Law:

Section:

Section 5 of the Income-tax Act, 1961 [corresponding to section 4 of the Indian Income-tax Act, 1922] - Income - Capital or revenue receipt - During relevant accounting year assessee shipped certain cloth to a consignee abroad; which was landed at Durban - At that time export to Durban was prohibited by Government and a result of said landing, assessee's licence for exporting goods was suspended - Assessee claimed damages from consignee for its negligence to unload shipment at Durban - On reference to arbitration, assessee received certain damages - Whether since licence of assessee was suspended, assessee had no trading opportunities at all and he could not carry on any trade and there was no scope for assessee to trade or to earn any profits, it could not be said that that compensation was paid for reimbursement of trading profit - Held, yes - Whether , therefore, amount of damages received by assessee was not revenue receipt and was not assessable in hands of assessee - Held, yes FACTS During the relevant accounting year, the assessee shipped certain cloth to a consignee abroad. The consignment was made contrary to the directions of the Indian Government. As a result, the assessee's licence for exporting goods was suspended. The assessee claimed that due to the negligence of the consignee the consignment was unloaded at a prohibited place. He, thus, claimed damages from him and the matter was referred to arbitration and the assessee received certain amount as damages. The taxing department contended that this was a revenue receipt liable to be taxed and the Tribunal held that it was not. On reference : HELD The mere fact that the measure adopted was the loss of profit caused to the assessee by reason of the loss or destruction of the capital asset did not make the payment a trading receipt and not a capital receipt. The licence which alone enabled the assessee to carry on the business which would yield income was undoubtedly a capital asset and that capital asset was either destroyed or sterilized and what was paid to the assessee was compensation for the destruction or sterilization of this capital asset. It was not possible for the assessee to trade or to…

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