REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  3702 OF 2003   

COMMISSIONER OF INCOME  TAX,  GUJARAT  

— APPELLANT

VERSUS

M/S. SAURASHTRA CEMENT  LIMITED

— RESPONDENT

J U D G M E N T

D.K. JAIN, J.:

1.This appeal, by special leave, at the instance of the Revenue  

is  directed  against  the  judgment  and  order  dated  27th June,  

2001 delivered by the High Court of Gujarat at Ahmedabad in  

Income  Tax  Reference  No.44  of  1986.   By  the  impugned  

judgment,  the  High  Court  has  answered  the  following  

questions, referred to it by the Income Tax Appellate Tribunal,  

Ahmedabad (for short “the Tribunal”) under Section 256(1) of

the  Income  Tax  Act,  1961  (for  short  “the  Act”),  in  the  

affirmative and in favour of the assessee.   

(i) Whether the Tribunal has not erred in law on facts  

in holding that the amount of Rs.8,50,000/- received  

by the assessee was not taxable as revenue receipt  

in the hands of the assessee?

(ii) Whether the finding of the Tribunal that the receipt  

relating to liquidated damages cannot be treated as  

a revenue receipt but must be held to be a capital  

receipt not exigible to tax is correct in law?

(iii) Whether  the  assessee  is  entitled  to  the  addition  

made  to  the  machinery  during  the  year  thus  

determining the capital employed for the purpose of  

claim  under  Section  80J  of  the  Income  Tax  Act,  

1961?

2.At the outset, we may note that insofar as question No.(iii) is  

concerned, it was conceded on behalf of the Revenue before the  

High Court that answer to the said question stood concluded in  

favour of the assessee by the decision of this Court in  C.I.T.,   

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Gujarat  Vs. M/s Elecon Engineering Co. Ltd.1.  Relying on the  

said decision, the High Court answered the question in favour  

of the assessee.  Therefore, only question Nos. (i) and (ii), which  

in effect involve only one issue,  survive for our consideration.  

3. The reference pertains to the Assessment Year 1974-75 for  

which the relevant previous year ended on 30th June, 1973.  The  

factual  background  in  which  the  issue,  covering  both  the  

questions, has arisen, is as follows :  

The assessee,  engaged in the  manufacture of cement etc;  

entered  into an agreement with M/s Walchandnagar Industries  

Limited, Bombay, (hereinafter referred to as “the supplier”)  on  

1st September,  1967  for  purchase  of  additional  cement  plant  

from them for a total consideration of Rs.1,70,00,000/-.  As per  

the terms of contract,  the amount of consideration was to be  

paid by the assessee in four instalments.

The agreement contained a condition with regard to the  

manner in which the machinery was to be delivered and the  

consequences of delay in delivery.  Insofar as the present appeal  

1 (1987) 4 SCC 530  

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is concerned, clause No.6 of the agreement  is relevant and it  

reads as follows:

“6. xxx xxx xxx Delayed Deliveries:

In the event of delays in deliveries except the  reason of Force Majeure at para 5 mentioned above,  the Suppliers  shall  pay the Purchasers  an agreed  amount by way of liquidated damages without proof  of damages actually suffered at the rate of 0.5% of  the price of the respective machinery and equipment  to which the items were delivered late (sic), for each  month of delay in delivery completion.  It is further  agreed  that  the  total  amount  of  such  agreed  liquidated damages shall not exceed 5% of the total  price of the plant and machinery.”

As per the said clause in the agreement, in the event of  

delay caused in delivery of the machinery, the assessee was to  

be compensated at the rate of 0.5% of the price of the respective  

portion  of  the machinery  for  delay of  each month by way of  

liquidated damages by the supplier, without proof of actual loss.  

However, the total amount of damages was not to exceed 5% of  

the total price of the plant and machinery.   

4.The  supplier  defaulted  and  failed  to  supply  the  plant  and  

machinery  on  the  scheduled  time  and,  therefore,  as  per  the  

terms  of  contract,  the  assessee  received  an  amount  of  

Rs.8,50,000/- from the supplier by way of  liquidated damages.  

