HIMACHAL PRADESH NATIONAL LAW

UNIVERSITY, SHIMLA

DISCIPLINE: PRINCIPLES OF TAXTATION

TITLE: - CASE COMMENT : PADMARAJE R.

KADAMBANDE V. CIT [1992] 62 TAXMAN 456 (SC)

SUBMITTED BY- SUBMITTED TO

ROHIT DHAMIJA PROF. (Dr.) GIRJESH SHUKLA
1020202105 PROFESSOR OF LAW,
HPNLU BA.LLB, 7TH SEMESTER SHIMLA

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 ACKNOWLEDGEMENT

I Rohit Dhamija a FOURTH-year law student would like to express my sincere gratitude
towards Prof. (Dr.) Girjesh Shukla, Professor of Law, who always stand for us and helped me
at every possible step of my assignment. And without whose guidance I would not have
completed my assignment successfully. I would also like to sincerely thank Himachal Pradesh
National Law University, Shimla and its faculty for guiding and encouraging me at every step
of my assignment.

I would also like to extend gratitude to my seniors and friends who played an important role
and assisted me with the insights they had. Last but not the least I bestow my heartfelt
gratitude towards my parents and family members whose instant motivations kept me going
throughout the assignment.

ROHIT DHAMIJA
B.A. L.L.B (Hons)
7th SEMESTER

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 DECLARATION BY THE STUDENT

I, the undersigned solemnly declare that the present assignment on the topic “CASE
COMMENT: PADMARAJE R. KADAMBANDE V. CIT [1992] 62 TAXMAN 456
(SC)”
is purely based on my own work as it have been carried out during my study under the
esteemed guidance and supervision of Prof. (Dr.) Girjesh Shukla, Professor of Law, at the
Himachal Pradesh National Law University, Shimla and also from the help of various online
websites and research papers. I would like to make clear that the whole assignment is typed
by me on my own words after taking the help from the mentioned sources. It is important to
note that plagiarism may be found as I haven’t done the assignment paraphrase. I further
certify that:

1. The work contained in the assignment is not purely original but has been done by myefforts
and hard work.

2. The work is not submitted to anyother organizations, journals, websites, etc.

3. I’ve followed the guidelines provided bythe university in writing the assignment.

ROHIT DHAMIJA
B.A. L.L.B (Hons)
7th SEMESTER

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 LIST OF ABBREVIATIONS

& And

AIR All India Reporter

Anr Another

Art Article

Bom Bombay

Civ. Civil

Co. Company

Const. Constitution

Del Delhi

Ed. Edition

Ltd. Limited

Ors Others

SC Supreme Court

SCC Supreme Court Cases

Sec Section

UOI Union of India

V. Versus

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 TABLE OF CONTENTS

 LIST OF CASES REFERRED............................................................................5

 FACTS OF THE CASE........................................................................................6

 ISSUES FRAMED................................................................................................7

 ARGUMENTS ADVANCED..............................................................................8

 OBSERVATIONS/DECISION OF THE COURT...........................................10

 SIGNIFICANCE & CONTRIBUTION OF THE CASE................................13

LIST OF CASES REFERRED

 Chandroji Rao vs Commissioner Of Income-Tax, M.P 1971 SCR (1) 422.

 CIT v. Kamal Behari Lai Singha (1971) 82 ITR 460, 462 (SC).
 CIT v. Seshasayee Bros. (P.) Ltd. 1996 222 ITR 818.
 CIT v. Shaw Wallace & Co. 1932 ILR 59 Cal. 1343.
 CIT v. South India Pictures Ltd (1956) 29 ITR 910 (SC)
 CIT v. Vazir Sultan & Sons [1959] 36 ITR 175.
 Divencha v. C.I. T. 48 I.T.R. 222.
 Dr. K George Thomas v. CIT 1985 156 ITR 412.
 E.D. Sassoon & Co. Ltd. v. CIT 1954 26 ITR 27.
 H.H. Maharani Shri Vijaykuverba vs Commissioner Of Income-Tax1963 49 ITR. 594 Bom.
 P.H. Divecha v. CIT 1963 48 ITR 222.
 Maharajkumar Gopal Saran Narairi Singh v. CIT (1935) 3 ITR 237 (PC).
 Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365, 4369
 Padmaraje R. Kadambande v. CIT AIR 1992 SC 1495.
 Pitney J Eisner v. Macomber (1919) 252 US 189.
 Raghuvanshi Mills Ltd. v. CIT 1952 22 ITR 484.
 Raja J. Rameshwar Rao vs Commissioner Of Income-Tax AIR 1963 SC 352.

