1986 (11) TMI 27 - HC - Income Tax

Issues Involved:
1. Whether the sum of Rs. 7,402 received by the assessee from the firm, M/s. K. S. Aiyar & Co., Bombay, was exempt from income-tax.
2. Nature of the payment received by the assessee - whether it was capital in nature or revenue income.

Detailed Analysis:

Issue 1: Exemption of Rs. 7,402 from Income-tax
The core issue referred to the High Court was whether the sum of Rs. 7,402 received by the assessee from the firm, M/s. K. S. Aiyar & Co., Bombay, was exempt from income-tax. The Tribunal had previously ruled that the amount was not taxable in the hands of the recipient, relying on the precedent set by the Supreme Court in P. H. Divecha v. CIT [1963] 48 ITR 222. The Tribunal's decision was influenced by the nature of the payment, which was deemed not to be income but a capital receipt. The High Court upheld this view, concluding that the payment was indeed of a capital nature and thus exempt from income-tax.

Issue 2: Nature of the Payment
The Tribunal and the High Court examined whether the payment was a capital receipt or revenue income. The partnership deed stipulated that if a partner died without introducing a new partner, the firm would pay 15% of its net income to the deceased partner's children for 15 years. The Tribunal found that this payment was in lieu of the right to nominate a partner, which was a capital right. This view was supported by the Supreme Court's decision in P. H. Divecha v. CIT, which emphasized that the nature and quality of the payment, rather than its periodicity, determined whether it was capital or income. The High Court agreed, noting that the payment was not related to any business done or loss of profits, nor was it compensation for services rendered. Thus, it was a capital payment, not taxable as income.

Supporting Judgments and Principles:
1. P. H. Divecha v. CIT [1963] 48 ITR 222 (SC): The Supreme Court held that the nature of the payment, its connection to the source, and the reason for the payment must be considered. Payments not related to business profits or services rendered are capital in nature.
2. IRC v. Pyman [1937] 21 TC 129 (KB): Payments calculated based on profits but made for capital rights are capital receipts.
3. A. K. Sharfuddin v. CIT [1960] 39 ITR 333 (Mad): Compensation for relinquishing partnership rights is capital, not revenue income.
4. S. Kuppuswami v. CIT [1954] 25 ITR 349 (Mad): Payments for acquiring goodwill are capital expenditures, not revenue.

The High Court concluded that the payment to the assessee was capital in nature, as it was compensation for the loss of a capital asset (the right to nominate a partner). This conclusion was consistent with the principles laid down in the aforementioned cases.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the sum of Rs. 7,402 received by the assessee was of a capital nature and exempt from income-tax. The question referred was answered in the affirmative, supporting the view that the payment did not constitute taxable income.

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