Lease rearrangement payment held to be capital receipt, not taxable income, where it reflected enhancement of leasehold capital value.

A lump sum received on waiver of forfeiture and rearrangement of leasehold rights was treated as a capital receipt, not assessable income under section 12 of the Income-tax Act, 1922. The receipt arose from a re-settlement of the lease and reflected the immediate realisation of enhanced value in the capital asset, not income from a trading or revenue source. As the assessees were not shown to be carrying on a business in house property, the amount was held to be outside the charge to tax and in favour of the assessees.

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Issues: Whether the lump sum of Rs. 1,00,000 received on waiver of forfeiture and rearrangement of the lease constituted assessable income, or was a capital receipt in the nature of salami or premium not chargeable to tax under section 12 of the Income-tax Act, 1922.

Analysis: The receipt arose from a re-settlement of the leasehold rights and represented the immediate realisation of enhanced value in the assessees' capital asset. The assessees were not shown to be carrying on a business in house property, and the sum did not form part of a trading or revenue account. In substance, the payment was made for the alteration of the capital structure of the leasehold interest and not as income earned from the asset. The character of the receipt remained capital notwithstanding that it was described as salami or premium.

Conclusion: The amount of Rs. 1,00,000 was not assessable income and was to be treated as a capital receipt in favour of the assessees.

Ratio Decidendi: A lump sum received for the rearrangement or realisation of a leasehold capital asset is not taxable as income under section 12 where it represents capital enhancement or substitution of capital, and not the product of a business or revenue receipt.

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