Termination compensation for abandoned infrastructure work treated as capital receipt, not taxable business income.

Compensation received on termination of a memorandum of understanding was treated as capital in nature because it was paid for stalling and discontinuing the agreed infrastructure work. The surrounding circumstances and the agreement as a whole showed that the payment was linked to sterilisation of the assessee's profit-making apparatus and loss of its source of income, not to ordinary trading operations. Applying the principle that cancellation compensation is capital where it impairs the trading structure, the receipt was held not chargeable to tax as business income. The addition was deleted.

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Issues: Whether the amount received on termination of the earlier memorandum of understanding was a capital receipt not chargeable to tax, or a revenue receipt taxable as business income.

Analysis: The receipt had to be determined by examining the real nature of the transaction, the surrounding circumstances, and the true import of the agreement as a whole. The material on record showed that the assessee had been formed for the infrastructure activity of constructing a railway siding and that the work was subsequently stalled and discontinued. The later memorandum and the clarification issued by the payer indicated that the amount was determined and paid for stalling and discontinuing the agreed work under the earlier arrangement. Applying the settled principle that compensation received for cancellation of a contract is capital where the cancellation impairs the trading structure or results in loss of the source of income, the receipt was not in the nature of ordinary trading income. It represented compensation for sterilisation of the assessee's profit-making apparatus and loss of its source of income.

Conclusion: The receipt was held to be a capital receipt not chargeable to tax. The addition made by the Assessing Officer was deleted and the Revenue's challenge failed.

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