Compensation for requisitioned business premises is capital receipt where the profit-making apparatus is destroyed.

Compensation for the compulsory requisition of business premises is a capital receipt where the taking over destroys or seriously impairs the profit-making apparatus of the business. The Bombay HC noted that the assessee's godowns were essential storage facilities for its timber business, that the business had practically come to a standstill, and that no suitable alternative premises were available. Although the amount was quantified by reference to net annual profits, the decisive test was whether the payment replaced trading receipts or compensated injury to the business structure itself. On those facts, the receipt was treated as compensation for sterilisation of an enduring business asset and was not taxable as income.

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Issues: Whether the compensation of Rs. 1,05,074 received for requisitioning of the assessee's godowns was taxable as business income or was a capital receipt.

Analysis: The compensation was awarded because the requisitioning of the six sheds or godowns deprived the assessee of the storage facilities essential to carry on its timber business. The findings recorded that the business had practically come to a standstill, no suitable alternative storage premises were available, and the award represented two years' purchase of net annual profits by way of compensation for the loss caused by the compulsory taking over of the premises. The decisive question was not whether the amount was calculated with reference to profits, but whether it was paid for loss of trading profits or for injury to the business structure itself. On the facts found, the payment was made for destruction or sterilisation of the profit-making apparatus and for loss of an enduring business asset, not as a mere substitute for trading receipts.

Conclusion: The amount was a capital receipt in the hands of the assessee and was not taxable as income.

Ratio Decidendi: Compensation received for compulsory requisition of premises that destroys or seriously impairs the profit-making apparatus of a business is a capital receipt, even if the amount is quantified by reference to profits.

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