Compensation Received would be Capital in nature if Cost of Project gone down

Tata Advanced Systems Limited Vs ACIT (ITAT Mumbai)

Conclusion:  In present facts of the case, the Hon’ble Tribunal by relying on the previous Judgments of the Tribunal in assessee’s own case for previous Assessment Years held that the compensation so received by the assessee company would only go to reduce the cost of project as it is effectively meant to cover up for the expenses and investments incurred by the assessee for the said project. Hence, the receipt of compensation would be capital in nature and would go to reduce the cost of project.

Facts: The issue to be decided in this appeal was with regard to taxability of compensation received by the assessee company during the Asst Year 2013-14 amounting to Rs 7,34,25,476/- towards interest cost; Rs 11,46,651/- towards insurance cost and Rs 10,15,04,000/- towards cost of modification and validation of the assets , warranty, restating etc.

The Hon’ble Tribunal observed that the assessee company had entered into the agreement for production of the floor beams for Dreamliner project. Due to the delay, the interest and insurance cost connected to the production of capital assets of assessee was affected and cost meter related to it was continuously increasing beyond the expected budgets. Due to this reason, compensation was paid to the assessee for interest and insurance cost incurred by the assessee and to offset the extra cost incurred by the assessee for the project. The said compensation was credited to profit and loss account in the books of accounts. However, for the purpose of income tax, the same was reduced from the total income being capital receipt not chargeable to tax. The delay in project was due to further change in specifications due to which the project was further delayed because of which compensation was paid to the assessee.

The Hon’ble Tribunal observed that the very same issue came up for consideration before this Tribunal in assessee’s own case for the Asst Years 2010-11, 2011-12 and 2012-13 and this Tribunal vide its order dated 27.10.2021 had adjudicated the same and held that the compensation received by the assessee would go to reduce the cost of project of the assessee company. In the said previous Tribunal order, it was observed as under:

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