This concept arises from a non-tax case, that of British Transport Commission v Gourley (1955) HL 1955; 34 ATC 305 ;  AC 185 ;  3 All ER 796. In simple terms, the principle is that taxation should be taken into account when determining the level of compensation due to an individual. It follows that the recipient of compensation should be put back into the financial position which they would have been in if the contract had not been broken. They should not be made better or worse off from a payment of compensation than they would have been if the contract had been honoured.
The following example, slightly adapted from EIM13995, provides a useful illustration of the principles: