Law: Income Tax Act, 1922

Section:

Income-tax---Income or capital ---Assessee managing a hotel belonging to another person---Agreement giving assessee first option of purchase or lease of hotel---Amount received for giving up such option---Compensation for loss of source of income---Amount received was a capital receipt---Indian Income Tax Act; 1961---ICIT v. Oberoi Hotels, (India) (Pvt.) Ltd. (1994) 209 ITR 732 (Cal.) reversed]. It maybe broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in. a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Where on a consideration of the circumstances, payment is-made to compensate a person for cancellation of a contract which does not affect the trading, structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue: Whereby the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessees income, the payment made to compensate for cancellation of the agency agreement is normally-a capital receipt. The assessee-company was operating, managing and administering many hotels belonging to others for a fee at several places. As per the memorandum of association of the company, it was authorised to run hotels op its own account, and also too operate, manage -and administer hotels belonging to, others for a -fee. In terms of an agreement, dated November 2, 1970, the company, agreed to operate the hotel known as Hotel Oberoi Imperial for which the assessee-company was to receive a certain fee called management fee which was calculated on the basis of gross operating profits as provided in the agreement. The agreement was to run for an initial period of ten years; the assessee, had the option to ask for renewal of the said agreement for two…

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