Case: Oberoi Hotel P.Ltd Vs. The Commissioner Of Income Tax

2. The said question arose in theassessment of thefor the year ending on 30th June, 1978 corresponding to the Assistant Yearin the background of the fact that thewas 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 thewas 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 XVII 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 Operation 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.a) .......b) simultaneously termination of the Principal Agreement and thisa sum of $250,000/if the said property is sold for a sum of less than S$30,000,000orii) a sum of S $375,000/if the said property is sold for a sum of S $3,300,000 or more than but less than S$33,500,000/oriii) a sum of S $750,000/if the said property is sold for a sum of S$33,500,000/or more."3. 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."4. 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. TheOfficer arrived at a conclusion that it was a revenue receipt, Commissioner of Income Tax (Appeals) held that it was a capital receipt, the Tribunal confirmed the said finding, on reference to the High Court, the High Court arrived a conclusion that it was a revenue receipt assessable toas business income for the Assessment YearHence, this appeal by special leave by the assessee.

Court's reasoning:
6. 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. 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.After analysing number of cases, the Court observed that following satisfactory measure of consistency in the principle is disclosed :"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 leave him from 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 assessees income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt."10. The aforesaid principal is relied upon in the case of Karam Chand Thapar and Bros.s case (supra). Considering the aforesaid principals 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 to 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 trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of Principal Agreement has resulted in loss of source of assessees income.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. 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.