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 FACTS AND BACKGROUND

1. Shrimant Padmaraje R. Kadambande, herein referred to as the assessee, was the sole child of
Late Chatrapati Raja Ram Maharaj, the erstwhile ruler of the State of Kolhapur.

2. Pursuant to the Huzur Order passed by the successor of Chatrapati Raja Ram Maharaj dated
8- 4-1947 the assessee was granted a cash allowance of Rs. 3,000 per month from 1-4-1947.

3. Subsequent to the amalgamation of the Kolhapur State into the State of Bombay, this
allowance persisted until 31-7-1955.hereafter, it was discontinued.

4. Discontinuation occurred due to the provisions of the Bombay Merged Territories

Miscellaneous Alienations Abolition Act, 1955 as the Act was passed to abolish
miscellaneous alienations of various kinds prevailing in the merged territories in the State of
Bombay.

5. The District Treasury Officer, Kolhapur, communicated the discontinuance of the allowance
on 14-4-1956.

6. The Act, particularly under clause (d) of section 15(1), facilitated the disbursement of a
compassionate cash allowance even in the wake of the general abolition of alienations
pursuant to section 4 of the Act.

7. Consequently, the assessee continued to receive a modified cash allowance from 1-8-1956
onward. For the assessment year 1963-64, the assessee received a sum of Rs. 36,000, and for
the subsequent year 1964-65, the receipt amounted to Rs. 33,992

8. The pivotal issue before the Income Tax Officer (ITO) was the taxability of these sums.

9. The assessee contended that the received amounts were of a capital nature, thereby falling
outside the purview of income taxation.

10. The ITO, however, rejected this contention.

11. Dissatisfied with the ITO's decision, the assessee appealed to the Appellate Assistant
Commissioner (AAC).

12. The AAC affirmed the ITO's orders, dismissing the contentions raised by the assessee.

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13. Subsequently, a reference was instituted before the High Court for the assessment years 1963-

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 64 and 1964-65, which relying on the statutory provisions of the Act and precedent, notably
the case of H.H. Maharani Shri Vijaykuverba Saheb of Morvi v. CIT 1963 49 ITR 594
(Bom.)1, determined that the amounts received by the assessee constituted income within the
purview of the Income-tax Act, precluding their classification as capital receipts.

14. The aggrieved assessee sought recourse in the Supreme Court, challenging the decision of
the High Court.

ISSUES

WHETHER THE CASH ALLOWANCE RECEIVED BY THE ASSESSEE

CONSTITUTES COMPENSATION OR INCOME?

1
H.H. Maharani Shri Vijaykuverba vs Commissioner Of Income-Tax1963 49 ITR 594 Bom.

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 ARGUMENTS ADVANCED AND CONTENTIONS

Arguments Advanced by Assessee’s Counsel (Appellant) : -

15. The learned counsel for the appellant laid emphasis on the provisions of the Act,
particularly on Section 22, where the definition of "alienation" is outlined and argued that
the original payment was instituted under the Huzur Order, an arrangement subsequently
annulled with the amalgamation of the Kolhapur State.

16. Also talked about Section 4 which unequivocally declares the abolition of all alienations,
incorporating a non obstante clause and asserted that this provision encompasses the
Huzur Order, abolishing the original payment.

17. Counsel further contended that a pivotal distinction exists between the cash allowance
granted under section 15(1)(d)3 and the allowances specified under clauses (i), (ii), and
(iii) of the same section and highlighted that section 15(1)(d) allows for the continuation
of a cash allowance on compassionate grounds, and this category is different from other
allowances under the section.

18. Counsel further contended that the High Court's construal of Section 15 contradicted the
overarching spirit and purpose of the section and that the statutory provision
accommodates compassionate payments under specific circumstances, and the High
Court's ruling undermines this legislative intent.

