TMI Blog1993 (9) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. The case of the assessee-company is that it was a capital receipt because the assessee received the same in consideration of giving up a capital asset. 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 agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-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. 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. On appeal by the Revenue, the Tribunal upheld that view taken by the Commissioner of Income-tax (Appeals). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,50,000 by the assessee was a revenue receipt and was chargeable to income-tax. In CIT v. Vazir Sultan and Sons [1959] 36 ITR 175 (SC), 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC), 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 Willia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. None of these findings have been reversed by the Tribunal. The case made up by the Income-tax Officer was thal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
