1. Dispute over whether compensation received for relinquishing a contractual right to purchase or operate a hotel is a capital or revenue receipt. (Para 1 , 2 , 3 )
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1999 Supreme(SC) 279
1999(2) Supreme 380
Supreme Court of India
(From Calcutta High Court)
S.P. Bharucha, M.B. Shah & N. Santosh Hegde, JJ.
Oberoi Hotel Pvt. Ltd. -Appellant
versus
The Commissioner of Income Tax -Respondent
Civil Appeal No. 7418 of 1994
Decided on 10-3-1999
Counsel for the Parties :
For the Appellant : Ravinder Nath, Advocate for M/s. Rajinder Narain & Co., Advocates.
Compensation received for relinquishing a contractual right to purchase or operate a property, which results in the loss of a source of income or impairs the assessee's trading structure, is classified as a capital receipt rather than a revenue receipt.
Headnote:Income Tax Act, 1961-Section 28(i)-Business income-Capital or revenue receipt-Assessee secured right to operate hotel for a fixed term-Entitled to management fee and option to purchase hotel in case owner sells hotel during currency of agreement-Subsequent agreement by which assessee gave up rights secured in earlier agreement in lieu of lumpsum payment as consideration-Receipt was in lieu of loss of source of income-Receipt amounts to capital receipt.
Held : The Tribunal was right in arriving at a conclusion that it was a capital receipt. Reason is that as provided in Article XVIII of the First Agreement assessee was having an option or right or lien, if owner desired to transfer the hotel or lease 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 assessee. It was agreed that 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. (Para 5)
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2. Revenue contends the receipt is revenue as the assessee manages multiple hotels and the termination of one contract does not impair its overall trading structure. (Para 6 )
3. The court found the payment was for relinquishing a right to purchase or operate the property, thereby resulting in the loss of a source of income. (Para 5 , 8 )
4. Compensation for the cancellation of a contract that impairs the trading structure or results in the loss of a source of income is a capital receipt. (Para 7 , 8 )
5. Appeal allowed; the receipt is held to be a capital receipt. (Para 9 )
6. How is the distinction between capital and revenue receipts determined for compensation payments?
It depends on whether the payment compensates for the loss of a capital asset of enduring value or a source of income (capital), or whether it is a profit in a trading transaction or compensation for injury to trading operations (revenue). (Para 4 , 7 )
7. When is compensation for the termination of an agency agreement considered a revenue receipt?
It is a revenue receipt if the agency was one of many held by the assessee and its termination did not impair the profit-making structure of the business, being a normal incident of the business. (Para 4 , 7 )
8. Why was the receipt for relinquishing the right to purchase/operate a hotel deemed a capital receipt?
The payment was received for giving up a contractual right to purchase or operate the property, which constituted a loss of a source of income and an injury to a capital asset. (Para 5 , 8 )
Judgment
Shah, J.-This appeal is filed against the judgment and order dated 8th September 1993 passed by the High Court of Calcutta in Income Tax Reference No. 91 of 1988. The Court allowed reference application and answered the following question referred to it in the negative and in favour of the Revenue:--
“Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in confirming the decision of the C.I.T. (Appeals) that the receipt of Rs. 29,47,500 by the assessee from the Receiver or the hotel in the course of assessee’s hotel operation business, is a capital receipt.”
2. The said question arose in the Income-Tax assessment of the assessee-company for the year ending on 30th June, 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 2nd November, 1970, the Company agreed to operate the hotel known as Hotel Oberoi Imperial, Singapore for which the assessee-Company was to receive 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 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 his owners desire to transfer the same during the currency of the Agreement. Thereafter on 14th September, 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 6th day of September, 1975 Receiver was appointed of the Undertaking and property of ISI pursuant to the terms of the Debenture dated 7th day of January, 1974 made between ISI on one part and Common Wealth Development Finance Company Limited on the other part. On the basis of the said appointment of Receiver, the Receiver executed the Supplemental Agreement in favour of the appellant which, inter alia, provides that:
“g. 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 hereof, be at liberty at any time hereafter to sell or otherwise dispose of the said property at such period and on such terms as he may 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 of 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.
(a) ......
(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 S $30,000,000- or
