing
radiators and not ingots. They were imported to be
converted into strips and sheets at Bombay. The link
which could create direct relationship between the
finished goods and raw material was snapped even before
it reached Bombay. Payment made for loss of such goods
did not bear any nexus with assessee's business. May be
that if it would have reached, it could have been after
conversion into strips and sheets used as raw material.
But so long as it did not reach Bombay and was not
converted into raw material, the connection it bore with
the assessee's business was remote. And any payment
made in respect of it could not be said to accrue from
business. In Strong & Co. of Ramsey Ltd. v. Woodifield
(Surveyor of Taxes) 5 TC 215, a converse case where the
assessee claimed deduction of certain payments made to
a customer, for the injury caused to him by falling off a
chimney due to the assessee's servant's negligence,
...................."
..................
8. Even assuming it was stock-in-trade, it was held by
this Court in Canara Bank Ltd.'s case (supra) that stock-
in-trade, if it gets blocked and sterilised and no trading
activity could be carried with it, then it ceased to be
stock-in-trade, and any devaluation surplus arising on
such capital due to exchange rate would be capital and
not revenue. Applying the ratio of this case, the copper
ingots, which even if assumed to be stock-in-trade, were
blocked and sterilised due to hostilities between India and
Pakistan, and, therefore, it ceased to be stock-in-trade
and any surplus arising due to exchange ratio in the
circumstances was capital receipt only."
4 Similar observations were made by the Supreme Court in
Commissioner of Income Tax vs. Bombay Burmah Trading Corpn.
[1986] 161 ITR 386 (SC); in an earlier point of time; are extracted as
follows:-
"It is, therefore, necessary as mentioned hereinbefore to
examine whether the acquisition of forest [leases by
assessee were acquisitions of capital assets. Though, we
will refer to some of the decisions to which our attention
was drawn and which were referred to by the High Court,
it is well to bear in mind the basic principles. These are;
if there was any capital asset, and if there was any
payment made for the acquisition of that capital asset,
such payment would amount to a capital payment in the
hands of the payee. Secondly, if any payment was made
for sterilization of the very source of profit-making
apparatus of the assessee, or a capital asset, then that
would also amount to a capital receipt in the hands of the
recipient. On the other hand if forest leases were merely
stock-in-trade and payments were made for taking over
the stock-in-trade, then no question of capital receipt
comes. The sum would represent payments of revenue
nature or trading receipts. Whether in a particular case,
for the contracts of the type with which we are concerned,
payments were capital receipts or not would depend upon
the facts and circumstances of the case. In this
connection it is important to bear in mind that normally
in trade there are two types of capital, one circulating
capital and the other fixed capital. Fixed capital is what
the owner turns to profit by keeping it in his own
possession; circulating capital is what he makes profit by
parting with it and letting it change hands. Therefore,
circulating capital is capital which is turned over and in
the process being turned over, yields profits or loss. It is
well settled as the high Court observed in the judgment
under appeal that what is capital assets in the hands of
one person may be trading assets in the hands of the
other. The determining factor is the nature of the trade
in which the asset was employed. Compensation received
for immobilisation, sterilization, destruction or loss, total
or partial of a capital asset would be capital receipt. If a
sum represented profit in a new form then that was
income but where the agreement related to the structure
of assessee's profit-making apparatus and affect the
conduct of the business, the sums received for
cancellation or variation of such agreement would be a
capital receipt."
5 In the present case too, the purpose of the ultimate use of the
assessee's land when acquired was rendered irrelevant on account of
the seller/JMA Buildcom Private Ltd defaulting in its commitment.
This rendered the amount expanded by the assessee immobile. The
eventual receipt of the amounts determined as compensation/damages,
therefore, clearly fell into the capital stream and not revenue as was
contended by the Revenue/appellant in this case.
6 In the circumstances, no question of law arises because the
findings of the ITAT are well reasoned and based upon appreciation
on the point of law.
7 The appeals are consequently dismissed.
S. RAVINDRA BHAT, J
VINOD GOEL, J
APRIL 25, 2018
ndn
