Lump-sum trade receipt and secret processes: capital element must be apportioned and excluded from taxable income.

A lump-sum payment received under a commercial agreement was held to be within the company's existing trade, because the arrangement was part of its business exploitation and development in Burma. The receipt was therefore not outside the trading field on that ground. However, secret processes and know-how were treated as a capital asset, and the part of the payment referable to disclosure of that confidential information was capital in character. Because the lump sum also covered drawings, designs and plans, the capital element had to be isolated by apportionment and excluded from taxable income.

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Issues: (i) whether the sum of 100,000 was received by the company in the course of its trade; and (ii) whether the sum, or any part of it, was a capital receipt and not taxable income, to the extent referable to the imparting of secret processes.

Issue (i): whether the sum of 100,000 was received by the company in the course of its trade.

Analysis: The agreement had to be read as a whole, but the consideration for the lump sum under Part I was distinct from the annual remuneration under Part II. On the evidence, the company chose the agreement as a commercial method of exploiting its business and of developing its trade in Burma. The finding that the receipt arose in the course of the existing trade was supported by the evidence and could not be displaced.

Conclusion: The sum of 100,000 was received in the course of the company's trade and was not outside the trading field on that ground.

Issue (ii): whether the sum, or any part of it, was a capital receipt and not taxable income, to the extent referable to the imparting of secret processes.

Analysis: Secret processes and know-how were treated as a capital asset. The obligation under Part I included communication of secret information necessary to enable the Burmese Government to commence production, and the value of that information was impaired by disclosure even though the company did not wholly divest itself of the information. A payment for the surrender or impairment of such secret knowledge could be capital in character, but the lump sum also covered other matters such as drawings, designs and plans, so the capital element had to be isolated by apportionment.

Conclusion: The whole sum could not be treated as income; the part properly attributable to the imparting of secret processes was a capital receipt and had to be excluded from assessment.

Final Conclusion: The assessment could not stand in full, and the matter had to be sent back so that the capital element, if any, referable to the disclosure of secret processes could be ascertained and deducted from taxable profits.

Ratio Decidendi: Where a lump-sum payment is made partly for commercial services in the course of trade and partly for the disclosure of secret processes that constitute a capital asset, the amount referable to the disclosure is capital in nature and must be apportioned and excluded from taxable income.

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