1988 (3) TMI 103 - AT - Income Tax

Assessee's Compensation Ruled Capital Receipt, Not Taxable as Business Income

INCOME TAX OFFICER. Versus OBEROI HOTELS (I) LTD.

The Tribunal upheld the CIT(A)'s decision, ruling that the compensation of Rs. 26,47,500 received by the assessee was a capital receipt and not taxable as ... - Issues Involved:1. Whether the sum of Rs. 26,47,500 received by the assessee as compensation for the termination of a contract is a capital receipt not liable to tax or a revenue receipt liable to tax.Detailed Analysis:Issue: Classification of the Compensation Received- Facts and Background: The assessee, a limited company, specialized in managing big hotels internationally. It entered into a contract on 2nd Nov., 1970, to operate Hotel Oberoi Imperial in Singapore for a fee based on gross operating profits. The agreement was for 10 years, renewable for two further periods of 10 years each. The agreement also provided the assessee with the right to purchase the hotel if the owners decided to sell it. However, the hotel was placed under a Receiver, necessitating a supplemental agreement on 14th Sept., 1975, where the assessee relinquished certain rights for a lump sum payment of Rs. 26,47,500. The hotel was eventually sold on 2nd Dec., 1977, terminating the assessee's rights under the original agreement.- Assessee's Argument: The compensation received was a capital receipt as it was given for relinquishing a capital asset, i.e., the right to operate the hotel and the right of first refusal to purchase it. The assessee cited several cases, including *CIT vs. Vazir Sultan & Sons* and *Divecha P.H. vs. CIT*, to support its claim that the compensation was for the loss of an enduring asset and thus a capital receipt.- ITO's Argument: The Income Tax Officer (ITO) argued that the compensation was a revenue receipt. The assessee was in the business of operating hotels, and the compensation represented the fees it would have received if the original contract had continued. The ITO relied on the case of *CIT vs. Rai Bahadur Jairam*, arguing that the compensation was for the loss of a trading contract, thus making it a revenue receipt.- CIT(A)'s Decision: The Commissioner of Income Tax (Appeals) [CIT(A)] sided with the assessee, holding that the compensation was a capital receipt. The CIT(A) noted that the agreement was a long-term source of income, and its termination led to the destruction of a capital asset. The compensation received was not related to any estimated loss of profit but was an ad hoc amount for giving up valuable rights.- Department's Appeal: The Department appealed against the CIT(A)'s decision, arguing that the compensation was a revenue receipt. The Department's counsel referred to several cases, including *Kettlewell Bullen & Co. Ltd. vs. CIT* and *Daruvala Bros. (P) Ltd. vs. CIT*, to argue that the compensation should be considered a revenue receipt as it was received in the ordinary course of business.- Tribunal's Analysis: The Tribunal considered the facts and the legal principles established in various cases. It noted that the compensation was for giving up valuable rights that constituted the profit-earning apparatus of the assessee. The Tribunal relied on the Supreme Court's decision in *Bombay Burmah Trading Corpn.*, which held that compensation for the destruction of the very structure of the operation of the assessee is a capital receipt. The Tribunal concluded that the compensation was indeed a capital receipt.- Section 28(ii)(c) and Section 28(iv) Arguments: The Department also argued that the compensation should be taxable under sections 28(ii)(c) and 28(iv) of the IT Act, 1961. However, the Tribunal held that section 28(ii)(c) did not apply as the agency was held outside India. Regarding section 28(iv), the Tribunal followed the Calcutta High Court's decision in *Indian Leaf Tobacco Development Co. Ltd. vs. CIT*, which held that cash payments do not constitute a perquisite. Thus, section 28(iv) was also inapplicable.Conclusion:The Tribunal upheld the CIT(A)'s decision, concluding that the sum of Rs. 26,47,500 received by the assessee was a capital receipt and not liable to tax as business income. The appeal by the Department was dismissed.