COMMISSIONER OF INCOME TAX, GUJARAT vs. M/S. SAURASHTRA CEMENT LTD.

CIVIL APPEAL No. 3702/2003Supreme Court[2010] 8 S.C.R. 40409 July 2010Bench: 2 JudgesAuthor: D.K. JAIN, C.K. PRASAD B9 pages
AI SummaryDismissed

What were the facts?

The respondent-assessee, engaged in cement manufacturing, entered into an agreement on September 1, 1967, to purchase an additional cement plant for Rs. 1,70,00,000/-. The supplier defaulted on the delivery schedule. As per clause 6 of the agreement, the assessee received Rs. 8,50,000/- as liquidated damages for the delay. The Assessing Officer treated this amount as a revenue receipt and included it in the assessee's total income for Assessment Year 1974-75. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld the assessee's claim that it was a capital receipt. The Revenue appealed to the High Court, which referred questions of law to it. The High Court answered these questions in favour of the assessee, leading to the present appeal by the Revenue before the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the liquidated damages received by the assessee were a capital receipt. The Court reasoned that the damages were calculated at 0.5% of the price of the respective machinery for each month of delay, without proof of actual damages suffered. Crucially, the damages were directly and intimately linked to the procurement of a capital asset (the cement plant), which would lead to a delay in the coming into existence of the profit-making apparatus. The delay in procuring the capital asset amounted to sterilization of the assessee's capital asset. Compensation for the sterilization of the profit-earning source, not being in the ordinary course of business, was therefore a capital receipt. The Court dismissed the appeal, agreeing with the High Court's opinion on the issue. The third question regarding capital employed for Section 80J was conceded by the Revenue in favour of the assessee.

What were the issues?

1. Whether the Tribunal erred in law and on facts by holding that the amount of Rs. 8,50,000/- received by the assessee was not taxable as a revenue receipt (Section 256(1) of the Income Tax Act, 1961)? 2. Whether the Tribunal's finding that the receipt of 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? Assessee's contentions: The amount received was compensation for delay in delivery and installation of the plant, having a direct nexus with the capital asset, and was therefore a capital receipt. The assessee relied on the decision in E.I.D. Parry Ltd. v. Commissioner of Income Tax (1998) 233 ITR 335 (Mad), where the Revenue's appeal was dismissed. Revenue's contentions: The judgment records no specific contentions for the Revenue other than its appeal against the High Court's decision.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 80J

AI-generated summary — verify with the full judgment below

A B [2010] 8 S.C.R. 404 COMMISSIONER OF INCOME TAX, GUJARAT v. M/S. SAURASHTRA CEMENT LTD. (Civil Appeal No. 3702 of 2003) JULY 09, 2010 [D.K. JAIN AND C.K. PRASAD, JJ.] Income Tax Act, 1961 - Liquidated damages received by assessee from supplier of the cement plant and machinery C on account of delay in supply of plant - Held: Is to be treated as capital receipt - The delay in procurement of capital asset i.e. the cement plant amounted to sterilization of the capital asset of the assessee - The amount received by the assessee towards compensation for sterilization of the profit o earning source, being not in the ordinary course of their business, was a capital receipt in the hands of the assessee.

The respondent-assessee was engaged in manufacture of cement. It entered into an agreement for purchase of additional cement plant. The supplier E defaulted and failed to supply the plant and machinery on the scheduled time and, therefore, as per the terms of agreement, the assessee received an amount from the supplier by way of liquidated damages. F G H In the instant appeal filed by Revenue, the question which arose for consideration was: "whether the

The order continues below.

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