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exciting query

som kansal (chartered accountant) (307 Points)

26 February 2008

hi there
as per the IT Act, any amount paid as compensation on breach of any agreement is allowed to be deducted from the PGBP
my ques. is whether this amount of compensation is taxable for the person who receives such compensation.
is it a capital receipt having no tax treatment under the IT Act or it is taxable under PGBP or Income From Other Sources.

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9 Replies

Rahul (CA Practice ) (1818 Points)
Replied 27 February 2008

in my view it is a revenue reciept taxable under PGBP. Lets wait for other replies.

M.Sriram Shenoy (CA Final) (814 Points)
Replied 27 February 2008

Mr.Som Kansal Ji, it is taxable as business receipts in the hands of the receiver.The main objective of absolving an expenditure from disallowance in the hands of the remitter is to tax it in the hands of the recipient. And where were you all these days Mr.Som Kansal ji. I was missing you.........

Rakesh (Asst Manager) (209 Points)
Replied 27 February 2008

its revenue receipt and taxable in the hands of Receiptent

kaushal (w) (545 Points)
Replied 27 February 2008

ask experts

RITESH KHANDELWAL (Corporate Taxation) (168 Points)
Replied 27 February 2008

Hey I disagree to Mr. Sriram, Actually the compensation which the redeiver is to get on the breach must br included in " Income from other source", How can it be PGBP?? . .Plz xpalin, in case m wrong.......

L Sridhar (CA) (23 Points)
Replied 28 February 2008

it is not income since a breach of covenants of the agreement has taken place. Hence a capital reecipt.

(Guest)

compensation received on breach of any agreement whether it is revenue receipt or capital receipt depends upon whether it is compensation for injury inflicted on a capital asset or on stock in trade . Please refer to sighania 's book in the chapter of BASic concept u will get the answer clearly.in my views if in the ordinary course of the business , it is revenue recipts.thanks

pushpendra (Director- FinMAT Consultants) (1703 Points)
Replied 09 March 2008

It's depend. but in most of the cases it will be capital receipt. like there is a contract of sale of property and purchaser breach the contract and pay the conpensation in the form of forfit of Earneast money. then it will be capital receipt but when seller sell this property leter on then this receipt will be deduct from the cost of purchase at the time of sale.

(Guest)

pushpender . it depends upon facts and circumstances of each case, not most of the case when u go according to law. u have to apply the sactions and when the case is decided in apeal they see whether it is question of law or fact not follow majority. thanks