Calcutta High Court
Commissioner Of Income-Tax vs Oberoi Hotels (India) Pvt. Ltd. on 8 September, 1993
Equivalent citations: [1994]209ITR732(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference made at the instance of the Revenue, the following question has been referred by the Tribunal to this court under Section 256(1) of the Income-tax Act, 1961 :
"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 ?"
2. The facts as found by the Tribunal are as follows :
This reference relates to the income-tax assessment of the assessee-company for the previous year ending on June 30, 1978, corresponding to the assessment year 1979-80. The assessee-company had acquired certain skills and experience in managing big hotels in different countries of the world. During the relevant previous year, the assessee-company was operating, managing or administering many hotels belonging to others for a fee in several places, i.e., Cairo, Colombo, Kathmandu, Singapore, etc. The memorandum of association of the assessee-company authorised it not only to purchase and run hotels on its own account, but also to operate, manage or administer hotels belonging to others for a fee.
3. In terms of an agreement dated November 2, 1970, the assessee-company agreed to operate the hotel known as Hotel Oberoi Imperial, Singapore. The assessee-company agreed to operate the Singapore hotel and all its facilities and activities in the same manner as is customary and usual in the operation of first-class international hotels. It also provided supervisory services in the form of providing technical staff. In return, the assessee-company was to receive a certain fee called "management fee" which was calculated on the basis of gross operating profits as laid down in Article X of the agreement. This agreement was to run for an initial period of ten years ; but 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 desired to transfer the same during the currency of the agreement. The assessee-company started operating Hotel Oberoi Imperial, Singapore, under the terms and conditions laid down in the said agreement dated November 2, 1970.
4. In 1975, however, the Singapore company went into liquidation and a receiver was appointed to take charge of its undertakings and properties. The receiver wanted to sell the hotel to a third party, namely "Hind Hotels International (P.) Ltd.". It, therefore, became necessary for the receiver to enter into a supplemental agreement with the assessee. This supplemental agreement was entered into on September 14, 1975. In pursuance of this agreement, the assessee-company gave up its valuable rights to operate, manage or administer the Singapore hotel in consideration of the lump sum payment. Clause 9 of the agreement dated September 14, 1975, which is relevant in this respect, is reproduced hereinbelow :
"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 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 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."
5. It may be noted that Article XVIII of the earlier agreement dated November 2, 1970, gave the assessee-company the right to purchase the hotel in case the owners desired to transfer the hotel during the currency of the agreement. This right of the assessee also ceased to have any effect in terms of the said agreement dated September 14, 1975. The receiver sold the Singapore hotel to a third party, namely, Hind Hotels International (P) Ltd. on December 2, 1977. In pursuance of Clause 9 of the said agreement dated September 14, 1975, the assessee-company was paid a sum of $7,50,000 equivalent to Rs. 26,47,500 on December 2, 1977, which date fell within the previous year ending on June 30, 1978, corresponding to the assessment year 1979-80.
6. The only dispute involved in this reference relates to the question as to whether the said sum of Rs. 26,47,500 is assessable to income-tax in the hands of the assessee-company as its business income for the previous year relevant to the assessment year 1979-80.
7. The case of the asses see-company is that it was a capital receipt because the assessee received the same in consideration of giving up a capital asset.
