In James Allan Thornton v The Commissioners for Her Majesty’s Revenue & Customs  at the end of a lease, the premises were in disrepair. The landlord and tenant agreed a settlement by way of surrender premium, which was not attributed to any particular item. The parties recorded the payment as being ‘…in full and final settlement in relation to all issues associated with the lease’ In due course the landlord proceeded to repair the premises at a greater cost than the amount he receive.
The landlord treated the money as a receipt of capital but HMRC viewed it that it as income.
The question turned on what gave rise to the legal right to receive the payment. The payment was made because the landlord had suffered a permanent diminution in the capital value of his asset and its purpose was to restore that value. It was, therefore, a capital receipt, not an income receipt. Had it been merely to provide income for the landlord during the period the premise could not be let, it would have been an income receipt.