1972 (8) TMI 4 - SC - Income Tax

Supreme Court rules compensation received as taxable income, not capital receipt.

Commissioner of Income-Tax, Poona Versus Manna Ramji And Company

Commissioner of Income-Tax, Poona Versus Manna Ramji And Company - [1972] 86 ITR 29 (SC) Issues Involved:1. Nature of the compensation received - whether it is a capital receipt or a revenue receipt.2. Taxability of the compensation amount as income.Detailed Analysis:1. Nature of the Compensation Received - Capital Receipt or Revenue ReceiptThe primary issue in this case was to determine whether the compensation amount of Rs. 1,05,074 received by the respondent from the Government was a capital receipt or a revenue receipt. The respondent-firm, which was engaged in the timber business, had its premises requisitioned by the Collector of Poona under the Defence of India Act. The requisition included six sheds used for storing timber, but the respondent was allowed to retain possession of the office premises. The respondent sought compensation, which was eventually awarded by the Civil Judge, Senior Division, Poona, acting as an arbitrator. The award included Rs. 1,25,500 for loss of earnings, Rs. 310 per month for rent, Rs. 100 for wooden frames, and interest at 3% on Rs. 1,25,500 from November 15, 1944, until the date of payment.The Income-tax Officer treated the compensation for loss of earnings as a revenue receipt, taxable under section 10 of the Indian Income-tax Act, 1922. The respondent contended that it was a capital receipt, leading to an appeal. The Appellate Assistant Commissioner sided with the respondent, but the Income-tax Appellate Tribunal reversed this decision, treating the amount as a revenue receipt. The High Court, however, viewed the compensation as a capital receipt, not taxable as income.2. Taxability of the Compensation Amount as IncomeThe Supreme Court had to resolve whether the compensation was taxable as income. The Court analyzed the nature and character of the payment, emphasizing that the distinction between capital and revenue receipt is well-recognized but often complex in borderline cases. The Court noted that the respondent continued its business, albeit on a reduced scale, during the period of requisition. The Tribunal found that the business did not come to a standstill but was carried out from the same office premises, indicating that the compensation for loss of earnings was akin to the profits that would have been earned if the premises were not requisitioned.The Court referred to the case of Commissioner of Income-tax v. Shamsher Printing Press, where compensation for loss of business due to requisition was deemed a revenue receipt. It also distinguished the present case from others cited by the respondent, such as Senairam Doongarmall v. Commissioner of Income-tax and Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue, noting that those cases involved permanent deprivation or sterilization of capital assets, unlike the temporary requisition in the present case.The Court concluded that the compensation received by the respondent represented the supposed profit that would have been earned during the requisition period, thus having the same character as the profits and being taxable as income. The method of computing the compensation did not alter its nature as a revenue receipt.ConclusionThe Supreme Court accepted the appeal, set aside the judgment of the High Court, and answered the question referred by the Tribunal in favor of the department. The sum of Rs. 1,05,074 received by the respondent as compensation from the Government was held to be taxable as income and not a capital receipt. The parties were directed to bear their own costs in both the Supreme Court and the High Court.Appeal allowed.