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 ... Capital receipt - revenue receipt - compensation for loss of profits - requisition (temporary deprivation) v. acquisition (permanence) - character of receipt determined by nature of payment not method of computation - profit making apparatusRevenue receipt - capital receipt - compensation for loss of profits - requisition (temporary deprivation) v. acquisition (permanence) - profit making apparatus - The compensation received from the Government in respect of requisitioned business premises was taxable as income and not a capital receipt. - HELD THAT: - The Court examined the true character of the payment in light of the facts found by the Tribunal. The Tribunal had found that the assessee continued to carry on the timber business from its office premises during the period of requisition, albeit on a reduced scale, so that the business did not come to a complete stop and the injury was to the volume of business rather than to the capital assets or profit making apparatus. Accordingly, the award of a lump sum for loss of earnings represented the profits which would have been earned during the period of requisition and therefore partook of the nature of revenue. The temporary nature of requisition (as distinct from permanent acquisition or sterilisation of a capital asset) was decisive: compensation for deprivation of use over a limited period corresponds to the income lost and is taxable. The Court further held that the method or measure adopted for computing the compensation (two years' purchase or a lump sum) does not alter the intrinsic quality of the receipt; it is the character of the payment that determines tax treatment. Earlier authorities dealing with sterilisation or permanent destruction of capital assets were distinguished on their facts, and the factual findings of the Tribunal were treated as binding on the Court for the purpose of applying legal principles. [Paras 3, 5, 6, 11, 12]The compensation for loss of earnings paid for requisitioned premises is a revenue receipt taxable as income.Final Conclusion: Appeal allowed; the High Court's conclusion reversed and the question referred is answered in favour of the Revenue: the compensation paid to the assessee in respect of requisitioned godowns was taxable as income rather than being 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.)