(C) Matter referred by Monika Steel Balls: Monika Steel Balls manufacturing Steel Balls had ordered advanced technology machine to Punjab Machine Tools Ltd and paid an advance of ₹5 lacs. The machine was to be supplied b

The issue under consideration in this case is whether the liquidated damages received by the company from the supplier of machinery for delay in supply of machinery is revenue in nature or capital in nature. On this issue, the Apex Court, in the case of CIT vs. Saurashtra Cement Ltd. (2010) 325 ITR 422, held that such liquidated damages were directly and intimately linked with the procurement of a capital asset which lead to delay in coming into existence of the profit making apparatus. It was thus not a receipt in the course of profit earning process. Therefore, the amount received by the company towards compensation for sterilization of the profit earning source, not in the ordinary course of business, is a capital receipt in the hands of the company. Applying the rationale of the Apex Court ruling in this case, the income by way of liquidated damages of ₹3 lakh received by Monika Steel Balls from the supplier of machinery Punjab Machine tools Ltd is a capital receipt. Note: As per Amendment by Finance Act 2018 in section 28(ii), a New clause (e) has been inserted which says that any compensation or other payment due to or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business, shall be treated as business Income.