AMITA R. SHETH,MUMBAI vs. DCIT CEN CIR 46, MUMBAI

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ITA 1166/MUM/2013Status: DisposedITAT Mumbai15 February 2017AY 2009-105 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that liquidated damages received due to the failure of a purchaser to buy shares, where the shares were held as an investment and not stock-in-trade, constitute a capital receipt. The Tribunal also noted the First Appellate Authority's failure to provide a speaking order.

What were the facts?

The assessee received Rs. 59.98 lakhs as liquidated damages from a purchaser who failed to buy shares as per an agreement. The Assessing Officer treated this receipt as revenue, while the assessee claimed it as a capital receipt.

What were the issues?

Whether liquidated damages received for non-performance of a share purchase agreement are capital or revenue receipts. Whether the First Appellate Authority's order was a speaking order.

Which sections of the Income-tax Act were involved?

Section 51,Section 143(3)

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(3)Show list

Detected automatically from the text. Citations are also linked where they appear in the judgment. The count shows how many other judgments on BharatTax rely on the same authority.

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य,राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार -Per Rajendra,AM: अनुसार Challenging the order dt.24.12.2012 of CIT(A)-36, Mumbai the assessee has filed the present appeal.Assessee,an individual filed the return of income on 28.07.2009 declaring total income of Rs.2.39 lakhs.The Assessing Officer(AO)completed assessment u/s. 143(3) of the Act on 28.12.11,determining her income at Rs.61.98 lakhs. 2.The effective Ground of appeal is about making addition of Rs.59.98 lakhs under the head ‘liquidated damages received’.During the assessment proceedings the AO found that the assessee had entered into an agreement, dt.21.10.2008, with Eleventh Land Developers Pvt. Ltd.(ELDPL)for sale of 180952 equity shares of Great Offshore Limited (GOL) at the agreed rate of Rs.540/- per share on a spot delivery basis with certain conditions, that assessee did not receive any amount of advance or any other money at the time of the agreement, that the sale had to be completed on or before 18.11.08, that as per the cl.7 of the agreement in event of failure by the purchaser to purchase the shares he had to pay liquidated damages not in the nature of penalty to the sellers, that the purchasers failed to pay money to the assessee, that the assessee received Rs.59.98 lakhs as liquidated damages after negotiations,that the assessee reduced the cost of equity shares from the amount received from the seller, that it was stated that amount received by her was capital receipt as per the provisions of section 51 of the Act.After considering these facts, the AO held that the assessee had neither received advance money nor any other money at the time of agreement, that she did not receive/retain

1.

1166/M/13(09-10)- Amita R. Sheth any money for the transaction till 18.11.2008, that the transaction would not fall within the meaning of provisions to Section 51 of the Act.He referred to the case of Travancore Rubber and Tea Co.(243ITR158)and held that provisions of section 51 were not applicable to the facts of the case,that she received Rs.32.93 per share as liquidated damages through negotiations, that the prolonged negotiations resulted in reducing the liquidated damages, that the agreement dated 21.08.2008 was not honoured, that the relevance and sanctity of the agreement was lost.Finally, he held that liquidated damages received by the assessee were to be taxed as revenue receipts.

3.Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority (FAA).Before him,it was argued that the liquidated damages received by her were a capital receipt, that they were directly linked to the sale of capital asset, that the only reason that the liquidated damages were receivable was that purchasers did not honour the agreement, that the assessee was an investor in shares, that she did not trade in shares, that the department had also treated her as an investor in shares, that the receipt was referable to fixed capital and was not part of circulating capital, that the character of liquidated damages would be the same as of the asset.The assessee relied upon the case of Saurashtra Cement Ltd.(325 ITR422).

After considering the submission of the assessee and the assessment order,the FAA confirmed the order of the AO without passing a speaking order.

