IMPORTNAT POINT
Liquidated damage for delay in supply of machinery and equipment is capital receipt.

JUDGMENT

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., Gujarat Vs. M/s Elecon Engineering Co. Ltd.1 (1987) 4 SCC 530. 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 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.

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