Law:

Section:

Section 4 of the Income-tax Act, 1961 (corresponding to section 3 of Indian Income-tax Act, 1922) - Income - Chargeable as - Assessment year 1960-61 - By an agreement with a Delhi-company, assessee-company undertook to lend certain amount to that company in order to erect a flour milling plant at Madras - Borrowing was to carry interest plus commission of one per cent on all sales at Madras - Agreement was subsequently cancelled due to some differences as a result of which assessee-company was paid back amount lent with interest as well as compensation for deprivation of commission which it could earn for seven years - Whether amount of compensation received was a capital receipt and, thus, it was not liable to tax as business income of assessee - Held, yes FACTS By an agreement with a Delhi company, the assessee-company undertook to lend certain sum to that company in order to erect a flour miling plant at Madras, and the borrowing was to carry interest plus a commission of 1 per cent on all sales at Madras. The agreement was subsequently cancelled due to some difference, as a result of which the assessee-company was paid back the amount lent so far with interest, as well as a compensation amount, whereupon the Delhi Company was released of all its obligations under the agreement. For the assessment year 1950-51, the assessee-company claimed the compensation amount as a capital receipt and not income. The ITO held that the compensation was for services rendered by the assessee-company contemporaneous with the advancement of the loan for finding a site to the Delhi company for erection of their factory and also for loss of profit on account of the termination of the agreement and therefore was of opinion that it was a business profit and included the same in the company's assessment. On second appeal, the Tribunal was of the view that the assessee ventured to invest a large sum with the Delhi company for a particular purpose, in return the assessee was to get 1 per cent, as commission on the selling price of all the products to be manufactured by the Delhi company; such a commission was to be paid for a continuous period of 7 years and the assessee therefore…

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