Capital receipt for surrender of business framework held not taxable as income under the Income-tax Act

Compensation paid for the premature termination of an agreement was treated as a capital receipt where the payment was made on surrender of rights under the contract and destroyed the business framework rather than representing a trading receipt from operations. The receipt was not a recurrent return, nor the product of business activity in the year received; its character depended on the nature of the right given up, not on any notional estimate of future profits. The sum was therefore held not assessable as income under the Indian Income-tax Act.

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Issues: Whether the sum received by the assessee as damages or compensation for premature termination of the agreement was income assessable under the Indian Income-tax Act.

Analysis: The payment was made on the surrender of rights under the agreement dated 9 May 1940 and was described by the Court as a solatium. The agreement created the framework of the assessee's business and its termination destroyed that framework rather than yielding a trading receipt from carrying on business. The receipt was not a recurrent return from operations, nor was it the produce of business activity in the year of receipt. The character of the receipt depended on the nature of the right surrendered, not on any notional estimate of future profits.

Conclusion: The sum was a capital receipt and was not liable to assessment as income.

Ratio Decidendi: Compensation received for the surrender or destruction of an income-yielding contractual framework is a capital receipt when it is paid for giving up the source or structure of the business and not for the profits of carrying on that business.

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