Question

Salmon Co manufactured custom-made fishing boats that were guaranteed to withstand the harsh open seas. They manufactured only 1 boat at a time, and each boat took 18 months each to build. An 18-month contract with one of Salmon Co’s clients was canceled in December 2018 with 14-months to run. Salmon Co received $400,000 as compensation for the loss of the contract. Salmon Co had no other income and no orders to manufacture another custom-made fishing boat. They were anticipating winding up their company and filing for bankruptcy if they received no orders to commence manufacturing a custom-made fishing boat by June 2019.

REQUIRED

Advise Salmon Co whether the $400,000 compensation is taxable.

NOTE: You must justify your answers by referring to relevant case law and legislation.

Salmon Co manufactured custom-made fishing boats that were guaranteed to withstand the harsh open seas. They manufactured only 1 boat at a time, and each boat took 18 months each to build. An 18-month contract with one of Salmon Co’s clients was cancelled in December 2018 with 14-months to run. Salmon Co received $400,000 as compensation for the loss of the contract. Salmon Co had no other income and no orders to manufacture another custom-made fishing boat. They were anticipating winding up their company and filing for bankruptcy if they received no orders to commence manufacturing a custom-made fishing boat by June 2019.

REQUIRED

Advise Salmon Co whether the $400,000 compensation is taxable.

NOTE: You must justify your answers by referring to relevant case law and legislation.

Answer 1

Salmon Co

In the present there are various thought of school that whether the compensation received due to breach of contract is taxable or not. But the same taxable with reference to the modification made by finance act,2018 in section 28 of income tax act,1961.

As per clause (i)(e) of section 28 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’.

So with reference to above it is clear that the said compensation of $400,000 is taxable under the head Income from Business and profession.