2007 (10) TMI 59 - HC - Income Tax

Capital or Revenue receipt - Tribunal in his order considered the compensation received by assessee as revenue receipt on the ground that the compensation received for the business loss not for permanent cessation of business and taxable accordingly - HC upheld the order of tribunal

Summary

Issues Involved:
1. Classification of the sum received by the Assessee as a capital receipt or a revenue receipt.
2. Taxability of the sum of Rs.3,24,000/- in the Assessment Year 1975-76.
3. Taxability of the sum of Rs.1,24,000/- in the Assessment Year 1975-76.
4. Taxability of the sum of Rs.40,000/- in the Assessment Year 1980-81.

Issue-wise Detailed Analysis:

1. Classification of the Sum Received by the Assessee as a Capital Receipt or a Revenue Receipt:
The primary issue was whether the sum of Rs.3,24,000/- received by the Assessee should be treated as a capital receipt or a revenue receipt for the purposes of the Income Tax Act, 1961. The court examined various precedents, including the Privy Council decision in *Commissioner of Income-tax v. Shaw Wallace and Company* and the Supreme Court decisions in *Commissioner of Income Tax v. South India Pictures Ltd.* and *Commissioner of Income Tax v. Shamsher Printing Press*. The court noted that the critical test for determining the nature of the receipt was whether there was a complete cessation of the Assessee's business or a radical alteration in its profit-making apparatus. In the present case, the court found that the Assessee continued to exhibit films in other cinema halls, indicating no complete cessation of business. Therefore, the sum received was classified as a revenue receipt.

2. Taxability of the Sum of Rs.3,24,000/- in the Assessment Year 1975-76:
The Revenue contended that the entire sum of Rs.3,24,000/- should be taxed in the Assessment Year 1975-76 on an accrual basis, as per the mercantile system of accounting followed by the Assessee. The court, however, noted that the correspondence between the landlord and the Assessee specified that Rs.1,24,000/- was paid towards business loss, with the remaining Rs.2,00,000/- to be paid in five equal installments in subsequent years. The court concluded that taxing the entire sum in the Assessment Year 1975-76 would result in double taxation, as the Assessee had already offered Rs.40,000/- for tax in each of the subsequent years. Thus, only Rs.1,24,000/- was taxable in the Assessment Year 1975-76.

3. Taxability of the Sum of Rs.1,24,000/- in the Assessment Year 1975-76:
The court affirmed that the sum of Rs.1,24,000/- received by the Assessee in the Assessment Year 1975-76 was a revenue receipt and not a capital receipt. This amount was paid as compensation for business loss due to the termination of the lease of the two cinema halls. Consequently, this sum was chargeable to tax in the Assessment Year 1975-76.

4. Taxability of the Sum of Rs.40,000/- in the Assessment Year 1980-81:
The court examined whether the sum of Rs.40,000/- received in the Assessment Year 1980-81 was a revenue receipt and chargeable to tax. It was noted that the Assessee had shown this amount on the credit side of its Profit and Loss Account for each of the subsequent years, including the Assessment Year 1980-81. The court held that the sum of Rs.40,000/- was indeed a revenue receipt and was correctly offered for taxation in the respective assessment years.

Conclusion:
The court concluded that the sum of Rs.1,24,000/- received in the Assessment Year 1975-76 was a revenue receipt and chargeable to tax. The remaining sum of Rs.2,00,000/-, paid in five equal installments of Rs.40,000/- each in subsequent years, was also revenue receipts and chargeable to tax in the respective assessment years. The court answered the questions referred at the instance of the Assessee in the affirmative, in favor of the Revenue and against the Assessee. The question referred at the instance of the Revenue was answered in the affirmative, in favor of the Assessee and against the Revenue. The reference petitions were accordingly disposed of.