Compensation for compulsory deprivation of management rights held to be capital receipt and not taxable as income.

Compensation for compulsory deprivation of the right to manage a life insurance business was held to be a capital receipt because the management right was an integral incorporeal asset of the assessee's profit-making apparatus. The legislative takeover permanently sterilised that capital asset and altered the trading structure, so the payment was not made for a mere loss of user or ordinary business income. The later insertion of section 28(ii)(d) of the Income-tax Act, 1961 did not apply to the relevant assessment year and could not change the position under the earlier law. The compensation was therefore not taxable as revenue income.

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Issues: Whether compensation received for deprivation of the right to manage the assessee's life insurance business under the Life Insurance (Emergency Provisions) Act, 1956 was a capital receipt or a revenue receipt, and therefore whether it was assessable to income-tax.

Analysis: The right to manage the life insurance business was treated as a proprietary and incorporeal asset forming part of the assessee's profit-making apparatus. The compensation was paid not for a commercial transaction or for a mere loss of user in the ordinary course of business, but for total deprivation of the management of the business by legislative action. The deprivation permanently affected the assessee's trading structure and sterilised an integral capital asset. The later insertion of clause (d) in section 28(ii) of the Income-tax Act, 1961 by the Finance Act, 1973 did not govern the assessment year in question and could not alter the position under the earlier law.

Conclusion: The compensation of Rs. 81,069 was a capital receipt and was not taxable as revenue income.

Ratio Decidendi: Compensation received for compulsory deprivation of an integral management right that forms part of the assessee's profit-making apparatus is a capital receipt, not a revenue receipt.

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