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Principal Commissioner Of Income Tax-(C)-2 Vs. M/s Aeren R Infrstructure Ltd.
May, 07th 2018
$~5 & 6

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

                                    Date of decision: 25th April, 2018

+      ITA 235/2017
+      ITA 236/2017
       PRINCIPAL COMMISSIONER OF INCOME TAX-(C)-2
                                               ..... Appellant
                           Through        Mr.Sanjay Kumar and Mr.Rahul
                                          Chaudhary, Standing Counsels.

                           versus

       M/S AEREN R INFRSTRUCTURE LTD.           ..... Respondent
                     Through Mr.Inder Paul Bansal and Mr.Vivek
                             Bansal, Advocates.

       CORAM:
       HON'BLE MR. JUSTICE S. RAVINDRA BHAT
       HON'BLE MR. JUSTICE VINOD GOEL

       MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)

       1       Revenue's appeals in these two cases question an order of the
       ITAT.         The issue concerns the treatment of damages and
       compensation awarded to the assessee. The Assessment Officer (AO)
       rejected the assessee's claim that these were towards capital receipts
       and ruled that they have fallen in the revenue stream. The CIT(A)
       rejected the assessee's appeal.









ITA 235/2017 & 236/2017                                                  Page 1 of 7
       2       The facts are that the assessee engages itself in the business of
       real estate and had entered into a consortium agreement with its
       associates which defines the role, rights and responsibilities. This
       consortium entered into an agreement to sell with one JMA Buildcom
       Private Limited for purchase of 10 acres of land for a consideration of
       Rs.15 crores. The seller JMA Buildcom defaulted in its commitment
       within the prescribed and extended time limit.         Ultimately, upon
       parties resorting to the Dispute Settlement Arbitration; a settlement
       was arrived at and an award was made based upon the parties'
       eventual settlement. The amount received by the assessee as a part of
       its entitlement (as consortium) was credited in its books of accounts as
       a capital stream. The AO and the CIT(A) held that the amounts were
       revenue in nature as the land would have been part of the stock-in-
       trade. The ITAT in its judgment after noticing the Supreme Court's
       judgment in Universal Radiators Vs. Commissioner of Income Tax
       [1993] 201 ITR 800(SC) held that in the facts of this case, the amount
       which was intended to be ultimately used as stock-in-trade purposes
       were immobile and sterilised, hence rendered non-offerable and
       therefore when received, as part of the arbitration award, fell into the
       capital stream. The relevant discussion in the impugned order of the
       ITAT is as follows:-

               "It was damaged for non-performance of the contractual
               obligation by the AIK. It was contended that the
               authorities below while deciding the issue against the
               assessee have not appreciated the injury caused to the
               profit making apparatus and that the knowhow was
               foundation of the business of the assessee. Appreciating


ITA 235/2017 & 236/2017                                              Page 2 of 7
               the same, huge compensation was awarded by the
               arbitrator. The basis of award remained the lost profit
               due to non-supply of the knowhow and not on loss of
               profit and that newly installed machinery in absence of
               supply of knowhow have gone completely wasted.
               Reliance was placed on several decisions. After dealing
               with the issue in detail, the ITAT has decided the issue in
               favour of the assessee. When we examine the facts of the
               present case in view of the above cited decisions of Pune
               Bench of the ITAT, we find that in the present case
               before us also the injury was caused to the profit making
               apparatus as the land which was profit making apparatus
               for the assessee was not supplied by JMA Buildcom (P)
               Ltd. as per the agreement entered into between the
               assessee and associates, and JMA Buildcom (P) Ltd.
               Appreciating the same, compensation was awarded in the
               arbitration proceedings initiated against JMA Buildcom
               (P) Ltd. In other words, the basis of award remained the
               lost profit due to non-supply of the land i.e. profit making
               apparatus and not on loss of profit. We thus find that the
               only inference can be drawn is that the compensation
               received by way of reward due to non-supply of land by
               JMA Buildcom (P) Ltd. under the agreement was capital
               receipt. We hold as such. The ground No.2 is
               accordingly allowed. In view of this finding, the
               remaining grounds 5,6 7 and 9 have become academic
               only and these grounds are accordingly disposed off."



