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Dt-compensation

29 August 2011

A partnership firm pays100000 as compensation to the supplier for the termination of contract which was capital in nature..

plz help me with the treatment of this 100000 in the hands of partnership firm and the recipient..

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5 Replies

praveen (Chartered Accountant) (6971 Points)
Replied 29 August 2011

The payment is done in relation to business hence, it is an allowable expenditure for the firm.

In the hands of the recepient it is taxable as business income only.

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CA Vineet Gupta (CA) (37 Points)
Replied 29 August 2011

thanks a lot for the reply but this is incorrect..it is not allowed as revenue expenditure as it will b treated as capital expenditure for the firm as breach of contract is for a capital asset (supreme court in case of swadeshi cotton mills co. ltd. vs cit(1967)63 ITR 65)..Actually i dont understand that even if the expenditure is disallowed for the firm,it will be taxable for the receipient under PGBP as it has an immediate nexus to his business..so the said rs. 100000 is getting taxed both in hands of firm and the receipient..so it is getting taxed twice..i know i am wrong somewhere but cannot figure it out..plz help..

CA Vineet Gupta (CA) (37 Points)
Replied 29 August 2011

i m sorry Mr. Praveen i forgot to mention that the contract was of capital nature..

praveen (Chartered Accountant) (6971 Points)
Replied 29 August 2011

Originally posted by : Vineet Gupta
	i m sorry Mr. Praveen i forgot to mention that the contract was of capital nature..

Thats OK as long as we are getting to the right answer. RIGHT!!!

See i think the the conclusion what you have come to is fully correct and there should be no confusion. Whether it is getting taxed twice or not is not the question. This is how the law operates.