19. The learned counsel asserted that the pivotal factor in determining whether the payments
in question constitute revenue receipts lies in a meticulous examination of statutory
provisions. Citing the authoritative guidance found in P.H. Divecha v. CIT 1963 48 ITR
222 (SC)4 at 231-32, the counsel underscores that the essence of income is contingent
upon the nature and quality of the payment, with periodicity not being deemed
conclusively determinative.

20. In drawing a parallel to the present case, the counsel invoked the precedent set by H.H.

2
Bombay Merged Territories Miscellaneous Alienations Abolition Act, 1955, No. 33 of 1956, § 2.
3
Bombay Merged Territories Miscellaneous Alienations Abolition Act, 1955, No. 33 of 1956, § 15(1)(d).
4
P.H. Divecha v. CIT 1963 48 ITR 222.

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 Maharani Shri Vijaykuverba Saheb of Morvi's case, wherein the High Court established
that voluntary payments lacking consideration do not fall within the ambit of income.
This analogy is aptly applied to the current scenario, emphasizing that the government's
allowance is entirely discretionary, devoid of any compulsion. The subsequent
acquisition of a right by the assessee post-order is asserted to be irrelevant in determining
the core question.

21. Furthermore, the counsel referred the case of S.R.Y. Sivaram Prasad Bahadur's5 to
underscore that the decisive factor in characterizing a payment lies in its quality, not the
method or measure of payment. It was contended that the High Court, in rendering its
decision, failed to adequately consider these essential aspects germane to whether the
payment in question should be categorized as capital or revenue.

Arguments Advanced by the Respondent’s Counsel:-

The learned counsel representing the respondent (revenue) asserted several key contentions.

22. Firstly, by referencing Section 2(24) of the Income-tax Act, it was argued that, in the
absence of windfall, regularity in payment is sufficient to qualify as income. This
principle, as elucidated in the case of E.D. Sassoon & Co. Ltd. v. CIT 1954 26 ITR 27
(SC)6 at 49 and reiterated in Raghuvanshi Mills Ltd. v. CIT 1952 22 ITR 484 (SC) 7 at 489,
establishes that consistent and non-fortuitous payments constitute income. Accordingly, it
was contended that the payments received by the assessee, not amounting to
compensation, should be categorized as income. In instances of compensation, the
counsel refers to the precedent in CIT v. Kamal Behari Lal Singha 1971 82 ITR 460
(SC)8.

23. Secondly, the counsel asserted the relevance of Raja Rameshwara Rao's case9 as a direct
authority governing the present case. Drawing parallels to the situation at hand, where the
assessee sought maintenance allowance from the government, the argument was made
that

5
S. R. Y. Sivaram Prasad Bahadur vs The Commissioner Of Income Tax 1972 SCR (1) 220.
6
E.D. Sassoon & Co. Ltd. v. CIT 1954 26 ITR 27.
10
7
Raghuvanshi Mills Ltd. v. CIT 1952 22 ITR 484.
8
CIT v. Kamal Behari Lal Singha 1971 82 ITR 460.
9
Raja J. Rameshwar Rao vs Commissioner Of Income-Tax AIR 1963 SC 352.

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 periodic payments in the form of maintenance allowance, as contemplated in clause (d) of
Section 15(1), do not qualify as compensation. The basis or grounds for the grant, it is
contended, are extraneous to taxation considerations. Therefore, the characterization of
the allowance as compassionate does not alter the tax implications.

24. Thirdly, reliance was placed on S.R.Y. Sivaram Prasad Bahadur's case to argue that the
substance of the payment should be examined. It is asserted that the judgment of the High
Court is correct in this regard.

OSERVATIONS AND DECISION (inc. RATIO DECIDENDI)

25. The court elucidated that Section 2(24) of the Income-tax Act, 1961, comprehensively
defines the term 'income' in an inclusive manner. In substantiating its stance, the court
referenced its precedent in the case of E.D. Sassoon & Co. Ltd., where it cited the ruling
in CIT v. Shaw Wallace & Co. 1932 ILR 59 Cal. 1343 10. This precedent established that,
within the context of the Indian Income-tax Act, 'income' implies a periodic monetary
return that "comes in" with some form of regularity or anticipated regularity from defined
sources. The source need not be one that is expected to be continuously productive, but it
must be geared towards yielding a definite return, excluding windfalls.

