Compromise receipts, depreciation and share-financing interest: revenue income, limited ownership, and deduction rules applied.

Compromise receipts substituting expected trading profits were treated as revenue income and assessed accordingly, because the compromise did not destroy the profit-making structure. A deed of exchange was held to confer a 1/6th share in the sugar mills itself, not merely an interest in machinery. Depreciation was denied on that share because the relevant provision applies only where the buildings, machinery, plant or furniture are the assessee's property. Interest paid on borrowed money used to acquire shares was deductible, even where the share purchase was not linked to the assessee's business, as expenditure incurred to earn income.

---

---

Issues: (i) Whether the sums of Rs. 16,000 and Rs. 39,262 received on compromise were assessable as income; (ii) whether the assessee acquired 1/6th share of the sugar mills; (iii) whether depreciation was allowable on the 1/6th share in S. B. Sugar Mills; (iv) whether the assessee was entitled to deduction of Rs. 75,211 on account of interest paid on borrowed money used to acquire shares of Jaswant Sugar Mills Ltd.

Issue (i): Whether the sums of Rs. 16,000 and Rs. 39,262 received on compromise were assessable as income.

Analysis: The compromise substituted a lump sum for the estimated profits expected under the lease arrangement. The receipts represented compensation for expected trading profits and did not destroy the assessee's profit-making structure. On the facts, the amounts were not capital receipts but income receipts.

Conclusion: The sums of Rs. 16,000 and Rs. 39,262 were assessable as income and the finding is against the assessee.

Issue (ii): Whether the assessee acquired 1/6th share of the sugar mills.

Analysis: The deed of exchange expressly conveyed a 1/6th share in the sugar mills. The transaction was not confined to a mere interest in the machinery but transferred a share in the property itself.

Conclusion: The assessee acquired 1/6th share of the sugar mills and the finding is in favour of the assessee.

Issue (iii): Whether depreciation was allowable on the 1/6th share in S. B. Sugar Mills.

Analysis: Depreciation under the relevant provision is allowable only where the buildings, machinery, plant or furniture are the property of the assessee. Fractional ownership of a share in the machinery was held insufficient to satisfy that requirement, and the provision was construed strictly.

Conclusion: Depreciation was not allowable on the 1/6th share and the finding is against the assessee.

Issue (iv): Whether the assessee was entitled to deduction of Rs. 75,211 on account of interest paid on borrowed money used to acquire shares of Jaswant Sugar Mills Ltd.

Analysis: The interest was paid on money borrowed for acquiring shares. Even if the purchase was not connected with the assessee's business, the expenditure was deductible as interest on borrowed funds and as expenditure laid out for earning income under the applicable provisions. The case was treated as governed by the same principle as earlier decisions allowing such deduction.

Conclusion: The assessee was entitled to deduction of Rs. 75,211 and the finding is in favour of the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly against the assessee, with no order as to costs.

Ratio Decidendi: Compensation received in substitution of expected trading profits is revenue income, depreciation is allowable only where the relevant asset is the property of the assessee, and interest on borrowed money used to acquire income-yielding shares is deductible under the applicable income-tax provisions.

---