Capital receipt for resumption of jagir lands remains non-taxable despite periodic annuity payment.

An annuity paid under a resumption scheme for jagir lands was treated as compensation for extinction of rights in a capital asset, so its character depended on the true nature of the receipt and not on the form or periodicity of payment. The High Court held that payment by annuity in perpetuity, or computation by reference to annual yield, does not convert capital compensation into taxable income where the receipt is a substitute for the resumed property. The annuity was therefore a capital receipt and not liable to tax as revenue income.

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Issues: Whether the annuity received by the assessee as compensation for resumption of jagir lands was a capital receipt or a revenue receipt liable to tax.

Analysis: The compensation under the resumption scheme was payable by way of annuity in perpetuity, but its character depended on the true nature of the receipt and not on its mode or measure of payment. The statutory scheme showed that the payment was made as compensation for the extinction of rights in the jagir lands. Principles governing capital and revenue receipts made it clear that periodic payment or computation by reference to annual yield does not by itself convert compensation for loss of a capital asset into income. The receipt was a substitute for the capital asset resumed by the State.

Conclusion: The annuity was a capital receipt and was not liable to tax as revenue income.

Ratio Decidendi: Where compensation is paid for compulsory resumption or acquisition of a capital asset, the receipt remains capital in nature even if it is quantified or paid periodically by reference to annual income.

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