Damages not capital receipts: SC

The Supreme Court has held that liquidated damages received by a company for breach of a contract are revenue receipts and not capital receipts, and hence not taxable. Whether a particular receipt is classified capital or revenue has been settled by the apex court. The issue had come up frequently before the courts but it had not been possible to lay down any single criterion for deciding on the question. Time and again, it had been reiterated by the courts that the answer to this question must ultimately depend on the facts of the case.

While calculating the net income of a person, only expenses of revenue are allowed to be deducted from revenue receipts as these arise out of business transactions. Whereas capital receipts are non-business income that arise independently and are treated as capital gain. Dismissing the Commissioner of Income Tax?s appeal against Saurashtra Cement Ltd, the apex court observed that ?compensation paid for delay in procurement of capital asset amounted to sterilisation 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?. It said that the damages to the assessee were directly and intimately linked with the procurement of a capital asset, that is the cement plant. This would obviously lead to a delay in coming into existence of the profit-making apparatus rather than a receipt, in the course of profit-earning process. While holding so, it has relied on its judgements in CIT vs Rai Bahadur Jairam Valji and others, where the broad principle on the issue was laid down.

Saurashtra Cement had entered into an agreement with Mumbai-based Walchandnagar Industries Ltd in 1967 for purchase of an additional cement plant for Rs 1.70 crore. As the supplier failed to deliver the machinery, the cement firm received Rs 8.50 lakh as damages. During the course of the assessment proceedings, the department included the amount in the assessee?s total income and rejected its claim that the amount received by it as damages was capital and not a revenue receipt.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) without success. Both the tribunal and the Gujarat High Court had ruled against the Revenue. Senior counsel RP Bhatt, appearing for Revenue, submitted that the damages received as compensation for loss of profit is in the nature of a revenue receipt. Opposing the Revenue?s contention, counsel Bhargav V Desai, on behalf of the cement company, argued that damages for the delay in delivery and installation of the plant had direct nexus with the capital asset and thus was in the nature of a capital receipt.

APERC asked to rework tariff for discoms

The electricity regulatory commissions are vested with the powers to fix tariffs, the Supreme Court has held. It has set aside the Appellate Tribunal for Electricity?s (Aptel) order of June 2, 2006, that ruled that Andhra Pradesh Electricity Regulatory Commission (APERC) had no power or jurisdiction to fix the tariffs for non-conventional energy produced by private ?green? companies.

The court while deciding a batch of petitions filed by APERC, Transmission Corporation of AP, Central Power Distribution Company of AP and Eastern Power Distribution Company of AP held that the Commission had the jurisdiction to determine tariff ?which takes within its ambit the ?purchase price? for procurement of the electricity generated by the non-conventional energy developers/ generators?. ?The functions assigned to the regulatory commission are wide enough to specifically impose an obligation on the regulatory commission to determine the tariff. The specialised performance of functions that are assigned to regulatory commission can hardly be assumed by any other authority?, it said.

The apex court, however, remanded the matter to APERC to examine the issue of whether the private power developers could be permitted to sell the electricity to third parties other than the state-owned utilities. The power developers had moved Aptel challenging APERC?s initiation of suo motu proceedings for determination of tariff applicable to the non-conventional energy generation projects in the state. It had fixed the energy purchase rates at base unit price of Rs 2.25 as on April 1, 1994, and the escalation index of 5% per year, but the escalation would be simple and not to be compounded every year. The base price as on April 1, 2004, was fixed at Rs 3.37 per kwh.

Insurance companies to pay more for road deaths: SC

The Supreme Court has ruled that only the income tax component can be deducted from a motor accident victim?s salary to arrive at his net income for calculating compensation from insurers.

While delivering a judgement in such a claim dispute, the Supreme Court has held: ?While ascertaining the income of the deceased, any deductions shown in the salary certificate as deductions towards GPF, life insurance premium, repayment of loans etc should not be excluded from the income.? Till now, insurance companies used to reduce the victim?s ?income? by making deductions on various accounts to arrive at a compensation amount.

Applying the new rule for computation of income of the deceased, the court ordered an increase in the compensation from Rs 14.6 lakh to Rs 19.7 lakh to the kin of a 36-year-old police sub-inspector, who was killed in an motor accident in 1990. The Motor Accident Claims Tribunal had calculated the victims income at Rs 9,489 after taking into account various deductions from a gross salary of Rs 13,794 and had directed the insurer to pay a compensation of Rs 14.4 lakh with simple interest at 9% per annum from the date of filing of the claim petition till realisation. However, the Delhi High Court had enhanced the claim by Rs 32,000 but reduced the interest payable on the compensation amount to 6% after taking note of various factors, including the recommendations of the Fifth Pay Commission and his annual increments.