4.During the course of hearing before us,the Authorised Representative(AR)argued that liquidated damage received by the assessee was with regard to investment i.e.capital asset, that such damage was to assessed as capital receipt,that in the case of husband and father in law of the assessee the FAA has allowed the appeal filed by them on identical facts,that the FAA had not considered the submissions made by the assessee.He relied upon the case of Saurashtra Cement Ltd.(supra).The Departmental Representative(DR)supported the order of the FAA 5.We have heard the rival submissions and perused the material before us.We find that the assessee along with members of her family,had entered into an agreement, dt.21.10.2008, with Eleventh Land Developers Pvt. Ltd.(ELDPL)for sale of equity shares of Great Offshore Limited (GOL) at the agreed rate of Rs.540/- per share, that there was provision for liquidated damages in the agreement, that the purchaser failed to honour the agreement, that 2

1166/M/13(09-10)- Amita R. Sheth after a long negotiation session both the parties arrived at a settlement, that in pursuance of the settlement the assessee received a sum of Rs.59.98 lakhs, that her husband and father-in- law also received liquidated damages for the same transaction, that in their cases the FAA (not the CIT-36) had held that liquidated damages received by them was a capital receipt. Before proceeding further we would like to refer the case of Saurashtra Cement Ltd.(supra). In that matter the assessee,who was engaged in the manufacturing of cement,had entered into an agreement with the supplier for the purchase of an additional cement plant.The agreement contained a condition that in the event of delay caused in the delivery of the machinery, the assessee was to be compensated at 5% of the price of the respective portion of the machinery, without proof of actual loss, but the total amount of damages was not to exceed 5% of the total price of the machinery.The supplier failed to supply the machinery within the stipulated time and the assessee received Rs.8,50,000/-from the supplier by way of liquidated damages. The assessed the amount in question in the hands of the assessee.In appeal,Tribunal held that the amount was a capital receipt.The High Court answered the reference in favour of the assessee. After deliberating upon the issue,the Hon’ble Supreme Court held as under:

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 [1959] 35 ITR 148 (SC), it was observed thus (page 152) : "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. Clark [1935] 3 ITR (Eng Cas) 17. That, however, is not to say that the question is one of fact, for, as observed in Davies (H. M. Inspector of Taxes) v. Shell Company of China Ltd. [1952] 22 ITR (Suppl) 1 '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. [1964] 53 ITR 261; AIR 1965 SC 65 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 [1959] 35 ITR 148 (SC) 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 (page 282) : "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 3

1166/M/13(09-10)- Amita R. Sheth 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 struc ture 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 agree ment is normally a capital receipt."

13.

We have considered the matter in the light of the aforenoted broad principle. It is clear from clause No. 6 of the agreement dated September 1, 1967, extracted above, that the liquidated damages were to be calculated at 0.5 per cent. 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 No. 6 thereof came into play. The aforestated 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 questions Nos. (i) and (ii) extracted in paragraph 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. 5.1.From the above,it is clear that if an assessee is in receipt of liquidated damages that is directly and intimately linked with a capital asset,same has to be treated as capital reciept.But,if the damage is received in the ordinary course of their business it has to be taxed as revenue receipt.In the case under consideration,the assessee was holding the shares as an investor and not as a trader.So,the compensation received by her due to non performance on part of the purchaser cannot be taxed under the head revenue receipt.Prolonged negotiations and final settlement on a later date cannot alter the nature of the receipt.We have gone through the orders of the FAA in the cases of the husband and father in law of the assessee.He has,in both the cases, relied upon the case of Saurashtra Cement Ltd. and has allowed the appeals filed by the assessees.He has passed a reasoned order.The AO.s in both the cases have filed appeals before the Tribunal.In the present case,we find that the FAA has not discussed anything.He has just reproduced the order of the AO and added one line to the order stating that he is convinced with the arguments advanced by the AO.We are unable to understand rational behind such an order.A reasoned order is primary pre-condition of any order-especially of appellate authorities.An order without reasons is no order at all.Appellate authorities are required to meet the arguments advanced before them during the course of hearing.In the matter before us,the FAA has not uttered a single word as to why the 4

1166/M/13(09-10)- Amita R. Sheth

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