26. The court emphasized that the interpretation of the term 'income' must be contextualized
within the specific facts of the case at hand. It underscored that the observations made by
the Privy Council in Shaw Wallace & Co.'s case cannot be wielded as a universally
applicable principle, as attempted by the counsel for the revenue. Instead, these
observations should be construed with reference to the unique circumstances of the case
to which they pertain.

27. In deliberating upon Section 15, the court discerned a fundamental distinction between
cases falling under sub-section (1), clauses (i), (ii), and (iii) and those covered by clause
(d) of the proviso. The former involves statutory payments at varying rates for different

10
CIT v. Shaw Wallace & Co. 1932 ILR 59 Cal. 1343.

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 categories of individuals, necessitating no application, whereas the latter, applicable to
individuals under clause (d), mandates an application. Relying on the precedent set by
Raja Rameshwara Rao, the court underscored that maintenance allowances, unlike the
present case, are qualified by statute, and the discretion involved in the present matter
distinguishes it as a purely discretionary payment. The court dismissed the contention that
an enforceable right arises post-order, highlighting that, unlike cases under clauses (i),
(ii), and (iii), no statutory right is established in cases falling under clause (d) of Section
15(1).

28. Further, the court, drawing from the ruling in S.R.Y. Sivaram Prasad Bahadur's case,
emphasized that the decisive factor in determining the character of a payment is its
quality, not the method or measure. It expounded on the requirement for a source from
which the receipt arises, emphasizing a connection between the quality of the receipt and
the source. Dismissing Section 15(1), proviso clause (d), as a source, the court
emphasized the discretionary and compassionate nature of the payment, stating that it
neither compels nor obligates the government to make the payment.

29. Citing H.H. Maharani Shri, Vijaykuverba Saheb of Morvi's case, the court highlighted
that a voluntary payment without consideration and lacking a traceable real source cannot
be categorized as income. The court also addressed the marginal heading of Section 15,
denoted as 'compensation,' emphasizing that the discretionary nature of payments under
clause (d) does not impart a revenue character. Quoting Chandroji Rao's case11, the court
asserted that a marginal heading cannot control the interpretation of a section with a clear
and unambiguous meaning.

30. Consequently, the court concluded that the amounts received by the assessee in the
relevant financial years should be regarded as capital receipts, thereby not constituting
income under Section 2(24). Accordingly, the judgment of the High Court was set aside,
and the appeals were allowed with no order as to costs.

13
11
Chandroji Rao vs Commissioner Of Income-Tax, M.P 1971 SCR (1) 422.

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OBITER DICTA

31. The court, in the course of its observations referencing the case of Raja Rameshwara Rao,
acknowledged a clear distinction drawn by the Regulations between the commutation
sum or compensation and the interim maintenance allowances. The court asserted that the
commutation sum, paid as compensation for the loss of the Jagir, was deemed capital and
not liable to taxation. Conversely, the court contended that, based on the Regulations
under which the allowances were paid, they should be regarded as income. The court
emphasized that the allowances, while not characterized as windfall, created a right
enforceable in a civil court under the Abolition Regulation. Furthermore, the court noted
that the allowances were payable with regularity and of a recurring nature, characteristics
recognized as indicative of income.

32. The court made an observation dismissing the contention that an enforceable right arises
post-order. It emphasized that, unlike cases falling under clauses (i), (ii), and (iii) of
Section 15(1), no statutory right is created in cases falling under clause (d) of the proviso.

33. The court considered the question of the source of interim maintenance allowances and
concluded that if a source had to be found for them, the Regulation had to be held as the
source.

34. Court further observed that a payment may even be described as 'pay', 'remuneration',
etc., but that does not determine its quality, though the name by which it has been called
may be relevant in determining its true nature, because this gives an indication of how the
person who paid the money and the person who received it viewed it in the first instance.
The periodicity of the payment does not make the payment a recurring income because
periodicity may be the result of convenience and not necessarily the result of the
establishment of a source expected to be productive over a certain period.

