Liquidated damages

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Mohit Bhandari (Querist)

14 April 2015 respected members, what is the treatment of liquidated damages received in connection with capital asset? that is whether explanation 10 to section 43(1) applicable or not? that is whether it would reduce the actual cost of asset or not? thanks in advance

CA.Sourabh Sethia

CA.Sourabh Sethia (Expert)

14 April 2015 No need to refer explanation 10

Section 43 (1) states that actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.

explanation 10 is about subsidy or grants

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Mohit Bhandari

Mohit Bhandari (Querist)

14 April 2015 Thanks alot sir,
So it would mean that the liquidated damages received are,
(1) Neither taxable as revenue item,
(2) Nor to be deducted from the actual cost of asset for the purpose of depreciation u/s 32.

That is it has no treatment in income tax.

Correct me if I am wrong. Thanks in advance.

CA Mohit Bansal

CA Mohit Bansal (Expert)

14 April 2015 Liquidated damages are to be taxable under the head other incomes in the P&L.

CA.Sourabh Sethia

CA.Sourabh Sethia (Expert)

14 April 2015 Liquidated Damages are not taxable as revenue items they are treated as capital receipts and are not taxable.

However they same should be deducted from the actual cost if the same was met before the asset was put to use as the same is met by other person

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