Royalty agreement converted into fixed capital, making the surrender payment a capital receipt, not trading income.

A sum received for surrender and release of rights under a royalty agreement was treated as a capital receipt rather than a trading receipt because the evidence showed the agreement had been appropriated from stock-in-trade to a permanent income-producing asset. The board's treatment of the royalty interest, together with the accounts and balance-sheet entries, supported the conclusion that it had become fixed capital well before the receipt arose. Mere passage of time was insufficient on its own, but on the facts the only reasonable inference was that the asset had been converted into fixed capital. The assessment therefore could not stand.

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Issues: Whether the sum received for surrender and release of the company's rights under the royalty agreement was a trading receipt or had become a capital receipt.

Analysis: The company had initially treated the royalty agreement as stock-in-trade, but the evidence showed that the board regarded it as a permanent income-producing asset long before the receipt in question. The accounts and balance-sheet treatment supported the conclusion that the royalty interest had been appropriated from trading stock to fixed capital. Mere passage of time was not enough by itself, but on the facts the only reasonable inference was that the agreement had been converted into a fixed capital asset well before 1964.

Conclusion: The receipt was capital in nature and not a trading receipt, so the assessment could not stand.

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