1972 (8) TMI 4 - SC - Income Tax

Taxability of government compensation for requisitioned premises under requisition: held taxable as income not capital receipt

Taxability of compensation for requisitioned premises: the sum paid as compensation for loss of earnings was treated as a revenue receipt because it ... Taxability of the compensation - Whether the sum, received by the applicant as compensation from the Government is taxable as income of the applicant or is a capital receipt in its hands - HELD THAT:- No doubt that the amount received by the respondent for the loss of earnings was revenue receipt. It can hardly be disputed that if the respondent-firm had been earning profits as a result of its business during the years the premises in question remained under requisition, the said profit would have been treated as revenue receipt and liable to be taxed as such. The amount received in lieu of the profits which would have been earned if the premises had not been requisitioned, in our opinion, would partake of the same character as the profits. The present is not a case wherein the respondent-firm was permanently deprived of a source of income. On the contrary, the present is a case arising out of requisition of the premises. Requisition, unlike acquisition, is of a temporary nature and though it may extend over some years, it has not the element of permanence.. The compensation paid to the respondent represents the supposed profit which the respondent would have earned during the years the premises remained under requisition but which profit the respondent could not earn because of the requisition. Thus, we accept the appeal, set aside the judgment of the High Court and answer the question referred by the Tribunal in favour of the department. In our opinion, the sum received by the respondent as compensation from the Government was taxable as income of the respondent and was not a capital receipt. Issues: (i) Whether the sum of Rs. 1,05,074 received by the assessee as compensation from the Government for requisition of business godowns is taxable as income of the assessee or is a capital receipt.Analysis: The Tribunal found that the assessee continued to carry on its timber business from its office during the period of requisition, albeit on a reduced scale, and that the award included a lump sum for loss of earnings. The Court examined whether the payment compensated for loss of profits (revenue) or for injury/sterilisation of capital assets (capital). Authorities distinguishing temporary requisition (which compensates for lost profits) from permanent sterilisation or destruction of capital assets were considered. The Court held that the nature of the receipt is determined by the character of the payment (compensation for loss of earnings) and the factual finding that the business was continued; the method of computing the lump sum did not change its character.Conclusion: The sum of Rs. 1,05,074 is a revenue receipt taxable as income of the assessee. (Decision in favour of Revenue.)