Compensation for cancellation of liquor contracts was treated as capital receipt because it destroyed the business apparatus.

Compensation for cancellation of liquor contracts is capital in nature where the contracts form part of the profit-making apparatus rather than ordinary trading stock. The receipt is treated as capital when termination destroys or sterilises a fixed capital asset or the business apparatus itself; it is revenue only where compensation replaces trading profits from contracts entered into in the ordinary course of trade. Applying that distinction, the liquor contracts were the means of carrying on the business, and their cancellation affected the capital structure rather than generating trading income. The amount was therefore a capital receipt and not taxable as revenue income.

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Issues: Whether compensation received on cancellation of liquor contracts was a capital receipt or a revenue receipt liable to tax.

Analysis: The receipt was examined in the light of the nature of the underlying contracts and the character of the asset affected. Where compensation is paid for the destruction or sterilisation of a fixed capital asset or profit-making apparatus, the amount partakes of capital character; where it is paid for termination of a contract entered into in the ordinary course of trading, it is a revenue receipt. On the facts, the liquor contracts were not part of the assessee's ordinary trading stock but the means by which the business could be carried on, and their cancellation destroyed the capital apparatus rather than yielding a trading profit.

Conclusion: The amount of Rs. 15,040 was a capital receipt and was not taxable as revenue income.

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