Capital gain

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This query is : Resolved

Ayushi Agarwal (Querist)

10 January 2013 An assesee had to PAY liquidated damages of Rs.100000 in respect of a CAPITAL asset on breach of a contract to sale. Now the assessee is selling the above said capital asset 4 years later to some other buyer. What would be the treatment of the Rs.100000 paid as damages? Whether it would be added to the COA or deducted from the sale consideration or no effect?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

10 January 2013 In my view, the damages paid for the breach of contract, neither make any change in the cost of the asset nor it can be termed as cost of improvement.
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Expenditure related with a capital asset is treated as a Capital expenditure and is not allowable against income.
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In CIT vs Saurashtra Cement Ltd (325 ITR 422) (SC) the Supreme Court has decided that -for the recipient- this was a capital receipt and as such did not become taxable.

Ayushi Agarwal

Ayushi Agarwal (Querist)

12 January 2013 ThankU Paras Sir....but when an amount is forfeited on account of cancellation of contract, it is deducted from the COA...though being a capital receipt...Kindly Clarify...

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

13 January 2013 In the later case, the amount received on forfeiture clearly reduces the carrying cost of the asset. That's why it is deducted from the cost of acquisition and indexation is allowed in respect of such reduced COA only. This has clearly been mentioned in the Law.
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However, in relation to the first case where damages are paid, in the absence of anything specifically prescribed, we have to go through by the computational provisions of Section 48.
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Ayushi Agarwal

Ayushi Agarwal (Querist)

15 January 2013 Thank You Sir.