Capital receipt treatment for termination compensation where cancellation destroyed a profit-making structure outside ordinary business.

Compensation received on termination of a financing arrangement was held to be a capital receipt because the arrangement was outside the assessee's ordinary cloth-export commission business and created a continuing source of interest and commission. The contractual structure secured commission even after the contractual period and regardless of whether finance was actually drawn, so its cancellation destroyed a source of income and a profit-making apparatus rather than replacing trading profits under an ordinary commercial contract. The compensation was therefore treated as consideration for injury to a capital asset or income-earning structure and was not chargeable to income-tax.

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Issues: Whether the compensation of Rs. 3 lakhs receivable on termination of the financing arrangement was a capital receipt or a revenue receipt chargeable to income-tax.

Analysis: The arrangement created under the three agreements was not part of the assessee's ordinary cloth-export commission business. Its terms secured to the assessee a continuing source of interest and commission, including commission payable even after the contractual period, irrespective of whether finance was actually drawn. The cancellation of that arrangement destroyed a source of income and a profit-making structure, and the compensation was paid for that injury rather than as trading profits under an ordinary commercial contract.

Conclusion: The compensation was a capital receipt and was not chargeable to income-tax.

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