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 ANALYSIS

35. The most litigated issue in the law of income tax is whether particular receipts or accruals
are of capital nature or are characterised as revenue receipts. Capital and revenue receipt
play a vital role in accounting and taxation profit and they always influence the decision of
the taxpayers. In common parlance, a capital receipt is one which adds to the corpus of an
organization, while revenue receipts are the yields generated by the business operations.
However, this is just a layman's view and the reality is not as simple to comprehend. The
distinction between the two, however is vital for arriving at the taxability of the business
as a whole.

36. Treatment of receipts under the Income Tax Act -

37. Receipts refer to amounts received by a business i.e., cash inflows. Receipts may be
classified as Capital Receipts and Revenue Receipts. It is necessary to note this distinction
clearly because only the revenue receipts are taken to the Profit and Loss Account and not
the capital receipts. For ascertaining the total income, only the revenue expenses are
deducted from the revenue receipts whereas amount spent on acquisition of capital assets
is not considered. Capital expenditure is in relation to capital and it is not deductible from
the gross income of business to determine the total income. It is a thumb rule that Capital
receipts are exempt from tax unless they are expressly taxable, whereas revenue receipts
are taxable unless they are expressly exempt from tax.12

38. Thus, income tax being on 'income', 'capital' was not the subject of charge under the Act.
Law Reports are full of cases where the legal battle raged over the issue: whether a
particular receipt is a return or realisation of capital, or it represents 'income/revenue'
taxable under the Act. The Legislature, in the name of plugging the loopholes has eroded
and made ingress in this field with the result that what was not taxable as 'capital' became
taxable by enacting express taxing provisions, e.g. by way of capital gains under Section
45, or Compensation under section 17(3)(i) or 28(ii), or balancing charge (upto
assessment year 1987- 88) under sections 41 and 59, or annuity, etc.

12
Maharajkumar Gopal Saran Narairi Singh v. CIT (1935) 3 ITR 237 (PC).

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 39. From time to time courts comment about the difficulty of distinguishing between revenue
and capital. In the case of Allied Mills Industries Pty Ltd v FC of T13, the Federal Court
has remarked that, "The problem of distinguishing between a receipt of income and a
receipt of capital frequently engages the attention of the courts, and, whilst the law
reports are replete with cases involving this distinction, in the end each case has been
found to turn on its own facts. No criteria of universal application emerge from the same;
but the decided cases do provide useful guidance to decipher principles which may be
helpful in considering the question."

40. Similarly in India, in the case of CIT v. South India Pictures Ltd14, the Hon'ble Supreme
Court while commenting on the difficulty of discerning a concrete test of distinction
between the two types of receipts, laid down that, "No infallible criterion or test can be,
or
has been, laid down and the decided cases are only helpful in that they indicate the kind of
consideration which may relevantly be borne in mind in approaching the problem. The
character of the payment received may vary according to the circumstances. Thus, the
amount received as consideration for the sale of a plot of land may ordinarily be a capital
receipt but if the business of the recipient is to buy and sell lands, it may well be his
income/revenue."

41. In deciding whether a particular receipt is of a capital or revenue type, the following
considerations are considered to be immaterial and not going to decide or change the
character or nature of the receipt.
 Receipt in lump sum or in Instalments. Whether any income is received in lump sum or
in instalments, it will not make any difference as regards its nature. Thus, whether a
receipt is a periodic receipt or a single receipt is immaterial for the purposes of
determining its nature.15
 Nature of receipt in the hands of recipient. Whether a receipt is capital or revenue will be
determined in the hands of the persons receiving such income. No attention will be paid
towards the source from which the amount is coming. Salary even if paid out of capital by
a new business will be it revenue receipt in the hands of employee.

13
Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365, 4369.
14
CIT v. South India Pictures Ltd (1956) 29 ITR 910 (SC).
17
15
Rajah Manyain Meenak and Shamma v. C.I. T. (1956) 30 1. T.R. 286.

