Capital receipt on cancellation of commission rights treated as compensation for extinction of an income-producing asset.

Compensation received on termination of a commission agreement was treated as a capital receipt where it was paid not for past services or accrued commission, but for extinguishment of the assessee's right to earn future commission. The right to future commission was regarded as an income-producing asset, and its cancellation by compromise decree amounted to surrender of a capital asset rather than receipt of ordinary income. The governing distinction is that compensation for destruction of a source of income is capital, while payment for past services or ordinary business receipts is revenue. The amount was therefore held to be capital and not taxable as revenue income.

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Issues: Whether the sum of Rs. 70,000 received on termination of the commission agreement was a capital receipt or a revenue receipt.

Analysis: The receipt was not paid for past services or for accumulated commission already earned. The assessee had acquired a right to receive commission in future under the agreement, and the compromise decree brought that right to an end in return for a lump sum payment. The right to future commission was treated as an income-yielding asset, and its destruction by cancellation of the agreement amounted to surrender of a capital asset rather than receipt of income in the ordinary course. The governing distinction is that compensation for extinguishment of a source of income or an income-producing asset is capital, whereas payment for past services or ordinary business receipts is revenue.

Conclusion: The amount of Rs. 70,000 was a capital receipt and was not taxable as revenue income.

Ratio Decidendi: Compensation received for the extinction of an income-producing right or asset is a capital receipt, even if the amount is measured by reference to future earnings.

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