OBEROI HOTEL (PVT.) LTD. VS COMMISSIONER OF INCOME?TAX
1999 P T D 3270
[236 I T R 903]
[Supreme Court of India]
Present: S. P. Bharucha, M. B. Shah and N. Santosh Hegde, JJ
OBEROI HOTEL (PVT.) LTD.
Versus
COMMISSIONER OF INCOME-TAX
C. A. No.7418 of 1994, decided on 10/03/1999.
(Appeal by Special Leave from the judgment and order, dated September 8, 1993 of the Calcutta High Court in I.T.R. No. 91 of 1988).
Income-tax
----Income or capital ---Assessee managing a hotel belonging to another person---Agreement giving assessee first option of purchase or lease of hotel---Amount received for giving up such option---Compensation for loss of source of income---Amount received was a capital receipt---Indian Income Tax Act; 1961---ICIT v. Oberoi Hotels, (India) (Pvt.) Ltd. (1994) 209 ITR 732' (Cal.) reversed].
It maybe broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in. a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Where on a consideration of the circumstances, payment is-made to compensate a person for cancellation of a contract which does not affect the trading, structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue: Whereby the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally-a capital receipt.
The assessee-company was operating, managing and administering many hotels belonging to others for a fee at several places. As per the memorandum of association of the company, it was authorised to run hotels op its own account, and also too operate, manage -and administer hotels belonging to, others for a -fee. In terms of an agreement, dated November 2, 1970, the company, agreed to operate the hotel known as Hotel Oberoi Imperial for which the assessee-company was to receive a certain fee called management fee which was calculated on the basis of gross operating profits as provided in the agreement. The agreement was to run for an initial period of ten years; the assessee, had the option to ask for renewal of the said agreement for two further periods of 10 years each by mutual agreement. Article XVIII of the said agreement gave the assessee a, right to exercise the option of purchasing the hotel in case its owners desired to transfer the same during the currency of the agreement. Thereafter, on September 14, 1975, a supplementary agreement was executed between the assessee and the receiver who had been appointed for the property. The right to exercise its option was given up by the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise and in its return agreed consideration was to be paid to the assessee. On the basis of the agreement, the assessee received the amount of Rs.29,47,500 and claimed that It -was a capital receipt. The Income-tax Officer rejected the claim but the Commissioner of Income-tax (Appeals) and the.7ribunal upheld it. The High Court arrived at the conclusion that it was a revenue receipt assessable to income-tax as business income for the assessment year 1979-80. On appeal to the Supreme Court:
Held, reversing the decision of the High Court, that the amount received by the assessee was the consideration for giving up its right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. It was not for settlement of rights under a trading contract, but the injury was inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement had resulted in loss of source of the assessee's income. The receipt in the hands of the assessee was a capital receipt ---[CIT v. Oberoi Hotels (India) Pvt: Ltd. (1994) 209 ITR 732 (Cal.) reversed].
Kettlewell Bullen & Co. Ltd. v. CIT (1964) 53 ITR 261 (SC) applied.
CIT v. Chari & Chari Ltd., (1965) 57 ITR 400 (SC); CIT v. Rai Bahadur Jairam VaIji (1959) 35 ITR 148 (SC) and Karam Chanti Thapar & Bros. (P.) Ltd. v. CIT (1971) 80 ITR 167 (SC) ref.
Ravinder Nath, Advocate for Rajinder Narain & Co Advocates for Appellant.
JUDGMENT
M. B. SHAH, J.---This appeal is filed against the judgment and order, dated September 8, 1993, passed by the High Court of Calcutta: (see ,(1994) 209 ITR 732) in Income-tax Reference No. 91 of 1998. The Court allowed reference application and answered the following question referred to it in the negative and in favour of the Revenue (page 735):
"Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in confirming the decision of the Commissioner of Income-tax (Appeals) that the receipt of Rs.29,47,500 by the assessee from the receiver of the hotel in the course of the assessee's hotel operation business, is a capital receipt?"
The said question arose in the income-tax assessment of the assessee-company for the year ending on June 30, 1978, corresponding to the assessment year 1979-80 in the background of the fact that the assessee-?company was operating, managing and administering many hotels belonging to others for a fee at several places, e.g., Cairo; Colombo. Kathmandu, Singapore, etc. As per the memorandum of association of the company, it was authorised to run hotels on its own account and also to operate, manage and administer hotels belonging to others for a fee. In terms of an agreement, dated November 2, 1970, the company agreed to operate the hotel known as Hotel Oberoi Imperial, Singapore, for which the assessee-company was to receive a certain fee called management fee which was calculated on the basis of gross operating profits as provided under Article X of the agreement; the agreement was to run for an initial period of ten years the assessee had the option to ask for renewal of the said agreement for two further periods of ten years each by mutual agreement. Article XVIII of, the said agreement gave the assessee a right to exercise the option of purchasing the hotel in. case its owners desire to transfer the same during the currency, of the agreement.