8. The Income-tax Officer, however, observed that one of the main businesses of the assessee was to operate hotels at different places like Nepal, Sri Lanka, Cairo, Tahiti, Singapore, etc. In the course of its normal business operations, it was usual for the assessee-company to enter into new agreements, make variations in existing agreements through renewal, alterations and/or scrapping. These things were part of the day-to-day trading operations of the assessee-company. The Income-tax Officer further found that the termination of the agreement with the Imperial Securities International Ltd., Singapore, resulting in receipt of Rs. 26,47,500 did not radically or at all affect or alter the structure of the assessee's business operations. The Income-tax Officer found that the assessee's business operation of managing and administering different hotels was not affected by the termination of the agreement with the Singapore hotel. On the other hand, the Income-tax Officer found that the assessee-company's business operations even in respect of managing and administering hotels belonging to others were expanding day by day. The Income-tax Officer also noted that after the termination of the present agreement, the assessee-company entered into a fresh agreement with the new management, Hind Hotels International (P) Ltd., and continued to run and administer the Singapore hotel on modified and better terms. According to the Income-tax Officer, the terminated agreement did not constitute the framework or the basic structure of the assessee's profit-making apparatus. The Income-tax Officer referred to the decision of the Supreme Court in CIT v. Rai Bahadur Jairam Valji (19591 35 ITR 148 and held that in the case of the assessee-company, the contract to manage and administer the Singapore hotel was entered into in the ordinary course of business and, therefore, the compensation received for termination of such agreement was nothing but a revenue receipt.
9. On appeal, the Commissioner of Income-tax (Appeals) referred to several other decisions of the Supreme Court and found that the assessee's business was not to buy and sell hotel operation agreements. The agreements to manage and administer hotels were long-term agreements. As long as the agreements were in force, the assessee-company could expect such agreements to yield income year after year. He, therefore, held that each of the agreements constituted a source of the assessee-company's income. The right to operate or manage a hotel was nothing but a capital receipt. The termination of the agreement to manage the Singapore hotel led to the destruction or sterilization of a capital asset. The Commissioner of Income-tax (Appeals) also found that under the original agreement dated November 2, 1970, there was no stipulation for payment of any compensation to the assessee-company. This right to receive compensation vested in the assessee-company only in pursuance of the subsequent agreement executed on September 14, 1975, with the receiver. The compensation was paid to the assessee-company on an ad hoc basis and it did not relate to the estimated loss of profits suffered by the assessee-company as a sequel to the termination of the agreement.
10. In this view of the matter, the Commissioner of Income-tax (Appeals) held that the receipt of compensation of Rs. 26,47,500 from the receiver of the Singapore company (in liquidation) was nothing but a capital receipt.
11. On appeal by the Revenue, the Tribunal upheld that view taken by the Commissioner of Income-tax (Appeals).
12. At the outset we would like to deal with some of the cases which have been cited at the Bar. In CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148, the Supreme Court held that if it was found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. The Supreme Court also held that in the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a conclusion. The Supreme Court noted that a difference existed between a payment made as compensation for the termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. In an agency contract, the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt. In this case, the assessee had acquired a quarry at Paraghat and had been himself working it and selling limestone quarried out of it to, among others, a company called the Bengal Iron Company Limited. In January, 1935, the said company entered into an agreement with the assessee for the purchase of all its requirements of limestone and dolomite at specified rates. These rates were subsequently modified by another agreement between the parties executed in December, 1935. In 1936, Bengal Iron Company Limited went into liquidation and its assets and liabilities were taken over by another company called the Indian Iron and Steel Co. Ltd. This new company continued to purchase limestone and dolomite from the assessee for some time, but later on, finding that the rates were uneconomical owing to increase in the railway freight had decided to purchase its requirements from other sources. The assessee filed a suit in the High Court at Calcutta for