1966 (12) TMI 5 - HC - Income Tax

Receipt in the hands of the assessee for the loss of profits in business and not as a gift - contention of assesseethat the amount was not income, profits or gains but only a casual and non-recurring receipt, not acceptable - taxable as revenue receipt

Summary

Issues:
1. Whether the sum of Rs. 26,000 was taxable income?

Analysis:
The judgment delivered by the High Court of Allahabad pertained to a case under section 66(1) of the Income-tax Act of 1922. The primary issue was the taxability of a sum of Rs. 26,000 received by the assessee, which was treated as a revenue receipt by the Income-tax Officer. The Appellate Assistant Commissioner upheld the assessment, leading the assessee to appeal to the Tribunal, arguing that the amount was a casual and non-recurring receipt pending the settlement of a claim with the Central Government. The Tribunal rejected this contention, prompting the reference to the High Court.

The crux of the matter revolved around determining whether the receipt of Rs. 26,000 was a capital or revenue receipt. The relevant provisions under scrutiny were section 4 and section 4(3)(vii) of the Income-tax Act. Section 4 broadly includes all income, profits, and gains unless exempted. The assessee relied on section 4(3)(vii), which excludes certain receipts from being included in the total income, specifically those not arising from business or profession and of a casual or non-recurring nature.

The High Court analyzed the nature of the receipt in question, emphasizing that if it arose from business or profession, its casual or non-recurring aspect became immaterial. The agreement between the parties revealed that the payment was made to compensate for losses in business due to a director's actions. The Court noted that the payment was not a gift but a means to rectify a hole in the company's profit structure. The receipt was deemed a revenue receipt as it stemmed from the business operations and was directly linked to the occupation of the assessee as a director and shareholder.

Citing the Supreme Court's ruling in a similar case, the High Court concluded that compensation for loss of profits constitutes a revenue receipt subject to taxation. The Court found that the receipt of Rs. 26,000 was intricately tied to the business operations and the actions of the director-in-charge, thereby falling outside the scope of being a casual or non-recurring receipt. Consequently, the Court answered the question in the affirmative, ruling against the assessee and affirming the taxability of the sum received.

In light of the analysis, the High Court ordered the assessee to bear the costs of the reference and assessed the counsel's fee accordingly. The judgment underscored the principle that receipts linked to business operations and compensation for business-related losses are considered revenue receipts for taxation purposes, even if settled outside the formalities of company law.