COMMISSIONER OF INCOME TAX, GUJARAT versus M/S. SAURASHTRA CEMENT LTD.

Citation: [2010] 8 S.C.R. 404 · Decided: 09-07-2010 · Supreme Court of India · Bench: D.K. JAIN · Disposal: Dismissed

Judgment (excerpt)

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[2010] 8 S.C.R. 404 
COMMISSIONER OF INCOME TAX, GUJARAT 
v. 
M/S. SAURASHTRA CEMENT LTD. 
(Civil Appeal No. 3702 of 2003) 
JULY 09, 2010 
[D.K. JAIN AND C.K. PRASAD, JJ.] 
Income Tax Act, 1961 - Liquidated damages received 
by assessee from supplier of the cement plant and machinery 
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on account of delay in supply of plant - Held: Is to be treated 
as capital receipt - The delay in procurement of capital asset 
i.e. the cement plant amounted to sterilization of the capital 
asset of the assessee -
The amount received by the 
assessee towards compensation for sterilization of the profit 
o earning source, being not in the ordinary course of their 
business, was a capital receipt in the hands of the assessee. 
The 
respondent-assessee was 
engaged 
in 
manufacture of cement. It entered into an agreement for 
purchase of additional cement plant. The supplier 
E defaulted and failed to supply the plant and machinery 
on the scheduled time and, therefore, as per the terms of 
agreement, the assessee received an amount from the 
supplier by way of liquidated damages. 
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In the instant appeal filed by Revenue, the question 
which arose for consideration was: "whether the 
liquidated damages received by the assessee from the 
supplier of the plant and machinery on account of delay 
in the supply of plant is a capital or a revenue receipt?". 
Dismissing the appeal, the Court 
HELD: It is clear from the agreement in question that 
the liquidated damages were to be calculated at 0.5% of 
404 
COMMISSIONER OF INCOME TAX,, GU_JA~AT, ".'· 
405 .. 
SAURASHTRA CEMENT LTD. 
the price of the respective m~chin~ry ~nd equi~rrient for A 
each month of delay in delivery completion, without proof 
of the actual damages the assessee would have suffered 
on account of the delay. The delay in supply could be-.of 
the whole plant or a part thereof but the determination of 
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damages-was not based upon the calculation made in B 
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respect of loss of profit on account of supply. of a 
particular part of the plant. It is evident that the d~mage 
to tne assessee was directly and intimately linked with the 
procurement of a capital asset i.e. tt:ie 'cement plant, which 
would obviously lead to delay in.coming into existence c 
of the profit making apparatus, rather than a receipt in .the 
course of profit earning process. The delay in 
procurement of capital asset amounted to sterilization of 
the capital asset of the assessee as the supplier had failed 
to' suppl'y the .. plant within' time as stipula.ted iri 'the 
agr~emeiit. T~e amou~t 'received_ by the ;a'ssesse·e; D 
towards compensation· fo~ sterilization' of the 'profit 
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earning source, being not in the ordinary course of their, 
business, was a capital receipt 'i·n the hands of the. 
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assessee. [Para 13] [412_7A-EJ 
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- ' Com.missioner of Income Tax, Nagpur v. Rai Bahadur· 
Jairam Valji and Others (1959) ·35 ITR 148 (SC) and 
Kettlewell B.ullen and .. Co .. Uc(_ ~;,-,~ommissioner of Income-
Tax, Calcutta AIR .1965 SC 65, relied on. 
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C.I. T, Gujarat v_ Mis Elecon Engineering Co. 'Ltd. (1987) 
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4 sec 530 and E.f.D.' Parry Ltd. v.'Commissioner of Income 
T.a.~ (1998) 233 ITR 335 (Ma.dl.rreferred .to. 
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Case Law· Reference: · · 
. (1987) 4 sec 530 . 
1, "· (195~).35 ITR ~,48 (SC) 
AIR 1965 SC 65 
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referred to 
r~li_~d on, 
relied on , . -
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Para 2 
. Para 5 
Para 5 
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406 
SUPREME COURT REPORTS 
[2010] 8 S.C.R. 
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(1998) 233 ITR 335 (Mad) referred to 
Para 9 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 
3702 of 2003. 
From the Judgment and Order dated 27.06.2001 of the 
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High Court of Gujarat at Ahmedabad in Income Tax Reference 
No. 44 of 1986. 
R.P. Bhatt, H.R. Rao, B.V. Balaram Das for the Appellant. 
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Bhargava V. Desai, Rahul Gupta and Nikhil Sharma for the 
Respondent. 
The Judgment of the Court was delivered by 
D.K. JAIN, J. 1. This appeal, by special leave, at the 
D 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.44of1986. 
By the impugned judgment, the High Court has answered the 
following questio

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