1977 (9) TMI 2 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of the sums received by the assessee.
2. Nature of the receipts: whether they are capital receipts or revenue receipts.

Summary of Judgment:

Issue 1: Taxability of the sums received by the assessee

The primary question referred to the court was whether the sums of Rs. 30,000 and Rs. 20,000 received by the assessee from M/s. Biological Products (P) Ltd. during the assessment years 1966-67 and 1967-68, respectively, are taxable. The ITO concluded that these amounts were revenue receipts and taxable as business income. However, the AAC and the Income-tax Appellate Tribunal disagreed, holding that the amounts were capital receipts and thus not taxable.

Issue 2: Nature of the receipts: whether they are capital receipts or revenue receipts

The court examined the agreements between the assessee and the company. Initially, the assessee was to receive royalty payments based on the sales of certain drugs. Disputes led to a new agreement in 1963, which was later superseded by a compromise agreement in 1966. Under this final agreement, the assessee received Rs. 50,000 in total, in consideration for withdrawing a suit and giving up his right to manufacture certain drugs.

The court noted that the assessee had surrendered his technical knowledge and know-how, which constituted a capital asset. This surrender made the asset unproductive of profit, thus the amounts received were not in the course of business but for sterilizing a capital asset. The court cited precedents, including *Chunduri Venkata Reddy v. CIT* and *CIT v. Prabhu Dayal*, to support the view that compensation for the termination of a business asset or right is a capital receipt.

The court rejected the Revenue's argument that the amounts were in lieu of salary or business profits. The assessee was no longer an employee of the company, and the amounts were not related to any past services or business profits. The court distinguished this case from others cited by the Revenue, such as *Travancore Sugars and Chemicals Ltd. v. CIT* and *CIT v. Manna Ramji & Co.*, where the payments were tied to ongoing business activities or profits.

Conclusion:

The court concluded that the sums of Rs. 30,000 and Rs. 20,000 received by the assessee were capital receipts and not taxable. The question referred was answered in the affirmative and in favor of the assessee, with costs awarded to the assessee.