specific performance of the contract executed in January, 1935, and as modified in December, 1935, and for an injunction restraining the Indian Iron and Steel Co. Ltd. from purchasing limestone or dolomite from any person other than the assessee. Thereafter, the assessee and the Indian Iron and Steel Co. Ltd. entered into an agreement in settlement of all the disputes between them in May, 1940. Under this agreement, the assessee was to work a quarry of the Indian Iron and Steel Co. Ltd. at Gangapur for a period of 25 years and to supply the limestone quarried therefrom to the company according to its requirement. There were, however, no facilities in Gangapur railway station for transporting the goods from the quarry, and so it was arranged that the authorities should be moved for permission to construct a siding at Gangapur and that the cost thereof should be borne by the company. It was expected that it would take 18 months before the siding could be completed and it was agreed that during that period, the assessee was to be paid Rs. 4,000 every month. Thereafter, the assessee was to be paid at Rs. 2-9-0 per ton of limestone which might be loaded in the railway wagons to be arranged for by Indian Iron and Steel Co. Ltd. The working of the quarry was left entirely in the hands of the assessee. The railway authorities did not agree to construct a siding and loopline at Gangapur to the quarry and so it became impossible to carry out the agreement in the manner contemplated by the parties. It was in this situation that the parties came together and in August, 1941, entered into a new agreement. Under this new agreement, the Indian Iron and Steel Co. Ltd. agreed to pay Rs. 2,50,000 to the assessee as solatium besides the monthly instalment of Rs. 4,000 remaining unpaid under the contract executed in May, 1940. It was also agreed that the Indian Iron and Steel Co. Ltd. shall take all the limestone required for its furnaces at Kulti from the assessee for a period of 12 years on certain terms and conditions and that the assessee was to be appointed the loading contractors of the company for loading all iron ore at Monoharpore for a period of 12 years from January, 1942, on certain specified terms and conditions. On these facts, the question arose whether the sum of Rs. 2,50,000 received by the assessee was capital or revenue. The Supreme Court found that the assessee had been carrying on the business of production and supply of limestone. The assessee had been supplying limestone and dolomite to Bengal Iron Co. Ltd. since 1920 and the two contracts executed in 1935 were entered into only in the carrying on of that business. The contract of May 1940 was made in settlement of the rights under those contracts. On these facts, the Supreme Court held that it was impossible to come to any conclusion other than that the contract in question was entered into by the assessee in the ordinary course of its business. The court held that when once it was found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt even when the contract in question was to be in operation for a long period. The court further observed that a payment made in settlement of that contract is an adjustment of the rights under the contract and must be referred to the profits which could be made in the carrying out of that contract. The court held that the receipt of Rs. 2,50,000 by the assessee was a revenue receipt and was chargeable to income-tax.
13. In CIT v. Vazir Sultan and Sons , the assessee, a registered firm, was appointed in 1931 as the sole selling agent and sole distributors for the Hyderabad State for the cigarettes manufactured by the Vazir Sultan Tobacco Co. Ltd. In 1939, another agreement was arrived at between the assessee and the said company whereby the assessee was given 2 per cent. commission not only on the goods sold in the Hyderabad State but on all the goods sold even outside the Hyderabad State. In 1950, the assessee and the company reverted to the old arrangement confining the sole agency of the assessee to the Hyderabad State and the assessee was paid a sum of Rs. 2,19,343 by way of compensation for the loss of the agency for the territory outside the Hyderabad State. The question before the Supreme Court was whether the sum of money thus received by the assessee was a revenue receipt assessable to income-tax or a capital receipt not so assessable. By a majority judgment, the court held that the agency agreement was not entered into by the assessee in the carrying on of business but this formed the capital asset of the assessee's business. This capital asset was exploited by the assessee by entering into a contract with various customers and dealers in the respective territories, it formed part of the fixed capital of the assessee's business and was not the circulating capital or stock-in-trade of their business, and the payment made by the company as and by way of compensation for terminating or cancelling the agreement was a capital receipt in the hands of the assessee. The decision is, in our view, clearly distinguishable from the facts of this case.