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5.During the course of assessment proceedings for the relevant  

assessment  Year,  a  question  arose  whether  the  said  amount  

received by the assessee as damages was a capital or a revenue  

receipt.   The  Assessing  Officer  negatived  the  claim  of  the  

assessee that the said amount should be treated as   a capital  

receipt. Accordingly, he included the said amount in the total  

income of the assessee.  Aggrieved, the assessee filed an appeal  

before the Commissioner of Income Tax (Appeals), but without  

any success.  The assessee carried the matter further in appeal  

to the Tribunal.  Relying on the ratio of the decisions of this  

Court  in  Commissioner  of  Income  Tax,  Nagpur  Vs. Rai  

Bahadur Jairam Valji and Others2 and Kettlewell Bullen and  

Co.  Ltd.  Vs. Commissioner  of  Income-Tax,  Calcutta3, the  

Tribunal came to the conclusion that the said amount could not  

be treated as a revenue receipt.  According to the Tribunal, the  

payment of liquidated damages to the assessee by the supplier  

was intimately linked with the supply of machinery i.e. a fixed  

asset on capital account, which could be said to be connected  

with the source of  income or profit  making apparatus rather  

than a receipt in course of profit earning process and, therefore,  2 (1959) 35 ITR 148 (SC)  3 AIR 1965 SC 65

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it could not be treated as part of receipt relating to a normal  

business activity of the assessee.  The Tribunal also observed  

that  the  said  receipt  had  no  connection  with  loss  or  profit  

because the very source of income viz., the machinery was yet  

to be installed.  Accordingly, the Tribunal allowed the appeal  

and deleted the addition made on this account.  

6.Being dissatisfied with the decision of the Tribunal, as stated  

above, at the instance of the Revenue, the Tribunal referred the  

afore-noted questions of law for the opinion of the High Court.  

The reference having been answered against the Revenue and  

in  favour  of  the  assessee,  the  Revenue  is  before  us  in  this  

appeal.   

7.We  have  heard  Mr.  R.P.  Bhatt,  learned  Senior  Counsel  

appearing  for  the  Revenue  and  Mr.  Bhargava  V.  Desai  on  

behalf of the assessee.  

8.Mr.  Bhatt  submitted  that  although  the  said  amount  of  

damages had been received by the assessee under clause 6 of  

the agreement for breach of contract, yet the said amount had  

been  received  as  compensation  for  the  loss  of  profit,  and  

therefore,  it is in the nature of a revenue receipt.  According to  

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the learned counsel, it was on account of late commissioning of  

the plant that the assessee could not commence production as  

per its schedule and thereby suffered loss in its profits, which  

was  compensated  by  the  supplier  and,  therefore,  the  said  

amount should have been  considered as revenue receipt.  

9.Per  contra,  Mr.  Desai,  learned  counsel  appearing  for  the  

assessee,  while  supporting  the  decision  of  the  High  Court  

submitted that the amount received by the assessee was by way  

of compensation  for delay in the delivery and installation of the  

plant  and  had  a  direct  nexus  with  the  capital  asset  and  

therefore, it  was in the nature of a capital receipt.  Learned  

counsel  also  argued  that  answer  to  the  questions  stands  

concluded in favour of the assessee by the decision of the High  

court  of  Madras  in  E.I.D.  Parry  Ltd.  Vs. Commissioner  of   

Income  Tax4,  which  has  attained  finality  on  account  of  

dismissal of the Civil Appeal preferred by the Revenue against  

the said judgment.   

10.Thus, the short question for determination is whether the  

liquidated damages received by the assessee from the supplier  

4 [1998] 233 ITR 335 (Mad)

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of the plant and machinery on account of delay in the supply of  

plant is a capital or a revenue receipt?

