Oberoi Hotels Pvt. Ltd vs Commissioner Of Income Tax
2023 Latest Caselaw 2447 Cal/2

                                ITA 8 of 2008
                      IN THE HIGH COURT AT CALCUTTA
                              In appeal from its
                     SPECIAL JURISDICTION (INCOME TAX)
                       CIVIL APPELLATE JURISDICTION



                          Oberoi Hotels Pvt. Ltd.
                                   Versus
               Commissioner of Income Tax, Kolkata - III & Anr.



Before:
The Hon'ble Justice I. P. MUKERJI
             And
The Hon'ble Justice BISWAROOP CHOWDHURY
Date: 1st September 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: 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.

(I. P. MUKERJI, J.)

(BISWAROOP CHOWDHURY, J.)

R. Bose