14. In P.H. Divecha v. CIT , a firm which was conducting business in electrical goods including electric lamps, entered into an agreement in 1938 with Philips Electrical Co. under which the firm was given exclusive rights to purchase and sell of electric lamps manufactured by Philips in certain areas. By a letter which formed an annexure to the agreement the firm was entitled to a commission of 12 1/2 per cent. on the gross invoice amount and a further discount of 2 per cent. on the net invoice prices to cover breakage or fault in manufacture. If the company sold any goods directly to the buyers in those areas, the firm was entitled to compensation at 5 per cent. of the net amount of invoices covering such sales. The firm on its part undertook to sell only Philips lamps in those areas and to prevent re-exportation of the lamps by third parties. The agreement was to continue unless determined by either party by giving three months' notice. There was no provision in the agreement for the payment of compensation to the firm on the termination of the agreement nor was compensation payable for temporary suspension of supplies. This agreement continued for a period of 16 years. Philips Electrical Co. decided to take over the distribution of lamps in those areas and served a notice upon the firm terminating the agreement with effect from June, 1954. Philips Electrical Co. agreed to pay in instalments Rs. 40,000 per annum for a period of three years to each of the partners of the firm. The question was whether the sum of Rs. 20,000 received in the accounting year ending December 31, 1954, by each of the assessees, who were the partners of the firm, was assessable to income-tax. The Supreme Court held that the agreement between the firm and the Philips Electrical Co. created a monopoly right of purchase for and a monopoly right of sale in certain areas. It secured to the firm an advantage of an enduring nature and was not an ordinary trading agreement. It was not related to any business done or to loss of profits and it was not recompense for services, past or future. The payment, therefore, did not bear the character of income taxable under the Income-tax Act. The court held that to constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person, it must be found out what that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt, one may have to examine the motive out of which the payment was made.
15. In Kettlewell Bullen and Co. Ltd. v. CIT , the assessee-company formed with the object, inter alia, of carrying on the business of managing agencies, was the managing agent of six companies including the Fort Willaim Jute Co. Pursuant to an arrangement with Mugneeram Bangur Co., whereby the latter agreed (i) to purchase the entire holding of shares of the assessee in the Fort Willam Jute Co., the managed company, (ii) to procure repayment of all loans made by the assessee to that managed company, and (iii) to procure that the managed company will compensate the assessee for loss of office by the payment of the sum of Rs. 3,50,000 after the assessee resigned its managing agency and reimbursed that amount to the managed company, the assessee-company tendered resignation of the managing agency and received the sum of Rs. 3,50,000 from the managed company. Under the terms of the managing agency agreement, the managed company was not obliged to pay any compensation to the assessee for voluntary resignation of the managing agency. The question was whether the amount received by the assessee to relinquish the managing agency was a revenue receipt liable to tax. The Supreme Court held that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction but was one in which the assessee parted with an asset of an enduring nature. What the assessee paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the assessee did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co. The court further observed that it cannot be said as a general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract, which does not affect the trading structure of his business or 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 a source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.
16. To the same effect is the decision of the Supreme Court in CIT v. Chari and Chari Ltd. [1965] 57 ITR 400. In this case, the assessee was the managing agent of three companies one of which was an electricity undertaking. The agreement to manage the electricity undertaking was terminated because the Madras Government exercised its powers under the Madras Electrical Undertakings Acquisition Act, 1949, and compulsorily acquired the undertaking. The Government paid compensation under Section 15 of the said Act and the assessee received Rs. 17,346 as compensation for the termination of the managing agency. The question was whether this income was assessable to tax. The Supreme Court held that ordinarily compensation for loss of office or agency was regarded as a capital receipt, but this rule was subject to an exception that payment received even for termination of an agency would be revenue and not capital in 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. It is true that in that case, the court held that the compensation was not income liable to tax by reason of the fact that there was no evidence on record about the nature of the other two managed companies and their relative importance qua the electricity undertaking and as to what effect the termination of the managing agency of the electricity undertaking had upon the other business of the assessee.
