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Compensation receipts from tangible assets
Compensation receipts from sale
or loss of tangible assets often give rise to tax disputes --- whether
it is of a capital nature (not taxable) or a revenue nature
(taxable)? Let us look at the following case.
Glenboig Union Fireclay Co.
Ltd. versus CIR 12 TC 427
In this case, Glenboig had the
right to work certain fireclay beds, some of which extended under
railway property. The railway company paid Glenboig for refraining
from working the beds, the payment being based on the profit that
might have been earned if Glenboig had worked the bed. It was held
that the payment was a capital receipt, being compensation for the
permanent loss of a fixed capital asset --- the right to work the
beds. The fact that loss of profits was taken into account in arriving
at the amount of compensation did not alter the nature of the
payment, which was capital.
In his judgment, Lord Wrenby
said this: "This was compensation for being precluded from working
part of the demised area which otherwise the Appellants might have
worked and thereby made profit. Was that compensation profit? The
answer may be supplied, I think, by the answer to the following
question: Is a sum profit which is paid to an owner of property on
the terms that he shall not use his property so as to make a profit?
The matter may be regarded from another point of view: the right to
work the area in which the working was to be abandoned was part of
the capital asset consisting of the right to work the whole area
demised. Had the abandonment extended to the whole area all
subsequent profit by working would, of course, have been impossible,
but it would be impossible to contend that the compensation would be
other than capital. It was the price paid for sterilizing the asset
from which otherwise profit might have been obtained. What is true
of the whole amount must be equally true of part."
Click here for Burmah Steam Ship
Co. Ltd. case.
Click here for
Barr
Crombie
case.
RYTC's comment: The
compensation received for a fixed asset or for a loss of permanent
part of business is of a capital nature and not taxable. In
practice, a fixed asset is an asset that is kept for long-term use.
Besides, on the same reasoning, the compensation in respect of a
long term investment is not taxable either. Whether there is a loss
of a permanent part of business (capital nature) or a temporary part
of business (revenue nature) is sometimes debatable. So, in every
case, it is advisable for the taxpayer to keep detailed record in
support of his claim and to put forward his reasoning in his tax
computation why it is of a capital nature and should not be taxable.
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