1984 (7) TMI 43 - HC - Income Tax

Summary

Issues Involved:
1. Whether the lease agreement was entered into by the assessee in the course of its regular business.
2. Whether the sum of Rs. 40,000 being the security deposit forfeited is a capital receipt or revenue receipt.

Summary:

Issue 1: Lease Agreement in Regular Business
The court concluded that the lease agreement dated August 25, 1968, was entered into by the assessee-firm in the course of its business of exhibiting cinema films. The authorities consistently treated the lease of the cinema hall as part of the assessee's business, and the income from this lease was assessed under the head "Business."

Issue 2: Nature of Forfeited Security Deposit
The primary question was whether the forfeited security deposit of Rs. 40,000 was a capital receipt or a revenue receipt. The court examined various precedents and principles, noting that the distinction between capital and revenue receipts depends on the facts of each case. The court observed that compensation for the cancellation of a contract that does not affect the trading structure of the business or the source of income is generally considered a revenue receipt. Conversely, if the cancellation impairs the trading structure or the source of income, the compensation is typically a capital receipt.

The court found that the capital asset producing the income was the cinema hall itself, not the lease agreement. The agreement was merely a means to manage the cinema hall, which continued to exist and produce income even after the termination of the lease. Therefore, the forfeiture of the security deposit did not result in the destruction of the source of income or the profit-making apparatus.

The court referred to several decisions, including the Supreme Court's ruling in CIT & EPT v. South India Pictures Ltd., which held that compensation received in the ordinary course of business to adjust relations between parties is income liable to be taxed. Applying this principle, the court held that the forfeited security deposit of Rs. 40,000 was a revenue receipt and thus taxable.

Conclusion:
The court answered the question in the affirmative, in favor of the Revenue and against the assessee, holding that the forfeited security deposit of Rs. 40,000 represented income liable to be taxed under the head "Business." The court also rejected the oral application for leave to appeal to the Supreme Court, stating that the principle was well settled.