Commissioner of Income Tax vs Ashoka Marketing Ltd.

M.G. Mukherji, J.—The two questions that arise for decision are :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 1 lakh received by the assessee as damages from New Central Jute Mills Ltd. for non-performance of the agreement is neither a revenue receipt nor a short-term capital gain ?

Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that a sum of Rs. 1 lakh received by the assessee as damages for non-performance of the agreement was a capital receipt not liable to capital gains tax ?"

It is the contention of the Revenue that the sum of Rs. 1 lakh which was received out of a contract by way of liquidated damages was in the nature of a business transaction and it was thus a revenue receipt. It was agreed in the agreement itself that if the transaction could not be completed because of any fault on the part of the vendor, a specified amount of liquidated damages to the tune of Rs. 1 lakh is to be paid to the intending purchaser.

It may be recalled that on the failure on the part of the vendor to complete the agreement, because of the title not being marketable and there having been a prior mortgage with the Uttar Pradesh Government, it was not possible on the part of the assessee to purchase the property. For this transaction, the assessee did not have to part with any money or any stock-in-trade. There was no cost involved in the acquisition of the sum of Rs. 1 lakh. Hence, it could not be deemed to be a capital gain at all. The liability of an assessee could arise only if there would have been a transfer of a capital asset and since there was no element of cost in the acquisition of Rs. 1 lakh, it could not answer the description of either a capital gain or a revenue receipt.

We have scrutinised the facts as also the reasonings as given by the Tribunal. We are in accord with the findings of the Tribunal that the amount of Rs. 1 lakh is not in the nature of a capital gain or in the nature of a revenue receipt. There is no transfer in relation to a capital asset within the meaning of Section 2(47) of the Income Tax Act, 1961 and the amount of Rs. 1 lakh also does not conform to the concept of a capital asset.

We, therefore, answer the first question in the affirmative and in favour of the assessee and against the Revenue. As regards the second question, we answer the same in the negative and in favour of the assessee and against the Revenue.

There will be no order as to costs.

Satish Chandra, C.J.

I agree.