Thereafter, on September 14, 1975, a supplementary agreement was executed between the appellant and the receiver of the undertaking and the property of imperial Securities International Limited, which, inter alia, provided that on September 6,1975, a receiver was appointed of the undertaking and property of I.S.I. pursuant to the terms of the debenture, dated January 7, 1974, made between I.S.I. on one part and Common Wealth Development Finance Company Limited on the other part. On the basis of the said appointment of the receiver, the receiver executed the supplemental agreement in favour of the appellant, which, inter alia, provides that (page 736):
"9. The operator hereby undertakes and agrees with the receiver as follows:
(a) That Article XVIII of the principal agreement shall henceforth cease to have any force and effect;
(b) That the receiver shall, subject to the provisions of clause (8) thereof, be at liberty at any time hereafter to sell or otherwise dispose of the said property at such price terms as he tray deem fit and shall not be under any obligation of procuring or requiring the purchaser thereof to enter into any agreement with the operator for the purpose of operating and managing the hotel or otherwise ;
(c) That should the receiver succeed in selling or disposing of the said property to any party, the principal agreement and this agreement shall upon completion of such sale as may then be made by the receiver, terminate and cease to have any force and effect ;
(d) That the operator shall do, execute and deliver all such acts, deeds, documents and instruments as may be necessary or reasonably required by the receiver for the purpose of giving effect to the provisions of this clause."
"10. For the consideration aforesaid, the receiver hereby agrees to pay to the operator, . . .
(b) simultaneously termination of the principal agreement and this agreement--?
(i) a sum of $250,000 if the said property is sold for a sum of less than $30,000,000, or
(ii) a sum-of S37s,000 if the said property is sold for a sum of $3;300,000 or more than but less than $33,500,000, or
(iii) a sum of $750,000 if the said property is sold for a sum of $33-,500,000, or more."
The right of the assessee, which was given up for a consideration mentioned above, arising from Article XVIII of the principal agreement is as under:
"During the term of this agreement in the event where the owner desired to transfer the hotel or lease all or part of the hotel to any other person, - firm or corporation, the same shall be first offered to operator or any of its nominee or affiliates."
On the basis of the said agreement, the assessee has received a sum of Rs. 29,47.500 from the receiver after the sale of the hotel. The question, which was considered by the Income-tax Authorities was whether the receipt of the said amount is capital receipt or revenue receipt. The Income-tax Officer arrived' at a conclusion that it was a revenue receipt, the Commissioner of Income-tax (Appeals) held that it was a capital receipt, the Tribunal confirmed the said finding, on a reference to the High Court, the High Court arrived at a conclusion that it was a revenue receipt assessable to income-tax as business income for the assessment year 1979-80. Hence, this appeal by special leave by the assessee.
The question whether the receipt is capital or revenue is to be determined by drawing a conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. This Court in the case of Karam Chand Thapar & Bros. (P.) Ltd. v. CIT (1971) 80 ITR 167, discussed and held that in CIT v. Chari & Chari Ltd. (1965) 57 ITR 400 (SC), it was held that ordinarily compensation for loss of an office or agency is regarded as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in a case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. Thereafter, the Court held that it was difficult to lay down a precise principle of universal application but various workable rules have been evolved for guidance.
Applying the aforesaid test laid down by this Court in the present case, in our view, the Tribunal was right in arriving at a conclusion that it was a capital receipt. This reason is that as provided in Article XVIII of the first agreement the assessee was having an option or right or lien, if the owner desired to transfer the hotel or lease all or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementary agreement, which was executed in September, 1975, between the receiver and the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under, any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise, and in its return, agreed consideration was as stated above in clause X. On the basis of the said agreement, the assessee has received the amount in question. The amount was received because the assessee had given up its right to purchase and/or to operate the property. Further, it is loss of source of income to the assessee and that right is determined for consideration. Obviously, therefore, it is a capital receipt and not a revenue receipt.
Learned counsel for the Revenue relied upon the decision in the case of CIT v. Rai Bahadur Jairam VaIji (1959) 35 ITR 148 (SC), and submitted that the assessee had the business of running hotels, in various countries and the amount which is received by him is for the termination of the first contract which was executed in '1970 and, therefore, it should be considered his revenue receipt. In that case, the court was dealing with a trading contract and held that compensation paid in respect of the rights arising under the trading contract would be a revenue receipt and must be referred to the profits which would be made in carrying out that contract. The Court has also observed (page 164):
". . . whether a payment of compensation for termination of an agency is a capital or revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assessee, or whether it was only part of his stock?-in trade."
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The aforesaid judgment was considered in the case of Kettlewell Bullen & Co. Ltd. v: CIT (1964) 53 ITR 261 (SC), wherein the court has held as under (page 270):
"Whether, a particular receipt is capital or income from business, has frequently engaged the attention of the Courts. It may be broadly stated that what is received for loss of capital is a capital receipt. What is received as profit in a trading transaction is, taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction."
After considering various decisions it was further held as under (page 272)
"These cases illustrate the principle that compensation for injury to trading operations, arising from breach of contract or in consequence of exercise of sovereign rights, is revenue, These cases must, however, be distinguished from another class of cases where compensation is paid as a solarium for loss of office. Such compensation may be regarded as capital or revenue: it would be regarded as capital, if it is for loss of an asset of enduring value to the assessee, but not where payment is received in settlement of loss in a trading transaction. "
After analysing a number of cases, the court observed that the, following satisfactory measure of consistency in the principle is disclosed (page 282): ??
"Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue: Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. "
The aforesaid principle is relied upon in the case of Karam Chand Thapar & Bros. (1971) 80 ITR 167 (SC). Considering the aforesaid principles laid down as per Article XVIII of the principal agreement, the amount received by the assessee is for the consideration for giving up his right to purchase and/or operate the property or for getting it on lease before it is transferred or let out to other persons. It is not for settlement of rights under a trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement has resulted in loss of source of the assessee's income.
In this view of the matter, the order passed by the High Court is set aside and the appeal is allowed. The question is answered in favour of the assessee and against the Revenue by holding that receipt in the hands of the assessee was capital receipt.
M.B.A./3313/FC ??????????????????????????????????????????????????????????????????????????????? Appeal allowed.