Temporary requisition compensation treated as revenue receipt for lost profits, but exempt as casual and non-recurring income.

Compensation for temporary requisition of factory premises was characterised by the statutory basis of the claim and the injury compensated for. Because the requisition was temporary and did not destroy or permanently sterilise the business structure or profit-earning apparatus, the amount was treated as compensation for interruption of business and loss of profits, not as payment for destruction of a capital asset. The fact that the sum was measured by profits earned elsewhere did not change its character. The receipt was therefore revenue in nature and taxable as income, but it was exempt as a casual and non-recurring receipt, with the result stated in favour of the assessee.

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Issues: Whether compensation received for temporary requisition of factory premises and resulting interruption in business was a capital receipt or a revenue receipt, and whether it was taxable as income.

Analysis: The compensation had to be characterised by reference to the statutory basis of the claim and the injury compensated for. The requisition was temporary and did not destroy or permanently sterilise the assessee's business structure or profit-earning apparatus. The machinery was not taken away, the business was shifted elsewhere by choice, and the premises at Arkonam were not shown to be an indispensable part of the business itself. The amount was therefore not compensation for destruction of a capital asset, but for the loss of opportunity to earn profits during interruption of the business. The fact that the quantum was measured by reference to profits earned elsewhere did not alter the character of the receipt. Since the receipt was not income from the business itself, it fell under income from other sources and, being casual and non-recurring, was exempt.

Conclusion: The compensation was a revenue receipt and taxable as income under section 6(v) of the Indian Income-tax Act, 1922, but it was exempt from tax as a casual and non-recurring receipt under section 4(3)(vii) of the Indian Income-tax Act, 1922; the answer was in the negative and in favour of the assessee.

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