Capital character of termination receipts excludes cancellation payments from revenue when they compensate for extinguishing business rights.
Whether a payment on cancellation of a five-year agreement is revenue in nature is resolved by distinguishing compensation for termination of ordinary trading contracts from sums received for surrender or termination of the business framework. The court applies the principle that amounts received for extinguishing rights that regulated the carrying on of trade are not trading receipts but have capital character as compensation for discontinuance of the business framework; accordingly the cancellation payment is not taxable as income.
Issues: Whether, on the facts and circumstances of the case, the receipt of Rs. 37,248 on cancellation of an agreement is of the nature of a revenue receipt.
Analysis: The agreement in question was a five-year arrangement that regulated the conditions under which the assessee was to carry on the trade, including exclusive rights and restrictions on carrying on similar business; these rights constituted the framework under which the business was to be conducted. The cancellation effected a termination of that framework and the congeries of rights acquired under the agreement. Precedent distinguishes between sums received as compensation for termination of contracts entered into in the ordinary course of trade (which are trading receipts) and sums received for surrender or termination of the business or of the framework regulating the carrying on of the business (which are not trading receipts). Applying that principle, amounts received as payment for the termination of rights that regulated the carrying on of trade are not income under the Income-tax Act but are akin to capital receipts or compensation for discontinuance of the business. The Tribunal's reliance on authorities treating cancellation of ordinary trading contracts as trading receipts was considered inapposite where the contract itself regulated the conduct of the trade and its termination extinguished those business rights; the earlier decision applying that distinction was followed.
Conclusion: The sum of Rs. 37,248 received on cancellation of the agreement is not a revenue receipt and is not taxable as income.
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