Solatium

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Hi Mr Devarajan,

The rule is that compensation received for loss of profits is taxable, being revenue in nature. But compensation received for the loss of source of income or the profit-making apparatus itself won't be taxable, being capital receipt. The main consideration received against the compulsory acquisition of land of course would be taxable by virtue of the provisions of Section 45. Let's discuss whether Solatium—-amount paid over and above the basic monetary consideration as some sort of comfort or solace for having been made to part with one's income-yielding asset—-would be taxable. In CIT v. Shaw Wallace & Co. AIR 1932 PC 138, the Privy Council considered the nature of a certain sum paid by way of compensation or solatium for termination of its agency with two oil companies. The revenue taxed the same as income arising from profits and gains of business. The Privy Council held that once it is admitted that the sum was received, not for carrying on the business, but as some sort of solatium for its compulsory cessation, the receipt has to be regarded as capital receipt not chargeable to tax. The expression receipts `arising from business' must mean receipts arising from the carrying on of the business. The Privy Council specifically held further that even if the receipt had been taxed as income from other sources, its decision would not have changed.But now after the introduction of clause (va) in Section 28 by FA 2002, even compensation received for foregoing one's right to carry on business would be taxable. The above judgement has only academic weight. I quoted it just to put the issue in perspective. Capital receipts are of course exempt unless specifically taxable; revenue receipts are taxable unless specifically exempt. Capital receipts arising from transfer of capital assets are specifically taxable. So solatium, even if we treat it as capital receipt, would be taxable. It would've been taxable even if received in exchange for loss of a current asset in view of Section 28(va). The question is: Which head would it be taxed under--Capital Gains or Income from Other Sources? I think the meaning of "full value of consideration received as a result of transfer" used in Section 48 is wide enough to cover even solatium—-it doesn't matter whether or not it was mentioned when the negotiations for the transfer of land were taking place. Solatium certainly was received as "a result of transfer" of the capital asset. So in my view, solatium would form part of the Sale Consideration.
Thanks,
CA Sanjeev Bedi

--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Devarajan.V. " wrote:>> Whether solatium received in compulsory acquisition is taxable? If so, > whether it has to be treated as part of compensation amount received > towards the property or should it be taken as income from other > sources?> > CA Devarajan.V>