17. In this case, however, we find that the position is otherwise.
18. The Income-tax Officer has clearly found that the assessee-company was formed with the object, inter alia, of operating, managing or administering hotels belonging to others for a fee. The memorandum of association of the assessee company authorised it to purchase and run hotels on its own account as also to operate, manage and administer hotels belonging to others. It was also found that the assessee company was operating, managing and administering many hotels belonging to others for a fee at several places like Cairo, Colombo, Kathmandu, Singapore, Tahiti, etc. The agreement to run, operate, manage and administer the Singapore hotel was entered into by the assessee-company in the ordinary course of its hotel operation business. The Income-tax Officer also found that entering into new agreements, variations of clauses under the existing agreements through renewals, alterations, etc., were part of the day-to-day operations of the assessee's business of running, operating, managing and administering the hotels belonging to others. It was also found that the termination of the agreement with Imperial Securities International Ltd. resulting in receipt of compensation of Rs. 26,47,500 did not at all affect or alter the structure of the assessee's business. In fact, soon thereafter when the Singapore hotel was purchased by Hind Hotels International Ltd., the assessee again entered into a fresh agreement for running the Singapore hotel on more favourable terms with the new owner. The Income-tax Officer looked into the fee earned by the assessee from operating, managing or administering of hotels belonging to different persons in several years and found that the termination of the agreement with the Singapore hotel did not affect the assessee's business operations. The assessee-company, on the other hand, was realising more and more fees from different persons in the course of its hotel operation business. None of these findings have been reversed by the Tribunal. The case made up by the Income-tax Officer was that the assessee's business of operating hotels belonging to others and running technical/consultancy services involving generation of substantial income by way of fees may be likened to a tree with different branches bearing valuable fruits. With the passage of time and as a natural occurrence the tree may lose one of its branches leaving the other branches unaffected in bearing the fruits. Another new branch may spring up yielding yet larger fruits with the result that the tree with its roots firmly entrenched in the ground continue to bear fruits as before. The Income-tax Officer was of the view that this was exactly what had happened in the instant case. He, therefore, held that the receipt of compensation in the case was in the ordinary course of business and was, therefore, revenue receipt. The Tribunal, on the other hand, held that each of the contracts entered into by the assessee-company for managing hotels belonging to others was a separate source of income. The rights under the agreement with the Singapore hotel, in the opinion of the Tribunal, constituted the profit-earning apparatus of the assessee and so the compensation received for the destruction or sterilisation of a capital asset was nothing but a capital receipt. We are, however, unable to agree with the reasoning given and the conclusion drawn by the Tribunal. As laid down by the Supreme Court in CIT v. Chari and Chari Ltd. [1965] 57 ITR 400 and reiterated later by the Supreme Court in Karam Chand Thapar and Bros. P. Ltd. v. CIT [1971] 80 ITR 167, compensation for loss of office or agency may be regarded as a revenue receipt 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. In both these two cases, the court held that it was for the Income-tax Department to clearly establish that the case fell within the exception to the general rule that compensation for loss of office or agency is a capital receipt. In our view, the Revenue has successfully brought substantial material by way of evidence on record in this case to show that the hotel operating agreement with the Singapore hotel was one of many agreements which the assessee had entered into for running several other hotels around the world. The evidence has also been brought on record to show that the termination of Singapore hotels operating agreement did not impair the profit-making structure of the assessee inasmuch as the assessee continued to run and operate various other hotels around the world. Even the Singapore hotel was soon thereafter run by the assessee-company pursuant to a fresh agreement entered into by it with the new owners, Hind Hotels International Ltd. Therefore, the original termination of the agreement to operate the Singapore hotel was within the framework of the business, it being a necessary incident of the business that some of the hotels operating agreements may be terminated and fresh agreements may be entered into to run the same or some other hotels around the world. In this view of the matter, we are of the view that the compensation of Rs. 29,47,500 received by the assessee from the receiver for termination of its original agreement to operate, manage or administer the Singapore hotel was a revenue receipt assessable to income-tax as business income for the assessment year 1979-80. We, therefore, answer the question referred in the negative and in favour of the Revenue.
19. There will be no order as to costs.
Shyamal Kumar Sen, J.
20. I agree.