Character of receipt test treats compassionate payment for abolished allowance as capital receipt, not taxable income.

A cash allowance paid under a statutory compassionate-payment provision was held to be a capital receipt, because its character depended on the nature of the receipt in the recipient's hands rather than on periodicity or the label attached to it. The payment was treated as compensation for the extinction of an earlier allowance under the abolition statute and did not create a real source of income. Accordingly, it was not taxable as income under section 2(24) of the Income-tax Act, 1961, and the tax authorities were not entitled to assess it as revenue receipt.

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Issues: Whether the cash allowance received by the assessee under the statutory compassionate-payment provision was a capital receipt or an income receipt taxable under the Income-tax Act.

Analysis: The allowance arose after abolition of the earlier cash allowance under the governing abolition statute. The Court held that the decisive test is the nature and quality of the receipt in the hands of the recipient, not its periodicity or the nomenclature attached to it. Although the payment was made on application and was discretionary under the compassionate-payment clause, it was linked to the extinction of the prior allowance and operated as compensation for that loss. The Court distinguished cases of statutory maintenance allowances and held that the provisions dealing with compulsory compensation and discretionary compassionate payment formed a different class, and the payment did not create a real source of income.

Conclusion: The allowance was a capital receipt and not income within section 2(24) of the Income-tax Act, 1961.

Final Conclusion: The tax authorities were not entitled to treat the receipts as taxable income, and the assessee succeeded in the appeals.

Ratio Decidendi: For determining taxability, the controlling test is the character of the receipt in the hands of the recipient; a payment made as compensation for extinguishment of an allowance remains a capital receipt even if it is periodic, discretionary, or described as a compassionate grant.

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