Capital versus revenue treatment of forfeited share money depends on its source, with later appropriation affecting only the interest element.

Forfeited share money later credited against a debtor's liability retained its original character as capital to the extent applied to principal, and did not become trading profit merely because it was later appropriated in settlement. Only the portion attributable to interest was revenue in nature and taxable. On that basis, a sum that was truly capital could not be treated as a bad debt deduction, while the interest element remained assessable as income. The governing principle is that the character of a receipt is fixed by its source and nature at the time of receipt, and later appropriation cannot convert capital into revenue except where the amount is in fact applied to interest.

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Issues: (i) Whether the amount of Rs. 50,108, representing forfeited share money later credited in settlement of the debt, was a capital receipt or a revenue receipt; (ii) whether the amount so credited could be treated as a bad debt deductible under Section 10(2)(xi) of the Income-tax Act.

Issue (i): Whether the amount of Rs. 50,108, representing forfeited share money later credited in settlement of the debt, was a capital receipt or a revenue receipt.

Analysis: The amount arose from share money paid in respect of shares which were forfeited and later reissued, so its character was that of circulating capital and not trading profit. The subsequent crediting of the amount in the debtor family's account did not alter its original nature. Only the portion appropriated towards interest could assume the character of revenue, while the portion appropriated towards the principal retained its capital character.

Conclusion: The amount was a capital receipt to the extent appropriated towards principal, and a revenue receipt only to the extent appropriated towards interest.

Issue (ii): Whether the amount so credited could be treated as a bad debt deductible under Section 10(2)(xi) of the Income-tax Act.

Analysis: A sum which is in truth a capital receipt cannot be treated as a bad debt. The Court therefore separated the composite amount by reference to the underlying debt and held that the part referable to principal remained outside income and was deductible on that footing, while the part referable to interest was taxable as income.

Conclusion: The assessee was entitled to deduction for Rs. 47,051, but the balance of Rs. 3,057 was assessable as income and not deductible as a bad debt.

Final Conclusion: The reference was answered by holding that the amount attributable to principal retained the character of capital and was not taxable, whereas the balance attributable to interest was revenue and assessable to tax, resulting in a partial success for the assessee.

Ratio Decidendi: The character of a receipt is determined by its source and nature at receipt, and a later appropriation cannot convert capital receipt into revenue receipt except to the extent that the amount is in fact applied towards interest income.

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