Capital receipt from surrender of pre-commencement rights was not taxable as business income

A receipt obtained on surrender of leasehold and film-exhibition rights before the cinema business came into existence was treated as capital in nature, not revenue. Because the cinema hall was incomplete and no exhibition activity had commenced, the amount did not spring from an existing business source or from the revenue field. A sum can be taxed as business income only where it arises from an existing business or a source of revenue character; where no business has started, the receipt retains a capital character. The amount was therefore held not taxable as revenue receipt, in favour of the assessee.

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Issues: Whether the sum of Rs. 1,00,101 received on surrender of leasehold rights and the right to exhibit films before the cinema came into existence was a capital receipt or a revenue receipt liable to tax.

Analysis: The receipt was examined in the context of the assessee's business having not commenced. Since the cinema hall was incomplete and no film exhibition activity had started, the amount could not arise from an existing business source. A receipt can be treated as business income only if it springs from an existing business or from a source falling within the revenue field; where no business has come into existence, the receipt does not assume a revenue character.

Conclusion: The amount of Rs. 1,00,101 was held to be a capital receipt and not taxable as revenue receipt, in favour of the assessee.

Ratio Decidendi: A receipt obtained on surrender of rights before the business comes into existence is capital in nature and cannot be taxed as business income.

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