Compensation for extinguishing an income-producing right is capital receipt, not taxable income.

Compensation paid for extinguishment of an income-producing right to levy excise duty was treated as a capital receipt, because the payment was made in lieu of destruction of the source itself and not for past services or discharge of a trading liability. The right to levy duty was held to be a capital asset, and when that source of income was sterilised, the compensation retained its capital character and was not assessable as income. The receipt was therefore held not liable to tax.

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Issues: Whether the sum received by the assessee as compensation for the extinguishment of his right to levy excise duty was a capital receipt or a revenue receipt liable to tax.

Analysis: The receipt was paid not for past services or for discharge of any trading liability, but as compensation for the extinction of the assessee's income-producing right to levy excise duty within the jagir. The right itself constituted a capital asset, and the payment was made in lieu of its destruction. Where the source of income is sterilised or destroyed and compensation is paid for that destruction, the receipt retains a capital character and is not assessable as income.

Conclusion: The amount of Rs. 62,204 was a capital receipt and was not liable to tax.

Ratio Decidendi: Compensation paid for the destruction or extinction of an income-producing source is a capital receipt, even if its measure is linked to anticipated income from that source.

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