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Issues: (i) Whether the sum received on termination of the limestone supply contract was a capital receipt or a revenue receipt; (ii) Whether the long duration of the contract and its importance to the assessee's business made the compensation capital in nature; (iii) Whether the receipt was compensation for sterilisation of a capital asset or for loss arising from a trading contract.
Issue (i): Whether the sum received on termination of the limestone supply contract was a capital receipt or a revenue receipt.
Analysis: The contract which was terminated had been entered into in the ordinary course of the assessee's business of supplying limestone. The payment was made as solatium for cancellation of that trading arrangement and not as reimbursement of capital expenditure or as price for transfer of a capital asset. A receipt arising from settlement of rights under a trading contract is referable to business profits and not to capital structure.
Conclusion: The receipt was a revenue receipt and was chargeable to tax, against the assessee.
Issue (ii): Whether the long duration of the contract and its importance to the assessee's business made the compensation capital in nature.
Analysis: The mere fact that the contract had several years to run did not alter its character. A contract made in the ordinary course of trading remains part of the trading operations even if it extends over a long period. The decisive question was not the length of the term but the nature of the contract in the business structure of the assessee.
Conclusion: The long duration of the contract did not make the compensation a capital receipt, against the assessee.
Issue (iii): Whether the receipt was compensation for sterilisation of a capital asset or for loss arising from a trading contract.
Analysis: The case did not involve an external restraint upon a capital asset or an injury to stock-in-trade by overriding statutory power. The assessee was not prevented from carrying on business and continued to obtain supply and loading contracts. The payment therefore could not be treated as compensation for sterilisation of a capital asset.
Conclusion: The receipt was not compensation for sterilisation of a capital asset, against the assessee.
Final Conclusion: Compensation received for cancellation of a contract entered into in the ordinary course of business is a trading receipt, even if the contract had a long unexpired term and was important to the assessee's business. The appeal succeeded and the taxability of the sum was upheld.
Ratio Decidendi: Payment received on cancellation of a trading contract made in the ordinary course of business is a revenue receipt, because it is an adjustment of trading rights and represents business profits or their commutation, not capital accretion.
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