1970 (4) TMI 51 - HC - Income Tax

Adventure in the nature of trade - Land on lease - Whether the amount received by the assessee-company as acquisition-compensation in respect of a portion of the lands held by the assessee on a lease agreement is a capital receipt

Summary

Issues:
1. Whether the amount received by the assessee-company as acquisition-compensation is a capital receipt?

Analysis:
The judgment pertains to a reference under section 66(1) of the Indian Income-tax Act, 1922, initiated by the revenue. The primary issue is whether the amount of Rs. 95,620 received by the assessee-company as acquisition-compensation for a portion of leased land constitutes a capital receipt. The assessee, engaged in pharmaceutical manufacturing, had leased land for factory construction. The acquisition of a part of the land by the Municipal Corporation of Greater Bombay led to the compensation payment. The Tribunal ruled in favor of the assessee, considering the compensation as a capital receipt. The agreement between the parties outlined the rights and obligations in case of land acquisition, emphasizing the continuation of full rent payment by the lessee despite land loss.

The judgment delves into the details of the lease agreement, highlighting the provisions related to potential land acquisition scenarios. The agreement specified the treatment of compensation in case of a set-back or acquisition, indicating an interim arrangement for compensation monies. It was noted that the compensation served to offset the lessee's continued rent liability for the acquired land portion. The court emphasized that the compensation was not a result of the assessee's trade activity but rather a capital receipt due to the specific circumstances outlined in the lease agreement.

The court dismissed the revenue's arguments that the compensation should be treated as profit subject to taxation. The revenue's contentions regarding the foreseeability of the acquisition and its impact on the capital asset were refuted. The court upheld the Tribunal's decision, emphasizing that the compensation amount was rightly considered a capital receipt. The judgment concluded by affirming the decision in the affirmative, with the revenue directed to bear the assessee's costs. The court's detailed analysis centered on the specific provisions of the lease agreement, the nature of the compensation received, and the absence of evidence supporting the revenue's claims regarding the receipt's taxability as profit.