Calcutta High Court
Oberoi Hotels [P] Limited vs Commissioner Of Income Tax on 6 October, 2023
OD-2
ITA/707/2008
IN THE HIGH COURT AT CALCUTTA
In appeal from its
SPECIAL JURISDICTION (INCOME TAX)
CIVIL APPELLATE JURISDICTION
Oberoi Hotels [P] Limited
Versus
Commissioner of Income Tax, Kolkata - III
Before:
The Hon'ble Justice I. P. MUKERJI
And
The Hon'ble Justice BISWAROOP CHOWDHURY
Date: 6th October, 2023
Appearance:
Mr. J. P. Khaitan, Sr. Advocate
Mr. Akhilesh Kr. Gupta, Advocate
Ms. Akshara Shukla, Advocate
for the appellant
Mr. Swarajit Roychoudhury, Advocate
for the respondent
The Court: The facts of this case are more or less identical to those
in ITA/8/2008 [Oberoi Hotels Pvt. Ltd. vs. Commissioner of Income Tax,
Kolkata-III & Anr.] decided by this court by its judgment and order dated
1st September, 2023. In that judgment and order we observed and held as
follows :
"The Court :A very interesting question of law is involved in this
appeal.
It arises out of the two agreements between the appellant and the
Government of Iraq in the 1980s, each for running a hotel in that country
by the appellant. The first one was entered into on 8th July 1981 to operate
a hotel for eight years from 15th October 1984 to 14th October 1992. The
second one executed on 25th June 1984 was to operate another hotel for
ten years from 1st April 1986 to 31st March 1996. According to the terms
and conditions of the agreements, the appellant was to get 8% of the
profits.
In 1990-91 the Gulf War was broke out. By mutual consent the
agreements were terminated. The appellant received around
Rs.1,45,00,000/- as compensation from the Iraqi authorities for premature
termination of the agreements, further to the United Nations'
recommendation in the matter.
The Indian tax authorities treated this as a revenue receipt and
wanted to tax it. According to the appellant, it was capital a receipt not
liable to be taxed.
Mr. J. P. Khaitan, learned senior advocate, appearing for the
appellant submits that the agreement to operate each of the hotels on a
long term basis, although on profit sharing terms and conditions, was to be
taken as resulting in capital creation and not an ordinary trading
transaction. On termination of the agreements by mutual consent, the
compensation received tantamounted to receiving compensation for loss of
capital. This was to be treated as a capital receipt.
Mr. Roy Choudhury, learned advocate for the respondent, submits
that the transaction between the parties was a pure and simple business
adventure, out of which the appellant was earning 8% profit. Hence the
compensation received was to be taxed as revenue receipt.
The leading judgment of the Supreme Court in this field is Oberoi
Hotel Private Limited vs. Commissioner of Income Tax reported in 236 ITR
903. The following principles of law can be enunciated from this
wonderfully written judgment.
What is received from loss of capital is capital receipt whereas
profit in a trading transaction is taxable. Where compensation is received
by a person for cancellation of a contract but does not affect the trading
structure of the business or deprive him of source of income, the receipt is
revenue. The termination of the contract is taken as a normal incident of
business. Where the trading structure is affected or source of income is
depleted which is sought to be compensated by paying an amount that
amount is to be taken as a capital receipt.
We have considered the submissions of learned counsel for the
parties.
On scrutiny of the impugned order of the tribunal we do not find
that any inquiry or finding has been made by the tribunal in relation to the
above essential facts. The above judgment of the Supreme Court was
sought to be distinguished on facts. It has been stated by the tribunal that
in the facts of the Supreme Court case there was an option to the appellant
to buy the hotel, a capital asset which the appellant was deprived of. Here
there was no such option.
The said premises on which the tribunal has proceeded is
unfortunately flawed.
The main question to be answered was whether on a construction
of the agreements, their execution, the conduct of the parties and so on the
operation of the two hotels in Iraq by the appellant on a long term basis
could be taken as creation of capital or a source of income? Whether on
termination of these agreements, the compensation received by the
appellant for not being able to carry out the agreements could be taken as
one for loss of capital?
In those circumstances, we set aside that part of the impugned
order of the tribunal dealing with above issue. We remand the matter to the
tribunal with a direction upon it to decide the same upon hearing the
parties preferably within a period of six months from date.
All points are kept open.
The appeal is accordingly disposed of. "
The difference between the impugned order of the tribunal in the
other case and this case is that in this case the tribunal has substantially
accepted the submission of the appellant that receipt of compensation was
capital in nature. However, it proceeded to treat the cost of acquisition as
nil and to direct computation of capital gains tax under section 45 of the
Income Tax Act, 1961 accordingly.
Mr. Khaitan, learned senior advocate appearing for the appellant is
aggrieved by this finding. He is also aggrieved by the recording of an alleged
concession made by him or his client before the tribunal.
For those reasons, we set aside that part of the impugned judgment
and order treating the cost of acquisition as nil for the purposes of
calculation of capital gains and remit the matter to the tribunal to consider
the issue afresh, without relying on any alleged concession within six
months of communication of this order.
The appeal is disposed of.
(I. P. MUKERJI, J.)
(BISWAROOP CHOWDHURY, J.)
pkd.