11.The  question  whether  a  particular  receipt  is  capital  or  

revenue has frequently engaged the attention of the Courts but  

it  has  not  been  possible  to  lay  down any  single  criterion  as  

decisive in the determination of the question.  Time and again,  

it  has  been  reiterated  that  answer  to  the  question  must  

ultimately  depend on the  facts  of  a  particular  case,  and  the  

authorities  bearing  on  the  question  are  valuable  only  as  

indicating the matters that have to be taken into account in  

reaching a conclusion.  In Rai Bahadur Jairam Valji (supra), it  

was observed thus:

“The question whether a receipt is capital or income  has frequently come up for determination before the  courts.   Various  rules  have  been  enunciated  as  furnishing a key to the solution of the question, but as  often  observed  by  the  highest  authorities,  it  is  not  possible to lay down any single test as infallible  or  any single criterion as decisive in the determination  of the question, which must ultimately depend on the  facts  of  the  particular  case,  and  the  authorities  bearing  on  the  question  are  valuable  only  as  indicating  the  matters  that  have  to  be  taken  into  account in reaching a decision.  Vide Van Den Berghs  Ltd.  v.  Clark5.  That, however, is not to say that the  question  is  one  of  fact,  for,  as  observed  in  Davies  

5 (1935) 3 I.T.R. (Eng. Cas.) 17

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(H.M. Inspector of Taxes) v. Shell Company of China  Ltd.6,  “these questions  between capital  and income,  trading  profit  or  no  trading  profit,  are  questions  which, though they may depend no doubt to a very  great extent on the particular facts of each case, do  involve a conclusion of  law to be drawn from those  facts.”  

12.In Kettlewell Bullen and Co. Ltd.  (supra), dealing with the  

question  whether  compensation  received  by  an  agent  for  

premature determination of the contract of agency is a capital  

or  a  revenue  receipt,  echoing  the  views  expressed  in  Rai  

Bahadur  Jairam  Valji (supra)  and  analysing  numerous  

judgments  on  the  point,  this  Court  laid  down  the  following  

broad principle, which may be taken into account in reaching a  

decision on the issue :

“Where  on  a  consideration  of  the  circumstances,  payment  is  made  to  compensate  a  person  for  cancellation  of  a  contract  which  does  not  affect  the  trading structure of  his  business,  nor deprive him of  what in substance is his source of income, termination  of the contract being a normal incident of the business,  and such cancellation leaves him free to carry on his  trade (freed from the contract terminated) the receipt  is revenue : Where by the cancellation of an agency the  trading structure of the assessee is impaired, or such  cancellation results in loss of what may be regarded as  the source of the assessee’s income, the payment made  to compensate for cancellation of the agency agreement  is normally a capital receipt.”

6 (1952) 22 I.T.R. (Suppl.) 1  

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13.We have considered  the matter  in  the light  of  the afore-

noted  broad  principle.   It  is  clear  from  clause  No.6  of  the  

agreement dated 1st September 1967, extracted above, that the  

liquidated damages were to be calculated at 0.5% of the price of  

the  respective  machinery  and  equipment  to  which  the  items  

were  delivered  late,  for  each  month  of  delay  in  delivery  

completion, without proof of the actual damages the assessee  

would  have  suffered  on  account  of  the  delay.   The  delay  in  

supply could be of  the whole plant or a part thereof  but the  

determination of damages was not based upon the calculation  

made  in  respect  of  loss  of  profit  on  account  of  supply  of  a  

particular part of the plant. It is evident that the damages to  

the  assessee  was  directly  and  intimately  linked  with  the  

procurement  of  a  capital  asset   i.e.  the  cement  plant,  which  

would obviously lead to delay in coming into existence of the  

profit making apparatus, rather than a receipt in the course of  

profit  earning  process.   Compensation  paid  for  the  delay  in  

procurement of  capital  asset  amounted to sterilization of  the  

capital asset of the assessee as supplier had failed to supply the  

plant within time as stipulated in the agreement and clause  

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No.6 thereof came into play.  The afore-stated amount received  

by the assessee towards compensation for sterilization of  the  

profit  earning  source,  not  in  the  ordinary  course  of  their  

business, in our opinion, was a capital receipt in the hands of  

the assessee.  We are, therefore, in agreement with the opinion  

recorded  by  the  High  Court  on  question  Nos.  (i)   and  (ii)  

extracted  in  Para  1  (supra)  and  hold  that  the  amount  of  

Rs.8,50,000/- received by the assessee from the suppliers of the  

plant was in the nature of a capital receipt.

14.We, therefore, dismiss the appeal with no order as to costs.  

……………………………. J.

(D.K. JAIN)

                              …………………………….J.  (C.K. PRASAD)

NEW DELHI; JULY 9, 2010.

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