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  Magnitude of receipt. The magnitude of the receipt, whether big or small, cannot decide
the nature of the receipt although the size of a receipt in a transaction is not an entirely
irrelevant consideration. A receipt of 10,000 may be of revenue nature whereas a receipt
of only ‘1,000 may be a capital receipt. Supreme Court has ruled in a case Divencha v. C.I.
T. (48 1. T.R. 222)16, that the magnitude of a receipt is immaterial for the purpose of
determining its nature.
 Time of receipt. The nature of the receipt has to be determined at the time when it is
received and not afterwards when it has been appropriated by the recipient.
 Quality of receipt. Whether the income is received voluntarily or under a legal obligation,
it will not make any difference as regards its nature.

42. An Insight - Tests of Identification

43. The distinction between a capital receipt and revenue receipt though fine, is real. The
dividing line may be thin, and often at first sight, imperceptible. The decision of the
question is, however, not left to the application of any arbitrary standards. There are
certain broad principles which guide the determination of the character of the receipt.
 Fruit-Tree Analogy - Income as a flow, Capital as a fund: In the case of CIT v. Shaw
Wallace17 pertaining to the determination of the taxability of compensation received on
account of termination of an agency agreement, under the aegis of the Income tax Act
1922, it was laid down that, " income has been likened pictorially to the fruit of a tree or
the crop of a field. “

 In the US, this para materia famous analogy is that of Pitney J Eisner v.
Macomber,18where his Honour said, "The fundamental relation of 'capital' to 'income' has
been much discussed by economists, the former being likened to the tree or the land, the
latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the
latter as the outlet stream, to be measured by its flow during a period of time."

 The tree signifies the source from which one gets fruits which symbolize the
yield/income. The receipt arising from the sale of tree itself is, therefore, considered a
capital receipt Â

16
Divencha v. C.I. T. 48 I.T.R. 222.
17
CIT v. Shaw Wallace AIR 1932 PC 138.

19
18
Pitney J Eisner v. Macomber (1919) 252 US 189.

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 which is not income; but the receipts flowing from this source, i.e. fruits, are income. On
application of this analogy, it can be said that while the receipt arising from the sale of a
machine is not income but from the sale of produce brought out from the machine is
income. In these cases, however, if a person deals in purchase and sale of machines, these
assets do not remain a source and the profit derived from activities of purchase and sale
become income.

 Examine the character of the receipt in the hands of the receiver, payer's motive is
immaterial : In deciding whether a certain receipt is income or not, the test is its character
in the hands of the recipient and not character in the hands of the payer, nor the fund out
of which the money came.19

 A capital receipt in the hands of one may be income in the hands of another. The source
from which the payment is made has no bearing on the question. Where an amount is
paid which, so far as the payer is concerned, is paid wholly or partly out of the capital,
and the receiver receives it as income on his part, the entire receipt is taxable in the hands
of the receiver.20 For example, in an instance of payment received on the redemption of
debentures, if is held as investment by the recipient then it is regarded as a capital receipt
in the hands of the recipient, even if the company makes payment out of its trading
profits, which is essentially a revenue receipt in nature.

44. While there are no concrete guiding yardsticks or exhaustive mechanisms to ascertain the
nature of income, the issue has been and shall be debated relentlessly before the judicial
forum where new light could be thrown on certain hitherto ignored factors which may be
a more conclusive test as to whether an income falls under the purview of revenue receipts
or capital receipts. As no infallible criterion or test can be, or has been, laid down and the
decided cases are only helpful in that they indicate the kind of consideration which may
relevantly be borne in mind in approaching the problem of an income, which may be
revenue receipt in the hands of one Assessee but at the same time it can be a capital
receipt by the way of its application and usage. It is in order of things that the legislature
entails certain express parameters to decipher the character of the receipts, in order to
mitigate the

19
CIT v. Vazir Sultan & Sons [1959] 36 ITR 175.
21
20
CIT v. Kamal Behari Lai Singha (1971) 82 ITR 460, 462 (SC).

22
 constant friction between taxpayer and the revenue officials and thus simplify the tax
framework.

45. Hon’ble Supreme Court, in the case of Padmaraje R Kadambande v. CIT21 observed that,
“…we hold that the amounts received by the assessee during the financial year in
question have to be regarded as capital receipts, and, therefore, are not income within
meaning of section 2(24) of the Income Tax Act.” This clearly shows, as is the settled
law, that a capital receipt, in principle, is outside the scope of income chargeable to tax.
Of course, there are specific provisions under the Income Tax Act which provide that
certain capital receipts can also be considered as income, such as under section 2 (24)(vi)
which covers “any capital gains chargeable under section 45”, but right now we are
confined to normal connotations of the expression income’.

