1981 (10) TMI 23 - HC - Income Tax

Compensation for loss of goodwill not taxable as revenue receipt. High Court decision.

The High Court held that a sum of Rs. 48,361 out of the total compensation received by the assessee was not taxable as a revenue receipt for the ... Business Expenditure Issues:Whether the compensation received by the assessee is liable to be taxed as revenue receipt during the assessment year 1975-76.Detailed Analysis:The judgment pertains to a reference under section 256(1) of the Income Tax Act, where the Income-tax Appellate Tribunal referred the case to the High Court for an opinion on whether a sum of Rs. 48,361 out of the total compensation of Rs. 55,291 received by the assessee was liable to be taxed as a revenue receipt during the year 1975-76. The assessee, a registered firm engaged in the purchase and sale of tyres, received compensation due to the acquisition of its business premises for the construction of an overbridge. The Income Tax Officer treated the entire compensation amount as business profit and added it to the assessee's income, which was contested by the assessee on the grounds that it was a casual or capital receipt. The Appellate Tribunal held that the sum of Rs. 48,361 was a capital receipt and not liable to be included as business income, overturning the decision of the Appellate Authority.The High Court analyzed the case in light of section 28 of the Income Tax Act, which charges income under the head 'Profits and gains of business or profession' only if the profits arise from a business carried on during the previous year. In this case, the business premises were acquired, resulting in the closure of the assessee's business, as confirmed by the Appellate Tribunal. The compensation received was not for business profits but for loss of goodwill and other related expenses due to the acquisition, as highlighted by the acquisition officer. The High Court referred to a similar case decided by the Supreme Court, emphasizing that compensation for the cessation of business activity does not constitute revenue receipts if the business was not carried on during the relevant period.The High Court distinguished the case relied upon by the revenue, where the business continued at a reduced scale after the acquisition, from the present case where the business had completely stopped. It cited another case to highlight the distinction based on whether the business could be carried on post-acquisition. The Court held that the compensation received by the assessee was not chargeable as a revenue receipt for the assessment year 1975-76, in line with previous legal precedents and the specific circumstances of the case. The judgment favored the assessee, and the costs were to be borne by the revenue.In conclusion, the High Court upheld the Tribunal's decision that the sum of Rs. 48,361 out of the total compensation received by the assessee was not taxable as a revenue receipt for the assessment year 1975-76. The judgment extensively discussed legal principles, precedent cases, and the specific facts of the case to arrive at this conclusion, providing a detailed analysis of the tax treatment of compensation in such scenarios.