Law:

Section:

Section 4 of the Income-tax Act, 1961 (Corresponding to section 3 of the Indian Income-Tax Act, 1922) - Income - Chargeable as - Assessment year 1951-52 - In year 1931 assessee firm was appointed as sole selling agents and distributors for Hyderabad State for cigarettes manufactured by company 'V' - In terms of appointment, assessee were allowed discount of 2 per cent on gross selling price - In year 1939, another arrangement was arrived at whereby assessee was given discount of 2 per cent not only on goods sold in Hyderabad but also outside Hyderabad State - In year 1950, company 'V' passed a resolution reverting to arrangement agreed upon in year 1931 - It, thus, paid certain amount by way of compensation to assessee for termination of arrangement entered into in year 1939 - Whether amount of compensation received by assessee was capital receipt and as such not liable to tax - Held, yes FACTS In year 1931, the assessee a registered firm was appointed the sole selling agents and sole distributors for the Hyderabad State for the cigarettes manufactured by company V. In terms of appointment, assessee were allowed a discount of 2 per cent on gross selling price. No written agreement was entered into between the company and the assessee in respect of the above mentioned arrangement nor was there any correspondence exchanged between them in this behalf. In 1939 another arrangement was arrived at between the assessee and the company whereby the assessee was given a discount of 2 per cent not only on the goods sold in the Hyderabad State but on all the goods sold in the Hyderabad State and outside Hyderabad State. On 16-6-1950, the board of directors of company 'V' passed a resolution reverting to the old arrangement agreed upon in year 1931. During the accounting year relevant to the assessment year 1951-52, the assessee received certain amount by way of compensation for termination of arrangement entered into in year 1939. The ITO included the aforesaid amount in the assessee's total income and taxed it as a revenue receipt. On appeal, the AAC held that the sum was not a revenue receipt but a capital receipt being compensation for the loss of the agency and as such…

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