1969 (3) TMI 16 - HC - Income Tax

Compensation received by the assessee-company - receipt was for the destruction of a capital asset and was therefore of a capital nature

Summary

Issues Involved:
1. Nature of compensation received - capital receipt or revenue receipt.
2. Impact of cancellation of the financial agreement on the assessee's business structure.
3. Applicability of judicial precedents in determining the nature of the receipt.

Issue-wise Detailed Analysis:

1. Nature of Compensation Received - Capital Receipt or Revenue Receipt:
The primary issue in this case was whether the sum of Rs. 25,000 received by the assessee-company as compensation for the termination of an agreement was a capital receipt or a revenue receipt. The Income-tax Officer and the Appellate Assistant Commissioner initially held that the compensation was for services rendered and thus constituted a business profit, making it a revenue receipt. However, the Appellate Tribunal differed, holding that the compensation was for the destruction of a capital asset and thus a capital receipt. The Tribunal noted that the agreement was not for the supply of raw materials or connected with the stock-in-trade of the assessee but was a framework for a profit-producing source, thus securing an enduring benefit for the assessee.

2. Impact of Cancellation of the Financial Agreement on the Assessee's Business Structure:
The judgment emphasized that the agreement dated April 25, 1959, between the assessee and the Delhi company was independent of the assessee's usual business of manufacturing and selling flour. The compensation was agreed upon because the assessee was deprived of the commission it could earn for seven years, which was considered an enduring benefit. The cancellation of the agreement resulted in the cessation of a profit-earning apparatus, leading to the conclusion that the compensation received was for the destruction of a capital asset.

3. Applicability of Judicial Precedents in Determining the Nature of the Receipt:
The court referred to various judicial precedents to determine whether the receipt was capital or revenue. The judgment cited Commissioner of Income-tax v. Rai Bahadur Jairam Valji, where the Supreme Court observed that the determination of whether a receipt is capital or income depends on the facts of each case and involves a conclusion of law. In Godrej & Co. v. Commissioner of Income-tax, a sum paid for the sterilization of a part of a capital asset was held to be a capital receipt. Similarly, in P. H. Divecha v. Commissioner of Income-tax, the Supreme Court emphasized the nature and quality of the payment in determining whether it was capital or income. The court also referenced Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax, which established that compensation for the cancellation of a contract affecting the trading structure of a business is a capital receipt.

The court concluded that the compensation received by the assessee was a capital receipt, as it was for the destruction of a profit-making apparatus that was independent and fundamental to the assessee's business. The judgment affirmed the Tribunal's decision and answered the question against the revenue, with costs awarded to the assessee.

Separate Judgments Delivered by Judges:
The judgment was delivered by RAMAPRASADA RAO J., with VEERASWAMI J. concurring.