       3       The judgment in Universal Radiators (supra) pertinently
       examines both situations first, where a direct link exists between the
       products or the ultimate purpose which the assessee intends to put the




ITA 235/2017 & 236/2017                                                Page 3 of 7
       equivalent and second, expanding the amounts and what is the
       eventual income on one hand, and on the other hand, conclusions on
       the stock-in-trade as well. The relevant observations are extracted as
       follows:

               "The assessee carried on business of manufacturing
               radiators and not ingots. They were imported to be
               converted into strips and sheets at Bombay. The link
               which could create direct relationship between the
               finished goods and raw material was snapped even before
               it reached Bombay. Payment made for loss of such goods
               did not bear any nexus with assessee's business. May be
               that if it would have reached, it could have been after
               conversion into strips and sheets used as raw material.
               But so long as it did not reach Bombay and was not
               converted into raw material, the connection it bore with
               the assessee's business was remote. And any payment
               made in respect of it could not be said to accrue from
               business. In Strong & Co. of Ramsey Ltd. v. Woodifield
               (Surveyor of Taxes) 5 TC 215, a converse case where the
               assessee claimed deduction of certain payments made to
               a customer, for the injury caused to him by falling off a
               chimney due to the assessee's servant's negligence,
               ...................."

               ..................

               8. Even assuming it was stock-in-trade, it was held by
               this Court in Canara Bank Ltd.'s case (supra) that stock-
               in-trade, if it gets blocked and sterilised and no trading
               activity could be carried with it, then it ceased to be
               stock-in-trade, and any devaluation surplus arising on
               such capital due to exchange rate would be capital and
               not revenue. Applying the ratio of this case, the copper







ITA 235/2017 & 236/2017                                              Page 4 of 7
               ingots, which even if assumed to be stock-in-trade, were
               blocked and sterilised due to hostilities between India and
               Pakistan, and, therefore, it ceased to be stock-in-trade
               and any surplus arising due to exchange ratio in the
               circumstances was capital receipt only."



       4       Similar observations were made by the Supreme Court in
       Commissioner of Income Tax vs. Bombay Burmah Trading Corpn.
       [1986] 161 ITR 386 (SC); in an earlier point of time; are extracted as
       follows:-

               "It is, therefore, necessary as mentioned hereinbefore to
               examine whether the acquisition of forest [leases by
               assessee were acquisitions of capital assets. Though, we
               will refer to some of the decisions to which our attention
               was drawn and which were referred to by the High Court,
               it is well to bear in mind the basic principles. These are;
               if there was any capital asset, and if there was any
               payment made for the acquisition of that capital asset,
               such payment would amount to a capital payment in the
               hands of the payee. Secondly, if any payment was made
               for sterilization of the very source of profit-making
               apparatus of the assessee, or a capital asset, then that
               would also amount to a capital receipt in the hands of the
               recipient. On the other hand if forest leases were merely
               stock-in-trade and payments were made for taking over
               the stock-in-trade, then no question of capital receipt
               comes. The sum would represent payments of revenue
               nature or trading receipts. Whether in a particular case,
               for the contracts of the type with which we are concerned,
               payments were capital receipts or not would depend upon
               the facts and circumstances of the case.            In this


ITA 235/2017 & 236/2017                                               Page 5 of 7
               connection it is important to bear in mind that normally
               in trade there are two types of capital, one circulating
               capital and the other fixed capital. Fixed capital is what
               the owner turns to profit by keeping it in his own
               possession; circulating capital is what he makes profit by
               parting with it and letting it change hands. Therefore,
               circulating capital is capital which is turned over and in
               the process being turned over, yields profits or loss. It is
               well settled as the high Court observed in the judgment
               under appeal that what is capital assets in the hands of
               one person may be trading assets in the hands of the
               other. The determining factor is the nature of the trade
               in which the asset was employed. Compensation received
               for immobilisation, sterilization, destruction or loss, total
               or partial of a capital asset would be capital receipt. If a
               sum represented profit in a new form then that was
               income but where the agreement related to the structure
               of assessee's profit-making apparatus and affect the
               conduct of the business, the sums received for
               cancellation or variation of such agreement would be a
               capital receipt."



       5       In the present case too, the purpose of the ultimate use of the
       assessee's land when acquired was rendered irrelevant on account of
       the seller/JMA Buildcom Private Ltd defaulting in its commitment.
       This rendered the amount expanded by the assessee immobile. The
       eventual receipt of the amounts determined as compensation/damages,
       therefore, clearly fell into the capital stream and not revenue as was
       contended by the Revenue/appellant in this case.




ITA 235/2017 & 236/2017                                                 Page 6 of 7
       6       In the circumstances, no question of law arises because the
       findings of the ITAT are well reasoned and based upon appreciation
       on the point of law.

       7       The appeals are consequently dismissed.




                                                   S. RAVINDRA BHAT, J




                                                         VINOD GOEL, J

APRIL 25, 2018
ndn




ITA 235/2017 & 236/2017                                          Page 7 of 7

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