Keep-out covenant payments under patent licences were capital receipts, not trading income, because they related to disposal of capital rights.

Lump sums received for keep-out covenants under patent-licensing arrangements were capital receipts, because the exclusive licences formed part of the assessee's fixed capital structure rather than stock-in-trade. The payments were not calculated by reference to actual or anticipated user; instead, they were part of the consideration for the substantial disposal of territorial rights and the related restraint on competition. Royalty amounts separately referable to use were treated as income, but the lump sums were linked to the surrender of part of the capital apparatus for earning profits and were therefore not taxable as income.

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Issues: Whether the lump sums received for the keep-out covenants under the patent-licensing arrangements were capital receipts or trading receipts liable to income tax.

Analysis: The exclusive licences granted under the patent arrangements were part of the assessee's fixed capital structure and not stock-in-trade. The lump sums were not payments calculated by reference to anticipated user, nor were they dependent on actual exploitation; they were payable as part of the consideration for the substantial disposal of rights in the relevant territories and for the corresponding restraint on competition. The royalty elements were separately referable to user and were accepted as income, but the lump sums stood on a different footing because they were tied to the surrender of part of the assessee's capital apparatus for earning profits.

Conclusion: The lump sums for the keep-out covenants were capital receipts and not trading receipts, and they were not taxable as income.

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