OBEROI HOTEL PVT. LTD. versus COMMISSIONER OF INCOME TAX

Citation: [1999] 1 S.C.R. 955 · Decided: 10-03-1999 · Supreme Court of India · Bench: S.P. BHARUCHA · Disposal: Appeal(s) allowed

Judgment (excerpt)

~ 
OBEROI HOTEL PVT. LTD. 
A 
v. 
COMMISSIONER OF INCOME TAX 
MARCH 10, 1999 
[S.P. BHARUCHA, M.B. SHAH AND 
B 
N. SANTOSH HEGDE, JJ.) 
Income Tax Act, 1961 : Section 28(ii). 
Compensation-For tem1inatio11 of agreement-Capital or revenue c 
receipt--Detemiination of-AY 1979-8()-Assessee operated a hotel belonging 
to others for a manageme11t fee calculated on the basis of gross profits-Agree-
ment between the assessee a11d the ow11er of the hotel provided for con-
ti11uance of arra11gement for a certain period--Assessee also had the right to 
-" 
opt for its purchase in case the owner desired to tr an sf er the same during the D 
said period-Subsequently by a supplemental agreement assessee gave up its 
.... 
right to purchase the hotel, thus entitling it to receive a certain amount of 
...0 
compensation in the event of the hotel being sold by its owner during the 
currency of earlier agreement-Held, giving up the right to purchase the hotel 
resulted in loss of assessee's source of income--Hence, amount of compen-
satio11 received by assessee pursuant to supplemental agreement is a capital E 
receipt and not a revenue receipt. 
The appellant-assessee was operating, managing and administering 
many hotels belonging to others for a management fee which was calculated 
-..; 
on the basis of gross operating profits. The agreement between the appel-
lant-assessee and the owner of the hotel provided for continuance of such 
F 
an arrangement for a certain period. The appellant-assessee also had the 
right to opt for purchase of the hotel in case the own~rs desired to transfer 
the same during the currency of the agreement. Subsequently, a Sup-
plemental Agreement was executed whereby appellant-assessee gave up its 
right to purchase the hotel, thus entitling it to receive a certain amount of G 
compensation in the event of the. hotel being sold by its owner during the 
currency of the earlier agreement. On the basis of the said Supplemental 
Agreement the Appellant-assessee received a certain amount of compensa-
tion after the sale of the hotel. 
The Income Tax Officer held that the said amount of compensation H 
955 
956 
I 
SUPREME COURT REPORTS 
[1999] 1 S.C.R. 
A was a revenue receipt. But the Commissioner oflncome Tax (Appeals) held 
that it was a capital receipt. The Income Tax Appellate Tribunal confirmed 
the said finding. However, the High Court held that it was a revenue receipt. 
Hence, this appeal. 
B 
Allowing the appeal, this Court 
HELD : 1.1. The question whether the receipt is capital or revenue 
is to be determined by drawing the conclusion of law ultimately from the 
facts of the particular case and it is not possible to lay down any single 
test as infallible or any single criterion as decisive. Ordinarily, the com-
C pensation for loss of an office or agency is regarded as capital receipt, but 
this rule is subject to an exception that payment received even for termina-
tion of agency agreement would be revenue and not capital in the case 
where the agency was one of many which the assessee held and its termina-
tion 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 
D business that existing agencies may be terminated and fresh agencies may 
be taken. [959-F -HJ 
Karam Chand Thapar&Bros. P. Ltd. v. CIT (Central), Calcutta 80 ITR 
167 (SC) and CITv. Chari and Chari Ltd., 57 ITR 400 (SC), relied on. 
E 
1.2. Applying the aforesaid test in the present case, the Income Tax 
Appellate Tribunal was right in arriving at the conclusion that the amount 
of compensation received by the appellant-assessee was a capital receipt. 
The amount was received by the assessee for giving up its right to purchase 
and /or to operate the property or for getting it on lease before it is 
F 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 the Principal 
Agreement has resulted in loss of source of assessee's income. Therefore, 
it is capital receipt and not a revenue receipt. [960-D-E] 
G 
Kettlewell Bullen & Co. Ltd. v. CIT, Calcutta, (1964) 53 ITR 261, relied 
on. 
CIT v. Roi Bahadur Jairam Valji, 35 ITR 148, held inapplicable. 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7418 of 
H 1994. 
• 
OBEROI HOTEL PVT. LTD. v. C.I.T. [SHAH,J.] 
957 
From the Judgment a

Excerpt shown. Read the full judgment & AI analysis in Lexace.