1956 (4) TMI 61 - HC - Income Tax

Company's lb100,000 receipt deemed capital, not trading, for tax purposes. Appeal allowed for income tax adjustments.

The court concluded that the lb100,000 receipt by the company was a capital payment and not a trading receipt. The company was deemed to be parting with a ... - Issues Involved:1. Whether the receipt of lb100,000 by the company is a trading receipt as part of the company's annual profits or gains.2. Whether the receipt of lb100,000 is of a capital or income nature for income-tax purposes.Issue-wise Detailed Analysis:1. Trading Receipt as Part of Annual Profits or Gains:The first issue is whether the lb100,000 received by the company should be considered a trading receipt as part of the company's annual profits or gains from any trade carried on by it, whether in the United Kingdom or elsewhere. The Crown conceded that under section 123 of the Income Tax Act, 1952, the receipt must result from a trading operation and be a profit arising from the carrying on of a trade. The Special Commissioners concluded that the receipt was a trading receipt, but the court found no evidence supporting that the company was starting a new trade or extending an existing trade. The company was not 'exploiting' its business in Burma but was entering into a new activity of advising the Burmese Government, which involved disclosing secret processes and gradually ceasing its wholesale trading activities. The court concluded that there was no evidence to support the Commissioners' determination, contradicting the reasonable conclusion.2. Capital or Income Nature for Income-Tax Purposes:The second issue is whether the lb100,000 receipt should be regarded as a capital or income receipt for income-tax purposes. The court referred to several cases, including Nethersole v. Withers, which established that a lump sum payment received for the grant of a patent licence for a term of years may be a capital receipt, depending on the facts and terms of the agreement. The court noted that secret processes bear a marked analogy to patent rights and copyright. The company parted with its secret processes to the Burmese Government forever, although it remained at liberty to carry on its wholesale trade and could theoretically set up a competing factory in Burma. The agreement was not simply for the sale or assignment of secret processes but included providing technical data, drawings, designs, and plans for a factory. The court found that the lb100,000 was a capital payment, as the company was parting with a valuable asset forever and enabling a new competing industry to be set up in Burma. The company was dissipating its asset, and the secret process, once communicated, was in jeopardy.Conclusion:The court allowed the appeal, concluding that the lb100,000 receipt was a capital payment and not a trading receipt. The matter was remitted to the Commissioners to adjust the figures accordingly.