46. Howsoever liberal or narrow be the interpretation of expression ‘income’, it cannot alter
character of a receipt, ie. convert a capital receipt into revenue receipt or vice versa. The
crucial distinction between capital and revenue cannot be blurred or nullified by even the
most liberal interpretation of expression ‘income’. It is also important to bear in mind that,
as held by Hon’ble Supreme Court in the case of Dr. K George Thomas v. CIT22, “the
burden is on the revenue to establish that the receipt is of a revenue nature” though “once
a receipt is found to be of revenue character, whether it comes under exemption or not, it
is for the revenue to establish”. It is thus clear that capital receipts are inherently outside
the scope of an income which can be taxed under section 28(iv), and Hon’ble Bombay
High Court, in the case of Mahindra & Mahindra Ltd. also holds so.

47. As to what constitutes capital receipt, we find guidance from Hon’ble Madras High
Court’s judgment in the case of CIT v. Seshasayee Bros. (P.) Ltd.23 [1996] 222 ITR
818/89 Taxman 13 wherein Their Lordships, after elaborately surveying the legal
precedents on this issue, concluded that, “Thus, a combined reading of the above said
judicial pronouncements would go to show that when a receipt is referable to fixed
capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to
circulating capital or stock in trade”. To sum up, unless it is a revenue receipt, it cannot
be in the nature of income [except in a

21
Padmaraje R. Kadambande v. CIT AIR 1992 SC 1495.
22
Dr. K George Thomas v. CIT 1985 156 ITR 412.
23
23
CIT v. Seshasayee Bros. (P.) Ltd. 1996 222 ITR 818.

24
 situations in which capital receipts are specifically included in the definition of income
such as under section 2 (24) (vi)], and unless it is in nature of income, it cannot be
considered for taxation under section 28(iv). The reference to benefits which can be
brought to tax under section 28(iv) for benefits ‘arising from the business’ also indicates
that such benefit must be a business receipt, or revenue receipt, in nature.

CONTRIBUTION & SIGNIFICANCE

48. The case of Padmaraje R. Kadambande v. CIT24 has significantly shaped Indian income
tax law by providing clarity on the distinction between capital expenditure and revenue
expenditure. This distinction holds crucial importance as it determines the deductibility of
expenses for computing income under the Income Tax Act, 1961. The case establishes the
principle that all revenue receipts, unless expressly excluded, must be taxable, while capital
receipts, unless expressly prohibited, are ineligible for taxation. To subject a capital receipt
to taxation, it must either fall within the definition of income under Section 2(24)25 or be
expressly included as capital gains under Section 45 of the Act26. In the absence of either
circumstance, it can be inferred that the legislature intended such receipts to be
considered as revenue receipts.

49. Under the Indian Income-tax Act, the case underscores that even voluntary payments can
constitute 'income' for the recipient. The necessity for these payments to proceed from a
legal source is dispelled, as the enforcement of payments can be sought in a court of law.
However, it is clarified that not every voluntary payment automatically constitutes
'income'. Voluntary and gratuitous payments, when linked to the office, profession,
vocation, or occupation, may be considered 'income,' even if their enforcement cannot be
insisted upon. Such payments are regarded as 'income' because they are referable to a
definite source, namely the office, profession, vocation, or occupation. Therefore, a
voluntary payment connected to these sources is taxable, considering it has an origin in
the payee's office, profession, or vocation—a definite source of income. The Indian
Income-

24
Supra Note 21.
25
Indian Income Tax Act, No. 43 of 1961, § 2(24).
25
26
Indian Income Tax Act, No. 43 of 1961, § 45.

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tax Act taxes income from every source, and even a voluntary payment, seen as having a
practical and real source of income, falls within the category of 'income' taxable under the
Act. However, a voluntary payment made without consideration and not traceable to any
practical source, solely dependent on the whim of the donor, does not fall within the
category of "income."

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