1967 (2) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received as income or capital receipt.
2. Nature of compensation for loss of earnings.
3. Determination of compensation by the arbitrator.
4. Findings of the Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal.
5. Legal principles distinguishing capital and revenue receipts.

Detailed Analysis:

1. Taxability of Compensation Received as Income or Capital Receipt:
The primary issue was whether the sum of Rs. 1,05,074 received by the assessee as compensation from the Government was taxable as income or should be treated as a capital receipt. The court examined whether the compensation was for the loss of earnings or for the cessation of the business itself.

2. Nature of Compensation for Loss of Earnings:
The compensation awarded included Rs. 1,25,500 for loss of earnings, Rs. 310 per month as rent, Rs. 100 for loss of wooden frames, and interest at 3% per annum. The arbitrator awarded Rs. 1,25,500 as a lump sum for loss of earnings, calculated as two years' purchase of the net annual average profits, indicating that the business was practically closed down due to the requisitioning of the godowns.

3. Determination of Compensation by the Arbitrator:
The arbitrator considered the loss of earnings due to the requisitioning of the premises and awarded compensation based on the principle that the business was practically extinguished. The arbitrator did not accept the basis of the claim made by the assessee or the Collector but determined the compensation as two years' purchase of the net annual average profits.

4. Findings of the Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal:
- Income-tax Officer: Held that the amount was business income and liable to be taxed, despite acknowledging that the business was practically at a standstill.
- Appellate Assistant Commissioner: Reversed the decision, holding that the compensation represented a capital receipt and was not a revenue receipt, emphasizing that the business could not be carried on due to the requisitioning.
- Tribunal: The Judicial Member and Accountant Member had differing views. The Judicial Member focused on the loss of goodwill, while the Accountant Member concluded that the compensation was for the loss of business earnings, not goodwill.

5. Legal Principles Distinguishing Capital and Revenue Receipts:
The court referred to established principles distinguishing capital and revenue receipts, emphasizing that compensation for the loss of a source of income or impairment of the profit-making apparatus is a capital receipt. The court cited several precedents, including:
- Van den Berghs Ltd. v. Clark: Compensation for the cancellation of agreements affecting the profit-making apparatus is a capital receipt.
- Commissioner of Income-tax v. Vazir Sultan & Sons: Compensation for the loss of business territory was held to be a capital receipt.
- Senairam Doongarmall v. Commissioner of Income-tax: Compensation for the cessation of business due to requisitioning was held to be a capital receipt.

Conclusion:
The court concluded that the compensation of Rs. 1,05,074 received by the assessee was a capital receipt and not taxable as income. The compensation was awarded for the cessation of the business and the loss of the profit-making apparatus due to the requisitioning of the godowns. The court emphasized that the nature of the compensation, determined by the arbitrator and upheld by the High Court, indicated a fundamental impairment of the business structure, qualifying it as a capital receipt. The Commissioner was ordered to pay the costs of the assessee.