Capital receipt from cancellation of business contract held not taxable as income

Compensation received on cancellation of an agreement that regulated the conditions of business for a fixed term was treated as a capital receipt because it extinguished the contractual framework and source of income, rather than representing trading profits from ordinary operations. The receipt was not shown to be payment for profits already earned in the normal course of business. It was therefore not a revenue receipt and was not taxable as income.

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Issues: Whether the sum of Rs. 37,248 received on cancellation of the agreement was a revenue receipt liable to income-tax.

Analysis: The payment was made on cancellation of an agreement that regulated the conditions on which the assessee carried on its business for a fixed term of five years. The agreement conferred rights and imposed obligations relating to the structure and conduct of the business itself, and the cancellation extinguished those rights for consideration. The amount was not shown to be merely compensation for profits already earned from ordinary trading operations, but was paid for termination of the contractual framework under which the business was to be carried on. On that footing, the receipt represented compensation for giving up the source or framework of income, not trading profits arising in the ordinary course of business.

Conclusion: The receipt of Rs. 37,248 was not a revenue receipt and was not taxable as income.

Ratio Decidendi: Compensation received for termination of a contract that regulates the conditions under which a business is carried on is a capital receipt, not a revenue receipt, because it relates to the source or structure of income rather than to trading profits.

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