1978 (7) TMI 68 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the notice under Section 148 for reopening the assessment.
2. Nature of the Rs. 50,000 received: whether it is a capital receipt or income.
3. Assessment year applicability for the Rs. 50,000 received.

Detailed Analysis:

1. Validity of the Notice under Section 148 for Reopening the Assessment:
The Income Tax Officer (ITO) reopened the assessment for the year 1960-61 under Section 148, believing that the Rs. 50,000 received by the assessee was assessable in that year. The assessee contended that the notice was not warranted. However, the Appellate Assistant Commissioner (AAC) and the Income Tax Appellate Tribunal (ITAT) upheld the ITO's action, confirming the reopening of the assessment.

2. Nature of the Rs. 50,000 Received:
The primary issue was whether the Rs. 50,000 received by the assessee as compensation for the premature termination of the finance agreement was a capital receipt or income. The ITO classified the amount as income, arguing it was for loss of profits. The AAC upheld this view. However, the ITAT reversed this decision, holding that the amount was a capital receipt. The Tribunal reasoned that the payment was made for the premature cutting off of the source of income, which was the financing agreement, thereby constituting a capital asset. The Tribunal cited the specific mention in the later agreement (annexure "B") that the sum was compensation for the termination of the financing agreement (annexure "A").

The Tribunal's view was supported by precedents, including the Supreme Court's decision in P. H. Divecha v. CIT [1963] 48 ITR 222 (SC), where compensation for the loss of a capital asset was deemed a capital receipt. The Tribunal distinguished this case from other Supreme Court decisions cited by the revenue, such as CIT v. South India Pictures Ltd. [1956] 29 ITR 910 (SC) and CIT v. Rai Bhadur Jairam Valji [1959] 35 ITR 148 (SC), noting that in those cases, the payments were considered trading receipts made in the ordinary course of business.

3. Assessment Year Applicability for the Rs. 50,000 Received:
The ITO initially assessed the Rs. 50,000 in the financial year 1959-60 (assessment year 1960-61). The assessee argued that it should be assessed in the assessment year 1961-62, as it was shown in her returns for that year. The Tribunal did not address this issue, as it had already decided in favor of the assessee on the nature of the receipt being capital.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the Rs. 50,000 received by the assessee was a capital receipt. The Court referenced similar cases and legal principles, emphasizing that the termination of the finance agreement constituted the loss of a capital asset, making the compensation received a capital receipt. Consequently, the question referred to the Court was answered in the affirmative and in favor of the assessee. The Commissioner was ordered to pay the costs of the reference to the assessee.