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Taxation of Compensation Amount Received by Chevron Ltd Due to Furniture Damages

Question

Fine Furniture Supplies is in the business of leasing and selling Oasis Furniture imported from Sweden. In January 2012, Fine Furniture entered into a contract with Chevron Ltd, a furniture retailer, to supply Oasis furniture over a period of two years. The agreement provided for a fixed price on each various times sold within the two-year period, and also for a free warranty period of 18 months. 
Because of a change in tariff regulations in November 2012, the price of Oasis furniture increased by an average of 25%. As a result, Fine Furniture indicated that it wished to terminate the agreement with Chevron Ltd from 1 December 2012. The termination of the agreement forced Chevron to purchase furniture from another supplier at a higher price. 
Chevron began an action to sue Fine Furniture for damages of $700,000, being compensation for the increased cost of having to buy its furniture elsewhere. The action by Chevron was discontinued when Fine Furniture paid to Chevron $400,000 to settle the matter. 
Advise Chevron as to whether the amount received as compensation constitutes assessable income, and if so what type of assessable income it would be. 
If you think you need further information, explain what that information is and why it is needed. 

Summary

This question belongs to taxation law and discusses about a company’s received compensation constitutes assessable income or not.

Total word count: 1488

 

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