1960 (3) TMI 2 - SC - Income Tax

Whether a certain sum received by the respondent was a capital receipt or a revenue receipt? Whether this sum of ₹ 57,435 was liable to income-tax and excess profits tax? Held that - The sum of ₹ 57,435 had not been received by the respondent for any injury to any of its capital assets. In our view, the sum was received as compensation for loss of profits for the period during which, it was imagined, the respondent s business would remain stopped before it could be re-started at a new premises. That being so, it was clearly a revenue receipt ; it has not been disputed that if the amount in question was paid as compensation for loss of profit, it would be a revenue receipt and liable to tax. As it was a trading receipt, it cannot be held exempt from tax under section 4(3)(vii) of the Income-tax Act either. In the result we answer both the questions framed in this case in the negative.Appeal allowed.

Summary

Issues:
1. Whether a sum received by the respondent was a capital receipt or a revenue receipt.

Analysis:
The judgment delivered by the Supreme Court addressed the issue of whether a sum of Rs. 57,435 received by the respondent was a capital receipt or a revenue receipt. The respondent, a firm engaged in the business of purchasing and selling paper, stationery, and manufacturing books, had its premises requisitioned by the Government during the war. The respondent claimed compensation for the requisition, including a sum for "compulsory vacation of the premises disturbance and loss of business." The key question was whether this compensation was liable to income tax and excess profits tax, depending on whether it was a capital or revenue receipt.

The court examined whether the injury suffered by the respondent was to its capital assets or its trading activities. It was established that the requisition did not cause any injury to the tangible capital assets of the business. The respondent argued that the injury was to its goodwill, which is considered a capital asset. However, the Department contended that there was no claim for injury to goodwill, emphasizing that goodwill is a question of fact and must be claimed to be compensated for. The court analyzed the wording of the claim made by the respondent and the accompanying letter to determine the nature of the compensation claimed.

The court found that the claim made by the respondent was primarily for loss of profits due to the business disruption caused by the requisition, rather than for loss of goodwill. The court highlighted that the claim did not mention any loss to goodwill, and the accompanying letter focused on the estimated loss of profit for the period the business would remain stopped. Therefore, the court concluded that the sum received was compensation for loss of profits during the business disruption and was, therefore, a revenue receipt. It was held that the amount was not exempt from tax under the Income-tax Act, and the appeal was allowed in favor of the Department.

In conclusion, the Supreme Court determined that the sum received by the respondent was a revenue receipt for compensation for loss of profits during the business disruption caused by the requisition. The judgment clarified the distinction between capital and revenue receipts, emphasizing the importance of explicitly claiming compensation for specific types of losses, such as goodwill, to establish the nature of the receipt for tax purposes.