1978 (1) TMI 107 - AT - Income Tax

Summary

Issues Involved:
1. Nature of the sum of Rs. 90,500 received by the assessee.
2. Whether the amount received is a capital receipt or a revenue receipt.
3. Allocation of the amount received over the relevant assessment years.

Issue-wise Detailed Analysis:

1. Nature of the sum of Rs. 90,500 received by the assessee:
The primary issue in this case revolves around the nature of the Rs. 90,500 received by the assessee following a compromise agreement. The Income Tax Officer (ITO) included this sum as income, asserting it represented accumulated profits the assessee would have earned had the partnership continued. Conversely, the Appellate Assistant Commissioner (AAC) determined that the amount was compensation for the surrender of the assessee's source of income, thus categorizing it as a capital receipt.

2. Whether the amount received is a capital receipt or a revenue receipt:
The AAC's decision was based on the premise that the compromise resulted in the destruction of the assessee's income-yielding apparatus. The AAC concluded that the compensation received was for the loss of a capital asset. The Department, however, argued that the amount received was clearly profit the assessee was deprived of until the compromise. The Department's counsel cited the Supreme Court's decision in CIT vs. Gangadhar Baijnath, arguing that since no partner can specify their share in any particular asset of the partnership, the amount received was revenue in nature.

The assessee's counsel countered by emphasizing that the payment was for the destruction of the trading structure and not for past services or accumulated income. The counsel relied on CIT vs. Prabhu Dayal, where the Supreme Court held that compensation for the termination of an income-producing asset is a capital receipt.

The Tribunal analyzed the facts and concluded that the sum of Rs. 90,500 should be regarded partially as a receipt in lieu of profits up to the date of the compromise and partly for the surrender of a capital asset. The Tribunal referenced the decision in Gangadhar Baijnath, noting that the partnership had not incurred a loss and had, in fact, resulted in significant profits. Therefore, it was determined that the sum included profits due to the assessee and compensation for the loss of the income-producing asset.

3. Allocation of the amount received over the relevant assessment years:
The Tribunal acknowledged that the entire amount could not be treated as income for the assessment year 1973-74. Instead, it should be assessed on an accrual basis during the years of accrual. The Tribunal directed that the sum of Rs. 60,000, representing the profit portion, be allocated over the preceding four assessment years equally, i.e., Rs. 12,000 per year. This allocation considered the losses returned by Thillai for some years and the profits for others.

Conclusion:
The appeal was partly allowed, with the Tribunal concluding that Rs. 30,500 of the Rs. 90,500 received was a capital receipt and not taxable, while the remaining Rs. 60,000 was taxable as income, to be allocated over the relevant assessment years.